Financial Fortress Radio June 13 2010 with Richard Jordan

Patrick: Welcome to Financial Fortress, the show that gives you good information on how to follow the secrets of the wealthy. Richard, we have a great show today. I know you wanted to start with the difference between brokers and the Registered Investment Advisors.
Richard: Thank you, Pat. Yes, there is a difference between who is just another salesman compared to someone that is only a Registered Investment Advisor. The Registered Investment Advisor’s only business acts as a trusted advisor. 95% of the Registered Advisor also carry the brokerage licenses whose only purpose is to collect commissions in addition to fees, and that represents a conflict of interest.
What it means is they don’t have a duty to you. They have a duty to themselves and the brokerage firm first, and yours second. I don’t know how you feel about being second with your money, but if you want someone that cares about you, you need to talk to someone that is in the wealth advisory business and is only a Registered Investment Advisor.
Unlike the brokers, we are required to act as your fiduciary only. You don’t have to worry about the conflicts of interest you’ll get with stock brokers and the insurance only sales people. Our golden rule is in our mission statement, so we’re going to treat you just as if you would like to be treated ourselves if we knew nothing about financial services.
You’ll find we offices all over the city, in North and Northeast Dallas, in the park cities uptown, Plano, Addison, Arlington, and Grapevine Southlake areas.
This week, we’re going to talk about undisclosed fees that were in the news again. Investors, unfortunately, don’t know that the fees that they’re paying on their 401Ks are much higher than the human resources groups that their companies have told them.
That is because the brokerage industry has not been forced to disclose the fees to the participants. So, 50 million 401K participants who deserve to know how much they’re paying for their retirement accounts don’t really know.
And lawmakers in the Senate decided this week to drop a measure that would have forced the 401K industry to disclose those fees. Does that sound fair to you? We don’t think it is.
Now, don’t get me wrong. There are those who advocate against 401K fees just because it would be difficult for some sort of a standardized report to be created by all the different brokers that are out there. It is quite possible that would take them a little bit of time. But in the meantime, they’re siphoning off tens of billions of dollars that belong to the American investors, and it’s just not right.
Patrick: I understand. I understand you have a workshop that’s coming up pretty soon.
Richard: Yes, we do have a workshop coming up for people that are in the Northern suburbs of Dallas; North, Northeast, and Eastern suburbs. We’ll be meeting at the Master Grill Steakhouse, that’s one of those Brazilian Steakhouses, at the Firewheel Mall.
Patrick: And that’s on?
Richard: We’ll be there on June 16th and June 22nd. That’s this coming Wednesday and the following Tuesday.
Patrick: What time should they be there?
Richard: 6:00 is when the seminar will start.
Patrick: Very good. Who should be attending these workshops?
Richard: Most of our clients are over 55 and have substantial assets ranging from $250,000 on up to invest.
Patrick: Very good. You were talking about the 401Ks and the expenses. They’re allowed to do this? They’re allowed to overcharge people all of this money and lawmakers you say are just letting it go, huh?
Richard: Well, they are. The lawmakers are ignoring the fact that the actual cost that people are paying on these funds are typically twice, three times, even four times as high as they think they are.
Patrick: Well, that’s because they all have corporate pension plans, right? Or wrong?
Richard: Well, Congress certainly has a heck of a pension plan.
Patrick: Well, I know that’s right. So what can anybody do? Folks that have money tied up in these 401Ks, what can they do?
Richard: Well, there’s a couple of things they can do. First of all, you need to notify your Senator immediately that this should’ve been included in the legislation. They cut it out at the last minute on the Financial Regulatory Reform.
And the second thing they should know is that you have a right under the Pension Protection Act of 2006 to roll your 401K out of your company and into a Traditional IRA that could be managed by someone that has a duty to take care of you and to disclose all the fees, like we do.
Patrick: Well, I know that you’re going to talk a little later about the Roth IRA, but that would be a logical thing to do, wouldn’t it, if they go through and analyze that?
Richard: Yes, the costs on their 401Ks, most of those costs are unknown. We have several ways of finding out what the actual costs are, but even we can’t find out all the costs. A lot of these are hidden from the public and they’re not listed in the prospectuses.
Patrick: I guess I presumed something there on that last thing. If you have a 401K and you have to stay with it in the company, you’re allowed now, due to some legislation, that you can take it out because of the Enron thing, right?
Richard: Yeah, the Enron Act is the colloquial term for it.
Patrick: But you can take it out and you can put it into your own self-directed IRA.
Richard: Correct.
Patrick: But it has to be a regular IRA, right?
Richard: It’s a Traditional IRA. There’s no tax consequences to do so. It simply means that you roll it over into an account and you can have that managed professionally. The other advantage to that, not only can you find out what your fees are on a Traditional IRA if it’s managed by us, you could have a selection of tens of thousands of different products, different funds, that are not available to you in the company 401K.
The reason the company 401K limits the number of options you have is so that the brokerage account, the brokerage manager, doesn’t have to deal with too many options. So by limiting their options, they can keep the disclosed fees low. The undisclosed fees are another matter.
Patrick: What else did you want to tell us about the 401Ks and the fees?
Richard: Those are the key things. Again, the cost of a 401K might be shown at your company to be less than 1%, but often we find that it ranges from 2-4% when we get done with all the disclosure information that we have access to that the public does not.
Patrick: Very good. Back to the workshop real quick, because we didn’t tell people how they could register. Do you want to tell them how they can register?
Richard: Yes, you can call (972) 325-1700 and you can find out all sorts of interesting facts by coming to one of our seminars because we discuss how the wealthy invest differently.
Patrick: I know it’s about a 60-minute presentation.
Richard: Correct.
Patrick: It’s not a sales presentation at all. Having been to a few, I would tell you it’s worth it and you should come. Who should be attending these really?
Richard: Again, most of our clientele are over age 55 that typically have assets ranging from $250,000 on up.
Patrick: Very good. Dinner follows as well, right?
Richard: Yes, this is one of those Brazilian Steakhouses where they cut off about a dozen different types of meat. They roast it on the spit, and they bring it to the table and you can take a slice and try it, see if you like it and, if not, just not take any more. They’ve also got an excellent salad bar. I highly recommend it. They’re at the Firewheel Mall, and the phone number to register is (972) 325-1700.
Patrick: What else did you want to talk about with the undisclosed fees?
Richard: Again, it’s up to you to make your viewpoint known to your Congressmen and your Senator. This was supposed to be the administration that was going to clean all this up, but look what’s happening. They are not taking care of the American public and the wealthy that is in 401Ks is supposed to sustain us. Social Security is only supposed to be 30-40% of our retirement savings. Pensions have been eradicated by 81% of the Fortune 500.
So 401Ks are really all we’ve got left and our gains are being siphoning off by these large brokerage houses that are managing these accounts and not disclosing these fees properly. If people knew how much it was costing them, they would’ve moved these accounts as soon as they had a chance to in 2007.
Patrick: I understand. We’re coming up on a break here in a little bit and I want to make sure folks know that next week, we’re going to have Harry Dent on the phone, so to speak, joining us for the interview. It’s going to be a great show.
Harry is known for his latest book, The Coming Great Depression. Actually, I was acquainted with Harry Dent back in 1993 when he came out with his book, The Coming Great Boom. That was really good.
It was good information. It will be great information next week. I think you all will really enjoy that. So make sure you tune in next week at 5:30-6:30 on KSKY. You’ll really enjoy the show.
Richard, I know there’s so much more of the show to go. We’ve talked about the fees. What else did you want to cover?
Richard: Well, again, Harry Dent is going to be an awesome opportunity for listeners next week on the 20th. His last book printed last year was The Great Depression Ahead. Harry does research based on the predictive ability of consumer spending to determine what’s going to happen in the stock market.
Since 2/3 of our stock market is driven and our gross domestic product is driven by consumer spending, it’s real important that you look at the demographics of our society and how when people get older, they have a tendency to spend more or less of different types of things and how that affects different sectors of the economy and the economy overall.
Very bright guy, Harvard Business School. I think you’ll enjoy listening to him. I highly recommend you show up.
Patrick: I know that people can also contact you during the week, Richard. They can catch you at your office direct, right?
Richard: Yes, Sir.
Patrick: That’s (972) 758-4484. If you want to join the call today or the conversation, (972) 299-5759. Connect with Richard direct during the week at (972) 758-4484 or register for the event on the 16th at (972) 325-1700. No salesman will call. You’ll just get a confirmation letter if you want to come either the 16th or the 22nd out in Garland. It will be a great presentation, and then dinner to follow. You’ll want to stick around. We’ve got so much more of the show. We’ll be right back.
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Patrick: Welcome back to Financial Fortress Radio. I’m here with Richard Jordan, the Chief of Investment Strategies in the DFW area. Richard, we’ve got a great show. You got a big article this week on the bonds and the bond bubble. What’s going on in bonds this week?
Richard: Well, it’s not just this week. It’s been going on since last year. We saw a record amount of money getting poured in the bonds when the bear market began back in ’07 and ’08, and that’s normal.
But when the stock market recovered last year in ’09 and ran up another 50% or so since then, people still carried the fear from the previous bear market and, as a result, they have continued to pour money into bonds hoping that they’re safe.
For several weeks now, I have told clients and investors that we are in the middle of a bond industry bubble and, recently, last week, Warren Buffet, on Thursday testified that a US government inquiry commission on the financial crisis and he said that municipal bonds are expected to go down soon for three reason, the same three things I’ve been talking about to my clients and to my investors for the last six months – overly generous retirement and health benefits that have been promised to the baby boomers working in these cities and states who create those municipal bonds, over 40-50% of the workforce, depending upon the municipality, are all retiring in the next five years, and they’re all expecting these huge pensions.
Some of these government service jobs have 90% pension rates. 90% of their salary will be paid to them for a lifetime. And although the actuary tables when they created these pensions 40 years ago expected these people to only live two or three years past 65, now the average person lives to about 80. So that’s another 13 years that are not expected that they will have to pay for.
Then you combine that with property tax collections being down 15 to even 50% in some cities and states like Florida, like Nevada, like California. And finally, sales tax collections down 10% in the best areas, like Dallas, but down as much as 50% in some of these cities and states.
So of course Warren has already dramatically reduced his municipal bond portfolio in the first quarter of this year, and we didn’t hear about that until just about a week ago.
Patrick: Very good. I know that he has a pretty big portfolio as well, doesn’t he?
Richard: Yes. He had over five billion dollars in munis and he cut back almost 50%. Anything that looked the least big risky in the wrong areas, he immediately sold. That is because of the record defaults that are being forecasted in munis right now. There was another article in the Wall Street Journal about it last week, and there was another article on Money News.
So while the yields look attractive on munis right now, the reason is when yields seem like they’re high, it’s because there’s an undercurrent where they’re expecting a record number of defaults.
Now what happens when they default? You not only don’t get your interest, you lose your principle. Does that sound like a safe investment?
Patrick: Well, are most of the investors out there right now in the mutual funds or do they buy the municipal bonds direct?
Richard: Most are buying actually through the bond funds. Again, the bond funds are being created by large brokerage houses and they’re being pushed by the bond brokers at the large brokerage houses who are driven by what? Commissions.
Since they have no requirement to disclose any additional risk beyond what’s in the prospectus, even stuff that’s in the news, like this has been recently. It just demonstrates they don’t have a fiduciary duty to you and you’re risking your life savings by giving your money to those folks.
Patrick: Do you think the government will, in any way, try to bail those municipalities out?
Richard: There’s a possibility of that. But how many more bailouts can we produce in this country? We’ve already got a record amount of debt and it’s becoming real unpopular to add to that debt in an election year.
Patrick: I understand there’s a lot of transition this year from people trying to, in a sense, fire the incumbent. So what can we do?
Richard: Again, I would be selling out of the bonds and I would be taking a look at other types of investments right now. There’s simply too much cash that have gone into these bonds and we’ve got a bubble that’s ready to burst. So let’s take a look at bonds that are considered the safest like US treasuries.
The average yield on five-year treasures this year has dropped to 1.9% and that’s the lowest rate in the last 25 years. Most of my clients are seniors, and seniors have a much higher rate of inflation than the average economy.
The consumer price index that the government touts does not include food, does not include energy, and it limits healthcare cost to 4% of income. When you add those three things in, there’s a much higher percentage of a senior’s budget. What happens is the amount of inflation they’re experiencing is typically 3-4% higher than the consumer price index.
So when the government is quoting 1%, a lot of seniors are experiencing 4%, 5% even. So when they’re only getting 1.9% on a five-year treasury. They’re losing 2-3% per year in purchasing power.
Let’s take a look at the rate over the last three years because of the record amount that’s gone in is still only 2.28%. So for most seniors, this is a losing investment.
Patrick: How much do you think someone can lose on this?
Richard: Again, as a result of the deficits, we are going to expect o see rates go up as soon as this election is over. I expect that we’re going to see rates go back to their historical averages. That five-year treasury used to be an average of 3.48%, about 3.5% over the last ten years.
The market value of that bond will result, if it goes up, the current market goes up to 3.48, that 1.9 is going to be worth 44% less.
Think about taking a 44% loss on one of the bonds that you thought would be the safest possible investment, a US treasury. Again, that’s more than most people lost in 2008 in the stock market.
Patrick: One of the things I’m curious about with these treasuries. You look at the average mutual fund out there that has a money market fund. Are they stuffing treasuries in those? And if so, do the money market funds that generally have a consistent dollar price, are they going to be affected by these changing rates?
Richard: Most of the money market funds are buying short-term treasures and those are 90 days or less, no longer than six months. The rates on those products are typically around 2/10 of a percent on up to about 4/10 of a percent. Again, we’re dealing with record low returns on these products. The yields are unbelievably low.
And now you know why the Chinese and the Japanese have started cutting way back on buying US treasury bonds and why you should, too.
Patrick: Who is going to fill in the gap? If we lose the Chinese and the Japanese that have purchased so much of our debt in the past, who is going to fill in?
Richard: Well, what’s been happening is the Federal Reserve has been buying these bonds that the Chinese didn’t day. That’s one arm of the government buying debt from another arm of the government. It’s robbing Peter to pay Paul. It just does not work long-term.
Patrick: I know you’ve got a workshop coming up. Before we go to the break here, can you tell us about this coming workshop?
Richard: Yeah. The workshop will cover some of these issues. We’ll be at the Master Grill Steakhouse at Firewheel Mall in Garland. That’s right there where Garland Highway 78 hits the George Bush Turnpike. So it’s pretty accessible for anybody in the North, or Northeastern, or Eastern suburbs. It will be at 6:00 p.m. this coming Wednesday, June 16th and the following Tuesday, June 22nd.
Patrick: And how would they register?
Richard: You can call (972) 325-1700 to register. No salesman will call back. Just leave your name, address, and phone number so we can send you a confirmation letter.
Patrick: So it’s (972) 325-1700. They’re going to get an hour presentation from you. What’s one or two of the topics that you’re going to cover?
Richard: Again, we’ll talk about how the wealthy invest differently and how they save money on taxes; both income taxes and estate taxes while they’re managing their investments.
Patrick: That’s great. (972) 325-1700. Or if you want to call Richard direct this next week, it’s (972) 758-4484. This is Financial Fortress Radio. We’ll be right back.
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Patrick: Welcome back to Financial Fortress Radio. Richard Jordan is the Chief Investment Strategist in the DFW area here on Financial Fortress. Richard, I know one of the things that you really have talked about, but you want to get into a little more is going back to the fees associated with your retirement accounts. Most people just don’t know how much they’re paying, do they?
Richard: They have no idea. Because the average investor never reads a prospectus, the typical person believes that they’re paying less than 1% to have their accounts managed when, in fact, they’re typically paying three to four times that.
Patrick: What are some of the other things that are included in these undisclosed fees?
Richard: Well, the undisclosed fees are just that. They’re not disclosed. They’re referred to in the prospectus by various, vague terminology. As a result of that, the government and the SEC allows these mutual fund companies to get away with the language that’s in there.
Certain types of fees have to be disclosed like ordinary initial commissions, but other types of compensation are referred to in vague terms that actually are forms of commissions.
For instance, if you sell so much of this mutual fund, we’re going to buy a trip to Tahiti for everybody on your brokerage team. We’re going to allow you to go golf at the finest golf course in your area. We’re going to spend a lot of money on special things for your people. Those are typically referred to in vague terminology as just “compensation.”
As a result, the investor can’t figure out what that stuff means, if he even bothers to read the prospectus.
Patrick: I guess it gets a little fuzzy, and I’m sure that’s kind of their intent, but if we were to look at it, are there any keys to finding some of those expenses or do we just need to call you?
Richard: That’s what we do for a living. If I could teach you everything I’ve learned in the last eight to ten years about finding undisclosed fees, it would take several weeks. We can’t get that covered in a show; we can’t even get that covered in a typical one-hour meeting.
Most people’s eyes glaze over when I start talking about some of this terminology. But I can show the results to people if they’ll simply bring their brokerage statements in and allow me a couple of hours to go over those statements because I can find the real information and show them what they’re actually paying.
I had a client come in that had been using a major brokerage house last week. And she was very smart. She was a very bright lady and her husband had been very smart and had accumulated well over a million dollars before he had passed.
But over the last 15 years, she wasn’t taking any money out of this account. It had gone down by about 45%. She was greatly concerned there wasn’t going to be anything left at the end for her heirs.
And she said, “But I’m only paying an average of about .83% on all these different funds, and I just don’t understand. My management fee is only about1%. How can I be losing money this fast?”
I went through and analyzed. She was in about 30 different funds. All the information that I have access to as a Registered Advisor that the public can’t get their hands on. And what I found was that her actual cost was 3.18% instead of .83%. Is that a little bit of a difference?
Patrick: So she was losing money no matter what the market did almost, it seems like.
Richard: And her fees – her undisclosed fees – were three times higher than her disclosed fees, meaning that she was paying four times what she thought she was paying for fees.
Patrick: Wow. So how much had she lost?
Richard: Again, she had lost about 45% in the last 15 years when the S&P 500 index probably has averaged around 5-6%. And of course, most of the gain in the S&P 500 was in the 90s, between ’94 and ’99. In the last ten years, as everyone knows, the S&P is down about 20-25%.
Patrick: Wow. That’s amazing. Speaking of the 90s, one of the things that I do want to make sure people know is that Harry Dent is going to be on the show next week. I think he’s one of the good guys. He’s been around for a while. I actually learned about Harry in the 90s when he came out with one of his early books called The Great Boom Ahead. It was done in ’93 and he very accurately assessed what was going to happen in the next ten or so years, plus.
And then in 2009, his latest book is called The Coming Great Depression. He’s using some interesting tools to assess what’s been going on in the marketplace, and what’s coming ahead.
But he has been very accurate to a great degree – not perfect; I don’t think anybody gets it all the time. But he has done a good job. So we wanted to get him on the air. We thought he’d give you some good information. So listen next week, 5:30-6:30.
Richard: It should be a great show. Again, Harry Dent is a Harvard Business School economist. He started writing books in 1989. He’s got about seven or eight books out there. A lot of his research is based on consumer spending patterns compared to demographics.
His major theory deals with the fact that young adults, of course, when they start having children and [38:38 inaudible] them, keep spending money more and more as the children grow up. It’s funny how kids cost money, isn’t it?
Patrick: A lot of money.
Richard: And then after the kids finish college and leave home, the spending slows down the last 15 years of the working life for the typical adult in America. They end up saving more and more to prepare for their own retirement.
For the baby boomers, that means that there have been record amounts of savings that have accumulated over the last 10-15 years, but now with the fear in the market and people flocking the bonds, a lot of people are going to get hurt by this bond bubble.
Patrick: We were just talking about that in the last quarter. The bond bubble is going to be significant. There are going to be more people losing more money than I think anybody would expect. Wouldn’t you agree, Richard?
Richard: Yes, and losing money on things that are considered the safest possible investments, like US treasury bonds or treasury inflation protected bonds, those are both a great risk in the coming market; a bond bubble bust.
Take a look at the base rate for a five-year treasury inflation-protected securities right now – 0.5%. Take the last 12 months inflation late – and again, the inflation rate that the government creates is different for these bonds than it is for the consumer price index that you hear announced. It’s even lower.
They say it’s 0.9% in the last year. Right now, the TIPS that have just been recently released are paying 1.4%. Think about that. 1.4%. With over $3 trillion in cash still sitting on the sidelines combined with high unemployment, we now have a substantial risk of deflation.
What would happen to your treasury inflation-protected security if we did go through deflation? It would drop below that 0.5%. In fact, this is the only bond that is allowed to drop below zero and erode your principle.
So you could actually start losing money on this. Not only would it be worth less in the open market if you tried to sell it, but the actual face value that if you held it to term, if you held it to maturity, the amount returned to you by Uncle Sam would be less than what you initially put in.
The reason you don’t know about this – Uncle Sam doesn’t have a fiduciary duty to explain bonds to you and neither does your broker. But we do, and we want to explain these things to our clients so they understand that they can get the same level of trusted advice that the wealthy have enjoyed since 1940.
Patrick: You’ve got a workshop coming up that should help them understand some of this. Wouldn’t you agree?
Richard: You bet. We’ll talk about the five key financial strategies that millionaires use on Wednesday night, June 16th and Tuesday, June 22nd at 6:00 p.m. at the Master Grill Steakhouse at the Firewheel Mall in Richardson.
Patrick: And how would they register?
Richard: You can call (972) 325-1700.
Patrick: (972) 325-1700. You can register to come to the June 16th at 6:00 p.m. workshop with Richard Jordan at the Master Grill Steakhouse. I know that it’s a good 60 minutes of a lot of content.
Richard: You bet.
Patrick: And they’ll be able to visit with you, ask you questions and enjoy a nice dinner afterwards. That’s (972) 325-1700. Register for the event. No salesman will call. It’s just a confirmation. We’ll be right back with Financial Fortress Radio. Thanks again.
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Patrick: Welcome back Financial Fortress Radio. This is Pat Dougher, Richard Jordan is in the house and we’re talking about ways to help you invest correctly. I know we’ve been talking about the undisclosed fees in the marketplace that’s a real shocker for most people, the bond bubble and how it really has a potential to be a real damaging effect to your investments and your portfolio in the next year.
Our guest next week being Harry Dent. This section, I know you wanted to talk about the Roth IRA. Explain what the Roth is, Richard, and why someone might consider transforming their old IRA into a Roth?
Richard: The Roth IRA is a different type of IRA. The Traditional IRA, you use pre-tax dollars to create an account, and then that account grows tax deferred. What that means is the dollars going in, the principle, were never taxed and then the dollars that the account made were never taxed so all of that money is taxable when it comes out.
Patrick: Very good. We get that. That’s a regular IRA.
Richard: Traditional IRA, or Rollover IRA. There are number of terms for them; SEPs, etc. Then we’ve got the Roth IRA and the Roth basically uses after tax dollars going in and then all the gains after you create the Roth IRA are tax free.
And since you’ve already paid taxes on the dollars before you put them in the Roth and all the gains in that type of IRA are tax free, that means all the gains that you take out of that are going to be tax free for your lifetime and for the lifetime of your heirs.
Patrick: So it’s a little bit like there’s two containers. One, you’ve never paid any taxes on the dollars that are in that IRA, so when it comes out, you pay taxes on it. If you do a Roth, that container, the taxes have been paid on the way in before they get there, and everything that comes out of there is tax free.
Richard: Exactly.
Patrick: I understand that we’ve got a rare opportunity in the next couple of years to change the Traditional IRA to a Roth. Tell us about that and why there’s a unique opportunity there.
Richard: Again, Congress passes laws to benefit who? The political action committees that represent the large companies and industries and the wealthy. This change in the Roth IRA law that went into effect at the beginning of this year was designed to help the wealthy who have record amounts of money sitting in large 401Ks and large IRAs of various types; Traditional and Rollover types.
And they’re scared that we’re going to see much higher tax rates over the next ten years, and that fear is well founded because of the large budget deficits. The Tax Foundation report that came out in March said we would have to effectively double our tax rates – and that includes the people in the 10% bracket, would have to go to 19. The people in the 15% bracket would have to go to 32. The people in the 25% bracket would have to go to 58%. It goes on and on. Effectively, double tax rates for ten years to pay off our deficit.
Patrick: Isn’t that a little bit scary? Because even if we gave more taxes in, at the rate that they keep over spending it, won’t they just increase the dollars spent?
Richard: Well, they can do that, but I think what will happen is people, eventually, will make a demand for a balanced budget upon Congress. That’s going to be a demand that’s going to be made by the people because they understand the pain they feel from the increasing tax rates. Until people feel pain, they don’t demand Congress changes.
So here we have the wealthy that got this Roth IRA law changed that was designed to benefit the lower and the middle class. Under the new law, anybody, regardless of their income level can roll their Traditional IRA into a Roth IRA. They’ve got two years to pay the tax on it interest free. When’s the last time Uncle Sam gave you a loan interest free?
Patrick: Never. I know their interest rates are very, very high and they charge penalties on top of what’s there.
Richard: Right. And unlike a Traditional IRA, you do not have to take a required minimum distribution out of a Roth. If that money is just sitting there waiting to go to the next generation, it can now sit there and continue to accumulate.
The reason this opportunity is so tremendous is because we’ve had a little dip in the market, but we’re still in a bull market so over the next 16 months, it is likely that this bull market is going to continue.
If you convert today to a Roth IRA and this market runs up 30% over the next 16 months, and there is a likelihood that will occur, then the run-up in your stock portfolio would essentially pay all the taxes due on your new Roth IRA. And now you own a truly tax-free account that can benefit you in generations for up to five generations to come. And with the use of clever estate planning, we can even extend it past that.
But we can easily stretch a half a million dollar Roth IRA into five generations. Just let us show you how.
Patrick: If somebody wants to do that, they can call you directly at your office, correct?
Richard: That’s correct. Or they can come to the seminar. Either way. My direct number is (972) 758-4484. But that’s also my trading desk so if the market is open, I’m generally busy with clients or I am busy online, so I would recommend you call after 3:00 p.m.
Patrick: Okay. So that’s (972) 758-4484. And they can discuss their IRAs and all their investments. You can look at what the options are.
Richard: Absolutely.
Patrick: (972) 758-4484. Let’s talk about the workshop you’ve got coming up.
Richard: Absolutely. They can come to the seminar and kick the tires, get a chance to meet me, hear about the five ways the wealthy invest differently and that’s coming up at the Master Grill Steakhouse at the Firewheel Mall this coming Wednesday night, June 16th at 6:00 p.m. Just call (972) 325-1700 to register for that.
Patrick: And if they do, they’ll get a confirmation letter. Is that correct?
Richard: You get a confirmation letter in the mail. No call from a salesman. Just simply leave your name, and address and phone number on the voicemail. If they come, they’re going to get a chance to learn how the wealthy get their principle and high returns in income guaranteed on their money, how they get high returns even above index averages without taking on necessary risk in stock and bond markets or variable annuities, how to identify poor investments with high fees, how the rich legally avoid paying up to 99% of their capital gains taxes, and how the IRS levies an outrageous tax of 68% or more on many middle class folks’ IRAs when they pass away and how that won’t happen to the rich because they’ll either convert it to a Roth IRA or they’ll use some other clever legal entities to protect it. We talk about all that at the seminar.
Patrick: That’s the June 16th – this coming Wednesday night, 6:00 p.m. Master Grill Steakhouse. That’s over in the Firewheel Mall in Richardson in the Garland area. If they register, they can come to the 16th or to the 22nd which is the following Tuesday. Correct?
Richard: Correct.
Patrick: And there’s 60 minutes of great information. Then afterwards, dinner but they can ask you questions, learn more about what you’re doing, what you’re recommending and even if they want to know more, then after that they can sit down with you in an appointment kind of a setting. Correct?
Richard: Absolutely.
Patrick: Okay. You can just call (972) 325-1700 to register for this great workshop. Or if you want to call Richard direct it’s (972) 758-4484. Don’t forget, next week we’ve got Harry Dent. Harry’s got a couple of books. Actually, he’s got several book out there, the latest one being The Coming Great Depression.
You won’t want to miss that. Harry’s a good guy. You’ll enjoy the presentation and what he’s talking about there. It will be a great show.
One last time, if you want to register for this coming workshop, it’s (972) 325-1700. There’s so much to come, so much to talk about. We will be talking to you next week on Financial Fortress Radio. Thanks again. Have a great week.

Financial Fortress Radio June 6 2010 with Richard Jordan

Patrick: Welcome to Financial Fortress Radio. This is Pat Dougher. So thankful you’re here today. We’ve got a great show for you and I want to get right into it. Richard Jordan. Richard, what is going on in Washington this week in New York? What’s been happening? Because I’ve seen a lot of things.
Richard: Well we’ve had quite a challenge. The market took a big hit on Friday because the employment report came out and it turns out that 90% of the jobs that were created were census workers. Of course, that’s – what, a 90-day job? Maybe it will last the rest of the summer and those people are unemployed again. So 411,000 out of the 430,000 jobs were census workers. Does that sound like an awesome recovery to you or what?
Patrick: [Laughs] I would think that’s what I’d call underemployment.
Richard: Well, we’re looking to Washington for guidance of course and we’re just not getting it and, as a result, we’re just seeing a lot of turmoil in the markets and expect a lot more turmoil to come. The recovery plan is still going slowly.
So, we’re going to talk today about also what happened in New York. We had a little testimony the day before from Warren Buffet, and Warren pretty much echoed what I said last week; that we are in the middle of a bond-industry bubble. And according to Warren Buffet, I think you would probably consider him a pretty good investor, wouldn’t you?
Patrick: Bright guy. The last time I checked, he ran a fund worth several billion dollars.
Richard: Yeah, probably hundreds of billions. But anyway, Warren testified to the US Government Inquiry Commission on the financial crisis. He said that municipal bonds are expected to go down and there are going to be record defaults. It’s primarily due to three reasons.
Overly generous retirement and health benefits promised to the baby boomers who represent over 40 – 50% of the government workforce, and all are retiring in the next 5 years. We see the same thing in the Post Office except the number is over 60%. Property tax collections are down 15 – 50% in all cities and states, and sales taxes are down 10 – 50%.
So, of course, Warren loves to testify about what he’s already done once he’s already done it. He dramatically reduced his muni-bond portfolio early this year because of the record defaults that are expected.
We’ve been talking about this also since the beginning of the year and our clients are well aware of it. So while the yields look attractive on muni’s right now, the record defaults means you are taking a huge risk buying muni’s right now, just like the junk bonds in the 1980s. Can you say Michael Milken?
Patrick: Well, for those of you that know history, that would be one to remember, because he was the junk-bond king.
Richard: Yes, he was. And he went to jail for it.
Patrick: Well, good riddance at that point but, because I know he took a lot of people for a really rough ride at that time and the thing that I wonder, who they’re going to hang out to dry in this new muni junk bond debacle.
Richard: Well, of course, the same ratings agencies were involved in rating these muni’s as the ones that rated the sub-prime mortgage bonds.
Patrick: That’s encouraging.
Richard: Yes and Congress is looking at filing not just fraud charges, but possibly criminal charges against the bond-rating agencies in New York and I’m not mentioning any names, like S&P or Moody’s, but you can read about it yourself.
Patrick: That’s a really huge thing. A lot of people do not understand how big that is. But, if those things start to happen, like if we look at California or Florida, which are probably two of the biggest states that are being affected immediately by that, right?
Richard: That’s right.
Patrick: If those things start to collapse, what are we going to see or what are they going to see as some of the by-products of that?
Richard: Well, we’re going to see huge cuts in services. We’re going to see a lot of road projects come to a halt. Of course, your friendly bond broker is going to collect his commissions up front so he’s got no requirement to disclose this risk to you because they have no fiduciary duty to you.
We’re going to see a lot of senior citizens that have poured their money into muni’s and corporate bonds in the last three years, out of fear of the stock market, lose their life savings in this sector.
I looked at a portfolio just a few weeks ago that was more than 50% muni’s and this guy was in a leveraged-bond fund. Can you say horrible idea?
Patrick: Well, no kidding. But, even beyond that, I mean the people that typically invest in muni’s are the ones who want to take the highest, or will get the greatest benefit, from the tax-free interest, correct?
Richard: Or they just don’t like paying taxes.
Patrick: Well, true, but in the sense that…
Richard: They’ve got something against the current administration. I don’t know what that might be, but some of the people that listen to this station might have something against paying taxes to the current administration considering what their plan is.
Patrick: Well, I’m just seeing that if those people have large holdings and then these things start to go through the eye of the needle, all it will take is one state beginning to go have defaults for it to have a ripple effect all across the nation, won’t it?
Richard: Yes, and the key problem is that these bond-rating agencies get paid by the very people that ask them to rate the bonds, so there is an inherent conflict of interest. Congress has not dealt with this in the so-called new financial regulations that they have passed in the House. They still are a long ways away from protecting the consumer. The only way you can get protection is you need to hire yourself someone that has a fiduciary duty to you.
Now, that would not be a broker or an insurance salesman. That would have to be a Registered Investment Advisor who is required to act as your fiduciary and trusted advisor – and that’s what we are. We’re in that top 5% that are only registered advisors. We don’t carry the extra licenses so that we can collect commissions on your stocks, bonds, mutual funds and variable annuities.
If we put you in one of those products, it’s because we are going to win together. It’s not because we want to lose, or we don’t care about you. The broker is driven by commissions first and that’s the inherent flaw in the system, just like the bond-rating agencies are driven by getting their fees paid.
If somebody tosses them a 6-inch thick document that explains through some complicated mathematical gyration that somehow sub-prime mortgage bonds are a great investment and should be rated triple-A, you get the kind of financial meltdown that we had over the last three years and we’re still paying for it.
Patrick: That’s right.
Richard: And Europe’s paying for it now.
Patrick: Well, I know that’s right. I know you have a workshop coming up?
Richard: We do.
Patrick: When is that scheduled for now?
Richard: We’ll be at the Master Grill Steakhouse at Firewheel Mall in the Richardson Garland area. If you don’t know where Firewheel Mall is, it’s right at the end of the George Bush Turnpike, just east of Central Expressway a couple of miles, and you’ll find us there at 6:30 p.m. on Wednesday, June 16th.
Patrick: Very good. And they should call and register.
Richard: Yes. Simply call (972) 325-1700 and you will hear more facts about how you can do a better job of investing, lower your costs, and get higher returns without worrying about the conflicts of interest that are inherent in our financial services industry.
Patrick: Well, I agree. The last week, we had that workshop out in Timarron. It was great. There was a good crowd, great questions afterwards and it was all just information that would help somebody understand exactly where they are and what they need to begin positioning themselves to take advantage of the tax tsunami that is coming and other things that are changing.
One thing I would love to encourage is if you’re listening to the show and you have a question for Richard, it doesn’t have to be on the topic we’re on. If we’re talking about financial planning and if you’re talking about questions that you just have, if you had the opportunity to ask a financial planner, a Registered Investment Advisor, or someone in that financial field a question, call in. (972) 299-KSKY (5759) or 866-660-5759, and ask Richard a question. So, with that, I know that you wanted to get back to more about bonds.
Richard: Yeah. We’ve got, in general, a bond-industry bubble. The last three years, we’ve had record amounts pour into it historically compared to any other period in history. The interest rates because of that have dropped to extremely low yields, low interest rates, and this oversupply of bonds is going to be a problem when people try to get out of them fast because the market value of them is going to be dropping quickly when inflation finally hits.
Now, it’s being held down artificially by the fed keeping the overnight-funds rate low, but that’s not going to last much past the election this year. You need to start thinking about getting out of bonds before the professionals do, and the professionals work 6 –12 months in advance. They are going to be all out by the end of this year. So you need to start thinking about it. It’s only six months away.
The average yield on five-year treasuries is only 1.9% right now; the lowest rate in the last 25 years. And the average rate in the last three years on that product is only 2.28. So while US treasuries want to look safe, just imagine if they just jump up to their last 10-year historical average of 3.48, the market value of your 1.9 bond will mean a 44% loss if you have to sell one of those. You’ll lose 44% of the face value. Every $10,000 you’ve got will be worth $5,600. Does that sound like a place you want to have your money put?
Patrick: I thought these were conservative investments, too.
Richard: Well yeah. But, you still have to consider that when inflation hits, 1.9% is nothing compared to the historical averages we’ve had on inflation. You will lose your purchasing power and when you have to sell these things in an emergency, you’re only going to get the market value. Now you know why the Chinese and Japanese have cut way back on buying treasury bonds.
Patrick: Yeah, well, one of the last things I want to do is make sure that people know they can register for your upcoming workshop. What’s the information on that?
Richard: June 16th, Wednesday, at the Master Grill Steakhouse at Firewheel Mall, (972)325-1700.
Patrick: (972) 325-1700, and there’s no salesman on that line, right?
Richard: No salesman.
Patrick: All they are going to get is they are going to be able to leave their information. You’ll send them a confirmation.
Richard: Correct.
Patrick: And then they’ll be able to attend the workshop for free and typically there’s a meal afterwards, but the real benefit is what you can get out of this great workshop. We’ll be right back with more of Financial Fortress Radio.
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Patrick: Welcome back to Financial Fortress Radio. This is Pat Dougher, Richard Jordan. We have a great show going. We’ve been talking about how Warren Buffet was listening to your advice – well, maybe not that. He was just – it seemed that he was echoing everything we talked about last week when we were talking about the bonds and the future debacle in the municipal arena and several other things.
I know we’d mentioned the inflation or the treasury-inflation protected securities. Tell us a little bit more about those and what’s going on and why investors that have money in those may be in for a really, really rough ride.
Richard: Well, we talked last week about TIPS. The latest rate they are offering is 0.5%, as a base rate, and the 12-month inflation rate that they’ve calculated with their special little method, that is the only place that inflation occurs is somewhere in Congress, I guess, I don’t know; doesn’t make any sense to me. Can you believe inflation was only 0.9% in the last 12 months?
So, the TIPS are paying a combined 1.4% compared to the treasuries paying 1.9. So, you’ve got a 5-year bond that’s supposed to be inflation protected, but the problem is you’ve got $3 trillion in cash still sitting on the sidelines, you’ve got high unemployment, we now have a substantial risk of deflation.
So, if prices continue to drop on things people are buying – and Uncle Sam measures that with this special index just for the treasury-inflation protected securities. It’s not the same as the Consumer Price Index; it’s another way they use to control the amount of returns they are going to pay investors.
TIPS were a great idea 10-years ago when they came out, but they have slowly found a way to make them a non-attractive investment. So, it can actually reduce the principal on your bond. Can you imagine that?
Patrick: No, I really can’t. But, the other thing I’m curious about is if deflation occurs, what are some of the things that will be driving deflation so that people can say, “Yep; we’re seeing it.”
Richard: Well, it’s just falling prices. When prices start falling, then employers are going to have the ability to drop wages and that’s going to drop our quality of life because you know how long it takes to get employers to agree to bring wages back up.
Patrick: Right.
Richard: It’s sort of like when you hear that crude oil has dropped at the wholesale level last week. Why does it take two weeks for it to drop at the gas pump? But if it goes up over the weekend, the crude oil, why is it that the retail gas prices go up with it?
Patrick: Oh, in fac,t it’s so fast at that point.
Richard: Isn’t it interesting how that happens?
Patrick: Oh yeah.
Richard: There’s some collusion in the oil industry there. So, Uncle Sam controls what he wants to pay on these TIPS and they were a great investment 10years ago, not very good right now. So, if you’re getting advice to start buying a lot of bonds, or if you’ve been buying a lot of bonds, any kinds of bonds, you may want to rethink this strategy.
There’s been way too much money poured into bonds and bond funds and when we see these rates change they are going to change rapidly after this November election. There is no reason for the fed to hold rates down after that, unless we’ve got deflation and, if that happens, it will be just like Japan. We could go six, eight, ten years with a deflationary spiral and that will cause long-term unemployment, long-term loss of value in your housing, long-term value loss in everything.
Even the stuff you’re trying to peddle on eBay and Craigslist is going to drop like a rock, so cash is going to be king either way and the only opportunity really you’ve got left is in the market. But, you’ve got to carefully select what you’re doing.
Now, why are you being steered to buy these kinds of products? Because you’ve got a product focus in the brokerage industry. They are only concerned about pushing the items that make the most commissions for them and, right now, if they can’t convince you to get into the stock market they’re going to try to get you into the bond funds because bond funds, just like stock funds, any mutual funds have high interest, high commission rates.
So, when I look at mutual funds and bond funds on somebody’s brokerage statement, I often, even with a sophisticated investor, am told, but I’m only paying 1% for these because I’m a so-called elite investor with this top-ten brokerage outfit. I’ve got a lot of money here. I’ve got a million here. I’ve got three-quarters of a million; I’ve got $2 million, whatever. And they treat me with kid gloves. They love me.
Well, I run from an independent outfit in analysis of the funds that they are holding, and typically what I find is that they are paying two, three, even four times as much in undisclosed fees as they are in disclosed fees. Isn’t that interesting, Pat?
Patrick: Well, how can you even find out what undisclosed fees are, or can you?
Richard: Well, again, this is not something the industry wants to share. This is something that requires some investigation and some analysis. And if you want to go through a lot of prospectuses and read them over carefully and if you know what all the vague terminology means, and then you want to go back and analyze those costs in previous years, you can arrive at these figures, just like I can. It’s a lot of work.
Patrick: So, what can we do about it?
Richard: You could hire yourself a Registered Investment Advisor, like us, that doesn’t carry the brokerage licenses that do not have the conflict of interest that your stockbroker and your insurance sales guy has.
Patrick: Very good. So, you have a workshop coming up. Tell us about that.
Richard: We’ll be at the Master Grill Steakhouse at the Firewheel Mall and that will be on June 16th, on Wednesday, at 6:30 p.m.
Patrick: Richard, who should be really attending those?
Richard: Anybody that’s got a serious amount of money invested and would like to get away from these losing cycles where they keep losing and their brokers keep winning. Have you noticed their broker is not suffering?
Patrick: Well, that’s kind of indicative of the whole scenario though. A broker is a salesperson.
Richard: Absolutely.
Patrick: And I know that you spend a fair amount of your week just doing research, don’t you?
Richard: Yes. I probably spend at least half of my week in research every week, and some weeks it’s more than that. I limit the amount of time I spend face-to-face with clients for that reason so I can do the best possible job for my clients.
The typical profile in the industry is they spend 97% of their time either making cold calls, setting up appointments, in meetings with clients, trying to sell the stock pick of the week or the mutual fund of the month and that decision, that recommendation is driven by the highest possible commission they can make for themselves.
Patrick: So, if somebody wanted to come to the workshop, they would just…
Richard: Dial (972) 325-1700 and leave your name and address. We’ll get a confirmation letter over to you. There is no obligation whatsoever. I don’t know if you’ve ever been to a Master Grill, but it sure is scary. It’s a Brazilian steakhouse where they cook the meat on the spits, and they bring it to the table and they slice off what you want, so it’s really quite a feast and I think you would enjoy it if you’re just looking for some food, but we’re really looking to attract people that want to learn something new.
Patrick: Right. So that’s (972) 325-1700. Now, if someone wanted to ask you a question, Richard, could they call you direct?
Richard: Sure. I’m pretty busy during the day with the market and all the turmoil lately, so I’d recommend they call after 3:00, but if they call my desk and leave a voicemail, I’ll try to get back to them the same day after 3:00, (972) 758-4484.
Patrick: 972-758-4484. And that will get them to your direct line?
Richard: That goes direct to my trading desk and I man that as much as I can during the day, but I don’t pick up the phone when I’m busy. So, like I said, before 3:00, when the market’s open, I probably won’t pick up the phone unless I recognize your name.
Patrick: Very good. Well, I know that if folks want to ask you a question now they can call in at (866) 660-5759. Again, one last time here before the break, Richard, where’s the workshop going to be?
Richard: Master Grill Steakhouse, Firewheel Mall. It’s at the end of the George Bush Turnpike, just east of Central Expressway, in the Richardson Garland area.
Patrick: And that will be on?
Richard: June 16th. That’s a Wednesday, at 6:30 p.m.
Patrick: So, it will be 6:30 – 7:30. Your time to share with them the insights that you teach that you help people with and then after that, there will be nice a dinner.
Richard: An educational workshop followed by a gourmet dinner, absolutely.
Patrick: And I’m really thankful it’s not a sales pitch, so you’ll really enjoy that if you come.
Richard: Nothing will be sold.
Patrick: To register, it’s (972) 325-1700. This has been Financial Fortress Radio and we’ve got more to come, right after this.
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Patrick: Welcome back to Financial Fortress Radio. This is Pat Dougher, Richard Jordan. We’ve got a great show going. We’ve been talking about the bond market and how it really is set up for going through the eye of the needle next year. It was neat to hear Warren Buffet echo last week’s show, earlier this week, when he testified in front of Congress over some of the things that are going on with the municipal industry, and that’s good and bad.
It’s neat to be on the forefront; it’s kind of sad for those that are still investing in muni’s, and the future of muni’s. And we’ve also been talking about the undisclosed fees. That’s something that a lot of people don’t have a clue about their investments and how much of their investments are actually being taken by the financial institutions that are controlling their assets, so to speak. Wouldn’t you agree?
Richard: It is just astounding. Occasionally, I get someone in my office that keeps extraordinarily good records. I had a lady, whose husband died about 15 years ago, in my office last week and she showed me the returns she’s had over the last 15 years, and the market has probably only averaged about 5% over the last 15 years because, as you know, in the last ten years, it peaked at 14,000 on the Dow and, right now, it’s running right at about 11. So, it’s down a good 25%.
So, a lot of people experienced losses in the last ten years, but the average, because of the run up of the tax and a lot of other things in the bubble that occurred in the late 90s meant that they had some astounding returns then. Most people still averaged about a 5% rate of return in the last 15 years gross… gross return.
In other words, that’s the return that the broker told them they were making. That’s the return the mutual fund told them they were making. That’s the return they saw published in the magazines, and that’s what Morningstar said they were making. Bu,t unless they had somebody analyze those funds for them carefully, what they would have found is that the average cost for a fund are about 8% a year.
Patrick: 8% a year?
Richard: 8%.
Patrick: That doesn’t even seem realistic.
Richard: Because commissions average over five and then you’ve got disclosed fees usually running around one, and then you’ve got undisclosed fees running another 2 – 4%. So, no broker worth his salt wants to keep you in a fund more than a year. He wants to earn another commission every year on you and so the average amount of time he’s going to leave you in a fund is typically 12 –18 month
Patrick: I remember hearing stories even recently where somebody had half a million dollars to invest and they were in about 45 funds and I just kind of cringed because I knew what the broker had done.
Richard: Absolutely.
Patrick: He had actually kept the investments below the break points for commissions, so that he would get the most money out of the deal.
Richard: Yeah. Just blatant misuse of their power. In that case, had he put that person in funds a $100,000 at a chunk, they would have paid the lowest possible commission instead by averaging 10 or 15 or 20,000 in each fund, the highest possible commission, the maximum commission is 8.5%. That kind of account was probably paying closer to 7 or 8% on the average, and that’s what was happening with this poor lady.
She started out with a $1.5 million 15 years ago. She’s worth about 800,000 right now and she’s not taking anything out of it to live on. And she’s reinvesting all her dividends. So, you tell me, where did the money go?
Patrick: Really? That’s scary. Well, I know that if somebody had a question to call in to talk to you, they could just dial (866) 660-5759 if you want to get on during the show. If not, if you want to call and register for your next workshop, you’ve got a workshop coming up.
Richard: We do.
Patrick: June 16th?
Richard: I believe that’s right, on Wednesday at the Master Grill in Firewheel Mall. It’s in the Richardson Garland area at the end of the George Bush Turnpike. It’s a great mall. If you haven’t been there yet, you need to take a look at it. It’s just a block north of the AMC Theatre there.
This is one of those Brazilian steakhouses where they bring the meat to the table, about a dozen different varieties, after they cook it on a spit and slice off what you like and if you’re a vegetarian, an awesome salad bar.
Patrick: Yeah, I almost couldn’t come because I was on this no-meat diet for the next 90 days so that’s great. Now, to register, it’s real simple.
Richard: (972) 325-1700. Leave your name, address and phone number and we’ll get a confirmation letter out to you. No salesman will call. It’s a simple matter of registering. The seminar is strictly informational. We’re not pushing products.
In fact, that is the big difference between a broker and a Registered Investment Advisor. We’re looking for solutions for you that meet your goals and needs, and we care about those goals because we’re a fiduciary. We’re required to act as a fiduciary.
Furthermore, even if we weren’t, the golden rule is part of our mission statement. That’s just the way I feel about the business, and that’s the way we run the business.
Patrick: Well, weren’t there even some material this week that you saw in, really, about this fiduciary equation or fiduciary responsibility.
Richard: Yes. We’re 40 years now in the financial planning industry, and one of the trade magazines last month ran an article. This article was written by a gentleman that runs an educational business for brokers. Basically, what he does is he tries to teach brokers how to act like they care, to act like they are a fiduciary because we know they’re not.
He talks specifically in this article, about the brokers always claiming they want to do the best things for clients and provide impartial advice just like a Registered Investment Adviser does. And since they want to, that’s why there’s no need for Congress to regulate them in this area. And this guy, who actually teaches them how to act like they care, says, “If it’s true, then someone please explain to me why so many of our industry publications are filled with advice on how to avoid being too salesy and how to avoid pushing products.”
And why do they want to push products? Because there’s commissions tied to those products. In a survey that was done by another outfit that also does education he quotes among all the major brokerage firms, and what the result was – this is a large company; one of the best known in the industry – was that only 6.6% of the Registered Investment Advisors were true wealth managers.
The rest held brokerage licenses and were operating within the traditional investment generalist model where they value the transactions more than the long-term financial planning, or the financial health or the financial goals of the client. So, 93.4% of the people work this way in the financial services industry. That means you have only one chance in 16 to get it right.
And I know that there are persuasive guys out there in this business. I know that you meet them and they sound like they know what they are talking about, but trust me, they care about themselves first, second and third, the brokerage house fourth, and you’re way down on the list. You’re lucky if you’re on the top ten.
Patrick: Well, and with that in mind, I know that to really get a connection to a Registered Investment Advisor like you, meet him, go listen to your workshop. I would encourage you to do that. I’ve been through it a couple of times; really enjoyed it, found it to be informational intense and non-salesy which is really appreciated and I could tell in the audience. We had a great workshop this last week. Next one’s on June 16th.
Richard: At the Master Grill Steakhouse in the Firewheel Mall.
Patrick: And you’ll start at 6:30?
Richard: 6:30 is the start time. We’ll be done talking at 7:30. You’ll be eating at 7:30. Again, if you’re a vegan, they’ve got a great salad bar. If you’re a carnivore like I am, you won’t believe how much stuff they got there for you.
Patrick: It should be really good. So, just to register, they just dial the (972) 325-1700 and if someone wanted to connect to you directly, they can just call your direct line?
Richard: Absolutely. (972) 758-4484. If you’re worried about asking questions on the air about personal matters feel free to call. I return most calls after 3:00 because the market closes at 3:00.
Patrick: So, that’s (972) 758-4484 is your direct line.
Richard: That’s correct.
Patrick: To register for the workshop, the 16th, (972) 325-1700. There’s no salesman to call. It will just be they’ll leave their name and number, and address and you’ll send them a letter of confirmation. We’re just really thankful for this. We’ve got more to come on Financial Fortress Radio. We’ll be right back.
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Patrick: Welcome back to Financial Fortress Radio. This is Pat Dougher, Richard Jordan. We’ve had a great show. We’re talking about the bond market and the debacle that’s in front of it, the munis in the scary position that they’re in and even Warren Buffet saying what a mess that they’ve got there.
We’ve also been looking at undisclosed fees. A lot of people don’t even realize how much they’re paying in their investments. One of the things we want to make sure is encourage people to look at the Roth IRA. I know that you’re a big proponent of the Roth IRA. Can you tell us, not only what it is, but why someone would look at it?
Richard: A lot of people come to me and they say, “I don’t want to support this current administration.” I know how they feel.
Patrick: You feel their pain?
Richard: I feel their pain. I felt that way once before, but I’m an analytical guy and I like to look at the numbers. I’d rather give you good financial advise than bad financial advice. What an idea.
So, the key thing you’ve got to look at – there was a report put out by the Independent Tax Foundation in March and what it said was with the amount of deficits that we had already accumulated by January 1st of this year that we would basically have to double our tax rates for a ten-year period in order to pay off the debt that we already have – ten years, double the rates.
So, would you rather pay the rates we’re paying today or would you rather pay twice as much when you take it out on a minimum required distribution table over the next 15 or 20 years? Imagine the pain you’re going to feel if you’re taking that money out and you’re paying 50 or 60% on it, and you could’ve just swallowed and went ahead and make that payment today at 28 or 33%.
So, consider this: you’ve got two years to make the tax payments. You can make 50% next year and 50% the year after that – number one. Number two – you can characterize it as a Roth while we’re at a low point right now. The market is at 11,000 in the DOW and in the next 18 months – or not quite 18 months; it’s now about 16 months – you’ve got until October 17th of 2011 to decide whether to keep that a Roth or whether to flip it back to a traditional IRA.
If the market runs up 30% in the next 16 months, which it’s likely to because we’re still in a long-term bull market – I know it looks bearish this summer – then you’re taxes are going to get paid for by the increase in the stock market.
Wouldn’t that be a wonderful idea to have a fund that is completely tax free that you could take money out of the rest of your life and the rest of all your heirs life, if you plan on leaving it to your heirs anyway.
Patrick: So, for the uneducated investor, so to speak, the people that have not kept up with Roths, the Roth IRA is a new IRA, relatively new IRA, that they’ve come up with where once taxes have been paid on that money, it never has to be taxed again. Is that what I’m hearing?
Richard: It never gets taxed again. All the money that’s in it and the increases that are made in it are not taxed.
Patrick: So, if I had money from a 401K and I wanted to roll it over into a Roth IRA, I’m going to pay the taxes on what’s in the 401K or the IRA.
Richard: The standard IRA – traditional.
Patrick: So, you’re saying I’m going to pay the taxes, but I have two years to pay it.
Richard: You got two years to pay it at no interest. When’s the last time Uncle Sam gave you no interest for two years?
Patrick: Never. IRS, KGB – they’re…big interest. It’s like organized crime; it’s crazy. The point is you pay this 28 – 33%.
Richard: If you’re in a high tax bracket, you could pay that much. If you’ve got a large IRA, you could pay that much. If you’ve got a small one, you’re going to pay a lot less.
The point is, you should sit down and talk about it with somebody that has your best interest at heart, like a Registered Investment Advisor.
Patrick: Well, they could ask you about it, right? You’ll visit with somebody?
Richard: Sure. I’ll do the analysis.
Patrick: You can do the analysis and they could call your desk at (972) 758-4484.
Richard: We’ll schedule a meeting, and we’ll go over your holdings and we’ll decide whether it’s a good idea for you or not.
Patrick: Okay. And I know that if they do decide to roll it, they can actually even sweep it back.
Richard: They can change it back to a traditional IRA or whatever form it’s in right now as long as they do it before October 17th of 2011. So, that’s 16 months out.
So, imagine this. You go to Las Vegas, you roll the dice and you don’t put your bet down until after you see what number comes up. That’s what this is analogous to.
Think about that. If the market goes up, and most bull markets have run between three and four years, half the gain was taken the first year which has already occurred. The other 50% is over the next two years. So the odds are, this market is going to go up another 50 or 60% over the next two years after we get done messing around with this bearish summer and worrying about, “Oh, my God. What’s going to happen in Europe?”
Patrick: The thing that I hear, and a lot of people need to understand, is that if they sit down with you, they schedule an appointment and they sit with you, you don’t even have the licenses to sell a commissionable product, right?
Richard: We don’t carry any of the Series 6 or Series 7 licenses because they create a conflict of interest.
Patrick: They’re what brokers carry.
Richard: The only purpose of carrying those licenses is to collect commissions on stocks, bonds, mutual funds and variable annuities. If I want to make a recommendation to put you in one of those items, I can make that recommendation and we can put you in it, but I will not get paid a commission. So, I don’t have a conflict of interest. I’m only going to recommend that if it’s in your best interest, if it fits your risk profile, it’s still within the amount of risk you want to take, if the likely outcome, the amount of gains you’re likely to make is within your goal standards; it’s high enough to meet your goal standards and that, overall, that your financial plan is going to have a very high likelihood of being achieved. That’s the only reason we would put you in anything is to win together.
Patrick: Right. But, there’s no commission on that stuff?
Richard: No.
Patrick: That’s the thing that a lot of people need to understand is that you really do take the Registered Investment Advisor position and what was defined in the 40s to be exactly where you position yourself, so there is just a fiduciary responsibility that you’re fulfilling. Correct?
Richard: And no conflict of interest with the brokerage licenses. That’s the problem you’ve got is that 15 out of 16 registered advisors also carry the brokerage licenses. It represents a conflict of interest. The SEC allows it. Why do they allow it? Because – and this is never going to change as long as this industry is centered in New York – the guys that run the mutual funds, the guys that run the brokerage houses and the executives of the SEC all go to the same supper clubs, all belong to the same country clubs, their kids all belong to the same schools.
They know each other. It’s a tight, cliquey, little group. It’s kind of like if you know someone in the telecom industry here in Dallas, you may know about a cell phone that’s coming out before the rest of the world knows about it because you know someone in the industry.
It’s the same thing on Wall Street. It’s a tight, cliquey, little deal and it’s never going to change as long as the regulatory people are in New York with the people that are trying to regulate.
Patrick: So, if somebody wanted to connect with you, they could just set up an appointment at (972) 758-4484. Look at their IRAs, analyze it whether it would be worthwhile to go into a Roth. Is that correct?
Richard: That’s correct.
Patrick: Then the next thing, as we’re finishing the show, we want to make sure that you, really, come to one of your workshops.
Richard: Yeah. If you just like to kick the tires and hear me talk in general about several topics – purely educational – we’ll be at the Master Grill Steakhouse in the Firewheel Mall at the end of the George Bush Turnpike just east of Central. That will be on June 16th on a Wednesday night at 6:30 p.m. or Tuesday June 22nd at 6:30 p.m. Just call (972) 325-1700 to register and no salesman will call or answer the phone. Just leave your name and address. We’ll send you a confirmation letter. We look forward to seeing you.
Patrick: It’s (972) 325-1700. Get yourself registered for this event. I’ve been several times myself. I highly recommend it. It’s something that is not a sales pitch. It’s all about giving you good information to help you achieve your goals your way.
Again, this is Pat Dougher, Richard Jordan with Financial Fortress Radio. You can also hear the Financial Fortress on DougherSuccess.com later in the week. Thanks. We’ll talk to you next week. Have a great one.
Richard: Take care.

Financial Fortress Radio May 30 2010 with Richard Jordan and Patrick Dougher

Patrick: Welcome to Financial Fortress Radio. This is Pat Dougher. Richard Jordan, you are the Chief Investment Strategist for DFW, and it’s always good to hear from you and hear the things that we’re going to talk about. I know we’ve got a great show lined up to talk about an area that is – well, a lot of people think it’s real conservative investing, but you have a different opinion. Richard.
Richard: Thank you, Pat. We’ve got a bond bubble going on out here. Pat, it’s just a lot of fear that has driven people out of the market the last three years, and a record amount of money has been poured in the bonds, and the rates are 25-year low and these folks are set to be whipsawed by the market big time. They could lose as much or more than they lost in the 2008 stock market crash, and they’re not hearing about their brokers because their brokers are driven by commissions.
Patrick: Well, I know that there’s also a ton of just “stay where you’re at, hunker-down; don’t move because you’re afraid of making a decision anyway” is already out there – a lot of fear. Wouldn’t you agree?
Richard: I agree, but buy and hold quit working in the 1990s.
Patrick: Right, you’ve got to be a little bit agile now with everything is going on, don’t you?
Richard: You need a professional.
Patrick: I agree. Well, while we’re talking about, it’s always good to say, why are we doing the show, Richard?
Richard: Well, we do this show for a number of reasons. First, of course, it’s a way to get the message out there on how we’re different. So, let’s talk a little bit about Fortress’ mission statement.
Our mission statement is to demonstrate leadership investment advisory practices for clients driven by the golden rule standard – to treat others like you who’d like to be treated. What an idea.
Patrick: Yeah, really, go figure. I thought that was – it sounds like though that’s part of even the whole registered investment advisory format.
Richard: It is.
Patrick: In the 40s, it was set up as an alternative to the brokerage system, wasn’t it?
Richard: It was set up in 1940 by Congress because the wealthy people said, “We do not want to deal with stock brokers who are driven by commissions; it’s a conflict of interest. We want someone who will act as our fiduciary.”
Patrick: And that’s the big part of what Fortress is all about, wouldn’t you agree?
Richard: Exactly. So, we act as a fiduciary and a trusted advisor for all our clients, always putting their interest and needs ahead of ours. We advise clients on how to maximize their financial opportunities with the appropriate levels of risk and taxation that each client needs and no more, and how to avoid the common practices in the stock brokerage industry that result in poor performance and unnecessarily high fees and taxes.
Patrick: That’s good, having somebody on your side of the fence rather than conflicted opinion.
Richard: And we believe that all investors, but especially seniors, deserve advice that avoids these conflicts of interest. We believe all clients deserve factual information about the brokerage industry’s primary areas of conflicts of interest.
For instance, collecting both investment commissions and fees on investments from the clients is how the industry operates. The confusion comes in here because 95% of the Registered Investment Advisers also carry brokerage licenses creating this conflict of interest.
But, at Fortress, we don’t allow our people to carry both. We do not have that conflict of interest. Second, from recommending proprietary investments that are only available at the brokerage funds and that results in higher compensation and commissions for the brokers and their managers. Does that sound like a fair game to you?
Patrick: Well, it’s always good. It’s one of those things where if you’re not basically saying one thing out of, one side – well, let me back up and say this way: it’s consistent with what people really want and that’s someone that is on their side to do them good, not do them in – and I appreciate that.
Well, I know that we started off with talking about the bond market and I want to get back to that. I know there’s so much information available now in the bonds and in the bond market. Let’s get talking about that. What are you looking at there?
Richard: Well, we’re looking at a market where people have poured record amounts of money into the bond industry the last three years because they believe it’s safe, but we now have such extremely low interest rates and an oversupply of bonds compared to the history that, simply put, we’ve got too much cash that went into this and the bubble is getting ready to burst.
So, let’s look first at the bond is considered the safest – US treasuries. The average yield on five-year US treasuries this year is only 1.9% – the lowest rate in the last 25 years and the rate is going down the last three years.
In fact, if you’ve been buying five-year treasuries the last years, your average yield right now is 2.28% less than inflation. Does that sound like a great way to lose your money?
Patrick: Well, I don’t think anybody really expects that. They’re trying to live by the adage, “don’t lose your money,” but aren’t they really setting themselves up to be hammered with returns that are much worse than the stock market’s volatility in the last few years?
Richard: Exactly. Well, in the first place, they’re losing purchasing power because the inflation rate is higher than this for most people. The inflation rate that Uncle Sam publishes excludes food, energy and it limits all healthcare costs to 4% of your income.
Now, for seniors, those are the three largest spending categories in their budget. So, for seniors, when the government says the consumer price index is 3%, seniors are paying between 5% and 7% inflation.
Patrick: Well, that’s because the value of the dollar, I know, against those commodities, which they are, has weakened which means that it’s taken more of that to buy the same thing. And we all see it. Nobody’s pulled any wool over anybody’s eyes. It just sounds like funky numbers.
Richard: No, but when you’re only making 2% on US treasuries and you’re paying 5%inflation, you’re essentially losing 3% a year. So, these treasuries look safe, but look what’s happening with our budget deficits. We have record budget deficits and, sooner or later, the market is going to quickly push these rates back up and they’re going to go up to about at least the average for the last ten years’ historical average at 3.48%.
In fact, the Chinese and the Japanese, it was announced about a month ago, cut back about 50% on what they were going to invest in our US treasury bonds and the Federal Reserve is out there buying them for us. It’s robbing Peter to pay Paul. It’s absolutely crazy.
So, let’s just say that you’re buying these things at 1.9% this year and they get pushed back up to the ten-year average of 3.48% or the 23-year average which is well over 4%. But, just at 3.48%, if you have to sell one of those 1.9% bonds, the market value in a 3.48% market is 56%. You’ll take a 44% loss in about a year worse than you did with the 2008 stock market.
So, why won’t you hear about this from your bond broker? Because he’s only cared about making his commissions. He has no interest in acting as your fiduciary, and he’s not required to.
Patrick: Well, the other thing is that a lot of people have bought these treasuries in a position of kind of a buy and hold. They don’t like to mess with them. A lot of folks that invest in this area are older. They just don’t want to be bothered by it.
Richard: They think they’re avoiding risk. But, right now, if you’re reading a lot of things about bonds, you’re reading two extreme points of view; that whether they’re going to see hyper inflation soon because of budget deficits or, because of record unemployment and underemployment, 25% of the people are working for zero or for way less than they used to just two years ago. The discretionary income is drafting. We’re going to see deflation or hyper inflation.
So, the volatility on bonds, the potential volatility in the next year is going to be extraordinarily high. It’s going to make the stock market volatility of the last few weeks look like a calm sea.
Patrick: Well, I know, also, with the problems that we’re seeing internationally with things like Greece, England and some of the others that are out there, we’ve got some real problems when it comes to attracting buyers to our debt.
Richard: Yeah, the Chinese and the Japanese, like I said, have already cut back 50% and the only reason that we’re still seeing Europe investing is because a lot of the countries over there look worse, but we’re heading in the same direction. We’re the next Greece in about two years.
Patrick: Right. And what I’m saying is this that in order for us to attract someone to buy our securities, our debt securities, we have to raise our rates.
Richard: Exactly.
Patrick: So that we stay at least competitive in the overall market, right?
Richard: Right.
Patrick: So if we do that, that’s going to push it even faster and farther and a lot of these people are even going to be able to get out of this until the damage is done.
Richard: Exactly.
Patrick: Wow. That really is scary. If you’re listening, we’re not trying to scare anybody. We’re trying to say, look, somebody needs to tell you the truth. And the truth is that this area that seems to have been conservative, well, it’s not as safe as it used to be. one of the things that I really encourage you to do is make sure that you come to Richard’s workshop this Wednesday night, isn’t it?
Richard: Yes, it’s at Southlake Timarron Country Club this Wednesday night at 6:30 p.m.
Patrick: And I know the last Wednesday, I’m sure it was absolutely fabulous. I’ve been to this and I will tell you, it’s at least an hour of solid information, no sale speech and then a wonderful dinner afterwards. I know that people will enjoy it. They’ll get a great deal of information. Just register.
And the way that you register is just you call 972-325-1700 or if you want to get a hold of Richard direct, it’s just 972-758-4484. In the last set of numbers, I just want to make sure that if you’d like to join the call today or join the conversation, just call 972-299-5759 in the Dallas/Fort Worth area.
Join the conversation and make sure that you get your questions answered by a Registered Investment Advisor, Richard Jordan on Financial Fortress Radio. This is Pat Dougher. And we’ll be right back, Richard.
Richard: Thanks, Pat.
[commercial]
Patrick: Welcome back to Financial Fortress Radio. This is Pat Dougher, Richard Jordan and we just heard a great commercial at the break there about the veterans and, of course, this is Memorial Day weekend and we want to make sure that we honor them, that we thank them. I am so thankful. My son has just become a graduate of basic, so he’s on his way to becoming a ranger and I couldn’t be more proud of him.
I just want to say it’s one of those things where, for a lot of the veterans that are out there, my dad was a veteran and a lot of people in our families have served in the military one way or the other. And what they do is beyond a belief good for the country, beyond belief, in my opinion, thankful for the way that they serve all over the world. Many of them are spending years away from their family to serve this country, and it would be a benefit and a blessing. And we’re so thankful for that.
Richard: [18:34 inaudible] where the people that have served over there in Iraq actually came out of the Reserves and National Guard and had to do three tours of duty just to maintain the forces over there. That kind of a sacrifice for somebody that just thought they were going to be a weekend warrior to end up being over there for three years or more, it’s incredible.
That’s why we do this community service announcements for the vets every week on this station because we want to say thank you. And thank you was said back in 2006 by the Bush administration when they created a special piece of legislation and they funded it with about $25 billion, and it’s to help vets that are either disabled or over 65 with their high medical expenses, with the costs of home healthcare, assisted living, and nursing home care. And they can get up to $2,300 a month tax free.
Now, think about that. We just talked about US treasury bonds paying 2.28%. So, that would be like having a million dollars in the bank if you could get – over a million actually – compared to putting a million dollars into US treasury bonds.
That’s the kind of potential asset this means for vets, but they don’t know about it because the current administration is not advertising it and they’ve added a whole bunch of forms that make it difficult to apply for the program.
On top of that, if you apply and you’re not approved because you forgot to fill in a blank, or cross a T or dot an I, you cannot reapply for another year, and that’s the current administration’s stance on taking care of our vets. So, I think it’s insane and I think the word’s got to get out and Memorial Day is a good day to talk about it in great detail. So, I did want to talk about that a little bit today, Pat. It’s a passion of mine. Freedom is not free.
Patrick: It’s right, and it never has been. The other thing though is that folks can connect with you and get more information about that program, right?
Richard: They can call my trading desk directly and I will talk to them about the program, 972-758-4484. Keep in mind that I am busy with the market until it closes at about 3:00 p.m. Central, so I don’t return calls often till after 3:00, but I’ll be happy to continue to try and catch you until I catch you, or you can just try and catch me after 3:00.
Patrick: Sure, and it’s just 972-758-4484. That’s direct to you and, hey, can get a lot of real help on getting those forms filled out making sure they’re qualified and all that, correct?
Richard: We work with an affiliated company that has an over 95% success rate in getting the forms filled out correctly and getting the checks off to the veterans within 90-120 days, which I know doesn’t sound quick but….
Patrick: In the government’s kind of way, that is pretty quick.
Richard: That is lightning.
Patrick: Yeah. My son talked about that. He goes, “The military doesn’t move fast.” So, unless they’re in an operation, then it’s a whole different program.
Richard: Exactly.
Patrick: Well, that’s really good. I hope that people will take the advantage of that and come and visit with you, connect with you on that and just dial at 972-758-4484. We really want to say thanks to all of veterans for all that they do. I’m so honored to have them in my family. My dad was one, my son is one and it’s an honor. So, thank you.
Richard: And that’s why we’ve run those commercials ever since we’ve gone on the air. It was our way of saying thanks, but we just want to put a little more emphasis on it because it’s Memorial Day weekend and we want to thank the soldiers again.
Patrick: Well, one last question on that – does it cost anything to do that program?
Richard: No, there’s no charge. We’ll be glad to help you without charging you anything. It’s s an information service and we can explain how it works. It’s more time than we’ve got on the air, but we’ll be happy to set you up an appointment and talk about it or just give you some time over the phone.
Patrick: That’s great. Well, let’s go back to bonds – the most conservative investment in the planet.
Richard: US treasury bonds.
Patrick: Not.
Richard: Not looking good.
Patrick: Not anymore.
Richard: You could get whipsawed one way or another.
Patrick: You’ve been telling us about how the rate right now is so low and that in the next year…
Richard: 1.9%.
Patrick: In the next year, it could almost double which would mean that the value of your current bonds that you have, your current bond portfolio, if it’s relatively new, could get smashed to the tune of 44% of the principle, right?
Richard: Yeah, you could lose 44% to over 50% of the principle in one year.
Patrick: And most people don’t see them because treasury – I mean, you can’t get any safer in treasuries, right?
Richard: Well, yeah, but we’re at the 25-year low on the rates and you don’t want to be buying bonds when you’re at a low point. So, a lot of people, Pat, have decided, “I’m going to protect myself against that kind of inflation, I’m going to buy TIPS.” These Treasury Inflation Protected Securities.
And the five-year TIPS, oh boy, they’re paying 0.5% as a base rate and the inflation rate that the government is quoting for this is 0.9%, which means your combined rate on a five-year TIPS, or Treasury Inflation Protected bond, is now only 1.4%.
Patrick: So, it’s less than just buying a regular treasury.
Richard: Yes. Way less.
Patrick: Okay. And what’s the benefit if you can say it that way?
Richard: Well, the benefit is that if the government measurement for inflation, which is different than the CPI rate that gets quoted in the papers every month, it’s a more conservative rate. It’s lower. If that rate goes up, then you would get an additional percentage added to your check every year.
The problem is we’re in a really strange market. We’ve got over $3 trillion in cash sitting on the sideline still. We’ve got high unemployment, even though we’re supposed to be in a recovery. We’ve got high underemployment. We’ve got all these people that used to make $80,000 or $100,000 a year as engineers, CPAs, etc. in large companies now running Starbucks or McDonald’s for $30,000 or $40,000 a year.
So, that combination means that we have a tremendous risk for deflation. And what happens with the deflation is that the effective rate on the TIPS will actually drop below 0.5% and could effectively become negative.
Patrick: So, what would that mean for investors?
Richard: That means that not only will they not pay you any interest, the value of the principle on the bonds you’re holding could decline.
Patrick: So, is there any way to protect against that?
Richard: No. What you’ve done is you’ve protected against inflation, but you have not protected yourself against deflation.
Patrick: Deflation, right. So, again, the thing that I keep saying is that if you’re thinking that you can park yourself anywhere and ride out the storm that’s coming without proper advice, you will probably get your head handed to you financially.
Richard: Exactly.
Patrick: Man. Well, I hope that people will come to your Wednesday night workshop.
Richard: You bet. Southlake Timarron Country Club, 6:30 p.m. Just call 972-325-1700 to register, and we will talk more about the bonds and the market and how to make intelligent decisions, and how to get a professional advisor on your side that has your best interest at heart, not just a commission salesperson like you get with the insurance guys and the brokers.
Patrick: That is awesome, 972-325-1700 to register for this excellent workshop on ways that you can protect yourself from this coming financial tsunami that’s going to hit – and hit really soon. Thanks so much for this part of the show. We’ve got so much more to come in just a few minutes.
[commercial]
Patrick: Welcome back to Financial Fortress Radio. This is Pat Dougher, Richard Jordan, the Chief Investment Strategist in the DFW area, and we’re so thankful for what you’ve been saying because, quite honestly, I think a lot of people do not understand the volatility of the bond market. They think bonds, treasuries, all is good, and then you were talking about TIPS. What is it, Treasury…
Richard: Inflation Protected Securities.
Patrick: Treasury Inflation Protected Securities.
Richard: Commonly called TIPS Bonds.
Patrick: And a lot of people are moving in there. In fact, we’ve got trillions of dollars moving in there.
Richard: Over the last three years, there’s been an overabundance of money put in that market. Anytime you’ve got an oversupply of money in a market, well, you know the lots of supply and demand.
Patrick: Exactly. The thing is this that there’s so much fear pent up in that money. They’re like, “I don’t want to lose any, I don’t want to lose any,” and yet, they’re about to get just slaughtered like sheep in the next year. Isn’t that true?
Richard: Just like they did in the stock market because the brokers have put them in in ‘07, knew the market was going to drop in ’08, but all they care about is their commissions this year.
Patrick: Well, you’ve got bills to pay, right?
Richard: Yeah, you’ve got to pay for the club, and the yacht, and the home in the Hamptons and the apartment overlook in Central Park. I mean, the guy’s got to live, right? That’s the way brokers live.
Patrick: I remember years ago, Donald Trump was given $400,000 a month to live after bankruptcy – wow!
Richard: Tough. How do you buy flowers for the apartment?
Patrick: I just don’t know how you survive in that; somebody could. But anyways, the point though is you’ve got a group of people, and a lot of people that are very afraid. You’ve got interest rates at an all-time low.
Richard: 25-year lows, absolutely.
Patrick: What is it?
Richard: 1.9% for five-year treasuries, 1.4% for Treasury Inflation Protected Bonds.
Patrick: Okay. And now, we’ve got the scenario where there’s a lot of volatility coming up – a lot of unsure people that when you look at what’s going on in Greece and Europe. You’ve got the Chinese and the Japanese going, “We don’t want this much of your debt as we used to carry.” That’s going to force the interest rate to come back up, isn’t it?
Richard: Right. So, guess what the bond brokers are pushing now?
Patrick: No clue; what’s next?
Richard: Because the rates are so low on the US treasuries, they’re talking about the next safest category historically – municipal bonds.
Patrick: Tax free.
Richard: Hey, they’re tax free, right.
Patrick: But, isn’t there a little bit of trouble in Dodge City.
Richard: Oh, my God. Let’s take a close look at this. Over 40% of the workforce in the city, state and federal government jobs, basically the baby-boomers, are set to retire in the next five years and collect their pensions. Do you think that’s going to put any stress on the system?
Patrick: Oh, absolutely. In fact, we were looking at our stuff the other day and we noticed that the tax rates for our home had actually properly evaluated our home which was, that was actually appreciated if they had actually said instead of inflating it by 30%, they actually stated about what the houses were selling for in our neighborhood.
Richard: And so, your value dropped over 20%.
Patrick: No, it was over 30%.
Richard: Wow.
Patrick: It was over 30%, as far as the tax basis, what they wanted to charge for taxes. Okay, so that means they’re going to get 30% less income as in the municipality.
Richard: So, let’s talk about where else they get income – sales tax. And sales tax collections are down 10% -30% across the Dallas/Fort Worth Metro and we’re one of the healthiest metropolitan areas in the country.
Patrick: Well, isn’t that directly related to the amount of available revenue to spend?
Richard: Yeah, it’s directly related to unemployment and underemployment.
Patrick: Right. People don’t have as much money, so they’re not spending as much. They’ve tightened their belt more than a few notches. So, they’re not buying the car, they’re going out to eat as much and that’s generating a lot less in tax revenue, right?
Richard: A lot less. So, that’s causing anybody that’s in this industry that’s got any brains to forecast that we’re going to have record amounts of defaults in the municipal bonds – record amounts compared to any time in the last 50 years, any time since the Depression.
Patrick: Now, historically, and I mean like since the Depression, there has not been many municipalities that have defaulted in their bonds.
Richard: No, take a look at California right now. Would you buy a California bond?
Patrick: No, I’d consider it more risky than a junk bond.
Richard: Well, exactly. And so, what we’ve got is muni rates are slightly higher than these US treasury rates, or Treasury Inflation Protected Bonds, and they’re tax free. And guess why they’re pushing them? Commissions.
The bond brokers don’t care about you. They don’t care if you get caught in a default and you’re, not collecting interest, but the principle that’s worth zero. They’re not going to tell you this information because they’re not required to. Oh, but it may be somewhere in the prospectus that you could risk and lose all your money. But, who ever reads a prospectus, Pat?
Patrick: Well, one thing about that, isn’t that the same – if you want to call it offense – that Goldman Sachs did?
Richard: Exactly.
Patrick: I mean, they were selling securities that they knew were garbage.
Richard: Well, the money that they were investing for themselves, for their company, they were sorting the mortgage securities that they were selling to some of the largest banks in the world and it ended up driving the eighth largest bank in Germany into bankruptcy, and another large bank here in the US.
Patrick: That’s what I’m talking about. So, when you look at the municipalities – I look around and I’m not a Registered Investment Advisor. I’m a host of a radio show’ I’m helping to make this thing more popular on the Internet and other things. But, my point is this that I can at least look around and go, “California is in a boatload of trouble.” You look at Florida.
Richard: All the states are. All the states.
Patrick: Well, you think it’s all? Because there are some that are like real key, like Arizona and Florida and New York.
Richard: Well, yeah, those are the worst. Those are going to have the lowest ratings, but all the states have this problem. You’re not seeing surpluses anywhere. The most conservative states, like Texas, are even having to cut their budget.
And when you start looking at budgets getting cut because sales tax revenues are down and property tax revenues are down, and now you’ve got record numbers of commercial properties going into default which means record numbers of commercial foreclosures coming soon, which is going to reduce the commercial property values, which is really a much bigger hit for municipalities, where are they going to get the money to pay for these bonds?
Patrick: Oh, absolutely. In fact, looking at the commercial real estate investments that are there and the adjustable rates that are – loans, mortgages, whatever – that are out there, those are sledded to go through a massive default in the next two years.
Richard: They are.
Patrick: Okay. So, just like you say, when those things default, they’re sold for dime on the dollar or whatever or a lot less many times, and then they get to where it’s a dime on the dollar.
Richard: it could.
Patrick: That’s horrible. So, what can they do about munis?
Richard: Well, I wouldn’t ask a municipal bond broker for advice. I would ask someone that has a fiduciary responsibility to you to be your trusted advisor which is what we are. We’re one of the few; we’re in that top 5% of the Registered Investment Advisors that don’t carry the brokerage licenses and we’re not driven by commissions. We’re driven by the desire to please you, to meet your needs and goals for your retirement and for your investments.
Patrick: Now, with that in mind, you’ve got a workshop coming up this week.
Richard: We do.
Patrick: And it’s at Timarron Country Club, starts at?
Richard: 6:30 p.m. on Wednesday, June 2nd.
Patrick: Okay, any cost involved in this thing?
Richard: No cost. It’s a one-hour educational-only seminar – no selling. We’ll serve you dinner for the trouble of you coming on out and if you’ve got some questions, we’ll be happy to answer them afterwards; just an opportunity to meet with me and some of our staff.
Patrick: Now, I will say that your clientele does tend to be, I would say, a little bit more affluent, so who should be here?
Richard: They’re either smarter than the average bear or they’ve got a little bit more saved than the average bear. So, our range of investors’ account failures are from roughly $250,000 up to $7 million. So, we would like to talk to people that have at least $250,000.
Patrick: Very good. And to register, it’s real simple. It’s just 972-325-1700, right?
Richard: Absolutely. No salesman will call. You will have the opportunity to hear me speak and we’ll talk a lot more about these bonds and smart ways to invest without getting so emotional about the market; smart ways that produce higher rates of return with lower fees and no commissions.
Patrick: I am really thankful for what you do because I’ve heard you speak and it was excellent. I was really surprised at how much information you cram into an hour, how valuable.
Richard: Bring your pen and paper.
Patrick: That’s really good too, 972-325-1700 to register for this workshop this week with Richard Jordan of Financial Fortress and we’ll just tell you, it is worth the time. 972-325-1700. We’ll be right back.
[commercial]
Patrick: Welcome back to Financial Fortress Radio. This is Patrick Dougher, Richard Jordan, Chief Investment Strategist in the DFW area. I’m getting a little tongue-tied here at the end of the show. It’s been good. We’ve talked about a lot of different things. We talked about securities that have to do with – and I really should say treasuries and bonds.
Richard: Bonds; things called bonds.
Patrick: Things called bonds.
Richard: That are thought to be safe, but right now, you’re set to get whipsawed in one direction or the other with this volatility coming up in the bond market. It’s going to make the volatility in the stock market the last couple of weeks looked like a cakewalk.
Patrick: But, a lot of people are going to fight you on that. They’re going to say, “It couldn’t be that bad,” but you’re talking 40% plus.
Richard: Yeah, you could lose 40% or 50%.
Patrick: And that really has to do with where the interest rate is and where it’s expected to go for multiple reasons. And it’s not like it has to jump a lot; it’s just effectively doubling. It’s 1.9% to – what do you say?
Richard: Well, 3.48% I believe is the ten-year average. That would result in a 44% loss for you.
Patrick: And that’s in the principle.
Richard: Right.
Patrick: Okay. So, you take all this money that you think is safe, you drop a million dollars into the bonds that are out there and you could have potentially close to half a million next year. It could be pretty bad.
Richard: It could get ugly fast.
Patrick: Okay, and that’s the thing that we’re just trying to emphasize. Then the funny thing is this that we went on to look at what’s the next kind of safest investment, which are TIPS you call them.
Richard: Treasury Inflation Protected Securities.
Patrick: Okay, but they’re not much better.
Richard: They’re only paying 1.4%.
Patrick: Okay. And if we do have inflation showing up, fine, but the real risk is in deflation which we could have that for a year or two, and that would mean even more mess.
Richard: Yeah, the face value of your bond could actually drop while you hold it.
Patrick: Okay. Then we went on to the next most conservative investment which is…
Richard: Municipal bonds.
Patrick: Right. So, we’re looking at municipal bonds, but most of us look around and go, “Wait a minute. We’re looking at 30% plus in a reduction in the income to the municipalities just from the changes that have happened in the last few years in property valuations, in the amount of unemployment or underemployment that’s out there,” right?
Richard: Yes, and sales tax revenue is down 25% -30% around the country as an average and in the very best municipalities in the Dallas/Fort Worth Metro, which is one of the healthiest, they’re still down over 10%.
Patrick: But, the point that that really amounts to is this that when these bonds are offered in the marketplace, they’re going to become increasingly more risky.
Richard: A lot of municipal bonds were rated AAA a year ago are going to end up being junk bonds in the next two years.
Patrick: And that’s because there’s just not any income coming in, or not enough to even service the debt that they’ve created.
Richard: Until the unemployment rate drops fast and the underemployment rate, what I call the hidden underemployment rate, we’re not going to see these sales tax revenues come back, we’re not going to see these home values come back, and these municipalities are going to be hurting. And they’ve got huge pension cost coming with over 40% of the baby-boomers set to retire in the next five years. So, imagine that – what do you think that’s going to do to city services? They’re going to drop while costs go up.
Patrick: Absolutely. It’s going to be one of those things where cost continues to rise and the only way that they’re going to be able to pay it, essentially, is print the money.
Richard: But cities and states can’t print money; they just go bankrupt.
Patrick: They just go bankrupt and, at that point, we’ve got all kinds of services that are falling out. It could be a rough ride.
Richard: Remember the Orange County bond default.
Patrick: Right.
Richard: It’s going to happen all over the country.
Patrick: Well, the thing that’s so important that I’m seeing is that if you don’t have a good advisor that really understands this, well, I would say they should be talking to you.
Richard: Absolutely. We take the clients’ needs and we treat them like our needs. We put the clients’ needs ahead of our own needs because we’re fiduciary.
Patrick: Well, as a Registered Investment Advisor, there is a huge difference between an RIA, Registered Investment Advisor, and a broker.
Richard: A broker is driven by commissions. The SEC thinks you know what, but a lot of people don’t realize that brokers are driven by commissions first and it’s caveat emptor, buyer be aware, that’s what the SEC says. And the category of Registered Investment Advisor was created in 1940 for the wealthy and the smart people – the educated people – and that’s all they use.
And 95% of the registered advisors, unfortunately, also carry brokerage licenses which creates the conflict of interest. At Fortress, we do not carry the commission-based licenses because the only purpose to carry those licenses is to collect commissions.
So, if you’ve got a Registered Investment Advisor and he’s got a Series 6 or a Series 7 license, it’s only to collect commissions. It’s real simple, folks. If they’re operating under a conflict of interest, you don’t have the most trusted advisor you could have.
Patrick: Very good. I know that you’ve got this workshop coming up this week. I want to make sure that people know about that early, that you’ve got a – it starts at 6:30 – about an hour of good information and I will say I’ve listened to it and it is excellent, it’s a ton of information when it comes down to it.
And it’s not a sale speech which is really unique. I really was actually taken back by that. I thought, “Wow. This is not a sales pitch.” It’s a presentation of information that will help investors make better decisions.
Richard: Absolutely.
Patrick: I know that they can connect with you just by calling the 972-325-1700 or they could connect with you at your desk, correct?
Richard: Yeah, the 325 number is to register for the seminar. So, to register, call 972-325-1700. If you want to call me direct, try my desk 972-758-4484 and, of course, I’m busy during the day with the market, so I would recommend you call after 3:00 or wait for a returned call after 3:00 if you want to leave a voice mail.
Patrick: Very good. Now, I also know that you’ll have time for question and answer afterwards, and then if somebody wants to meet with you, they can do that as well after they’ve been to the workshop.
Richard: You can schedule an independent objective evaluation of what you’re holding anytime you want by calling my desk or coming to the seminar, and if you decide you like me, you can do with that.
Patrick: Great, it’s awesome. And again, it’s at Timarron Country Club over in Southlake. It’s just actually about a mile off 114 on 1709. You go that way typically to get to Timarron.
Richard: Yes, where 114 and 121 come together, just west to the airport.
Patrick: Very good, so people from all of Dallas and Fort Worth could be a part of that. 972-325-1700 to register. No salesman will call; they’ll just get a confirmation, and then if they want to connect with you, 972-758-4484. As we’re going into this next few weeks, what should people be looking for with the interest rates and bonds?
Richard: Well, again, there is so much material out there from the analysts that the bond market could head either direction fast. The volatility is going to be going up in the next year. I’m not sure it’s going to change much in the next two weeks.
Patrick: Now, I just figured to look for, what should people begin to do?
Richard: I would pay attention to the US treasury rates. They’ve been dropping, but I think they’re going to bottom again. The only reason they’ve dropped is because the Federal Reserve has chosen to buy our own paper, which means we’re robbing Peter to pay Paul.
Sooner or later, we’ve got to toss that money into the budget deficit and pay for it. It’s absurd to think that we’re doing that. That’s never a long-term strategy, and the Chinese and the Japanese are just going to weight us out.
Patrick: I understand. I know that next week, one of the things we do want to cover is the whole Roth IRA conversion. That’s such a big decision. There’s so much money that it has been coming out of the 401Ks in retirements. People just don’t know whether to taken that or not. I know that’s coming up.
I would encourage you that as we move into this next week, go to Richard’s seminar. It’s Wednesday night. It starts at 6:30, ends at about 8:00ish; great dinner, great information. 972-325-1700 to register or 972-758-4484 to connect with Richard at his desk. Thank you so much, and we’ll talk to you next week.
Transcript by:
Lainie Lord
www.magiscript.com

Financial Fortress Radio May 23 2010 with Richard Jordan

Financial Fortress 5-23-10

Welcome to Financial Fortress radio. This is Pat Dougher. Richard Jordan is with me and we are talking about the five reasons that self investors fail or why professional investors win. I know that there are a lot of us out there that are trying to do well, we are trying to do our best with everything we’ve got but we just miss it. We’ve had our opportunities to succeed and we just haven’t put the pieces in the puzzle in the right way. Richard what can we do?

Richard: In short, hire a pro.

Pat: Well, I believe that. I know there are some real keys that are stumbling blocks of the average investor out there. What are some of those?

Richard: Well and it’s not just the average investor, it’s very smart people that I run into, engineers, CPAs, highly educated people that try to manage their own investments. And quite frequently when I analyze their results over the past several years, I see five things that cause them to fail frequently. And the first of these, and it all has to do with behavioral economics. I read a lot of about this and it’s all about the psychology of the investor. Duke has a department that studied this for over 30 years and a lot of the major financial universities like Chicago, and Wharton, and Stanford all have departments in this area. And conformational bias is probably the biggest one I ran into. Confirmational bias is kind of a funny thing and that is we look for information that confirms our decisions are genius. And we tend to avoid reading or looking at the information, even in our own files that confirms that we’ve made some mistakes. And I’ll give you an example. I had an investor that came into my office this last week, engineer, smart guy, smart guy, lots of patents and told me he had averaged between 5% and 6% on inflation protected bonds in the last five years. So, I said “That sounds kind of high to me. I’m going to pull the data on that and compare to your files and let’s just take a look at the real data.” And what I found was, there was one six months period when they paid in that range, and that’s the period he remembered. He was a genius for six months out of the five years but the actual rate of return that he average over the last five years was 2.56%, literally half of that. And he was in denial about those other periods that were mediocre and poor. And the fact he said he was ready to roll over some that were about to expire into some more TIPS because they had been so successful. I said “You know what the current rate is?” and he said “Oh yeah, it’s always about 5%.” I pulled it up off the treasury website, 1.74%.

Patrick: Is that all? 1.74%.

Richard: 1.74%. But hey it’s inflation protected.

Patrick: Right. Now that’s an interesting situation because a lot of the things that I’m hearing is that deflation could be our biggest thing to fight off in the near future, the next couple years possibly is that…?

Richard: Exactly. This guy was living in the 80s when we had rapid inflation. We have had high inflation since the 80s, the early 80s. It’s been over 25 years.

Patrick: Paul Volker was, when he started his close down, that was like the end of the 70s. So, it’s been a long time.

Richard: So that’s about when he started saving. So that’s what he was remembering, is that at the beginning of his investment period, that’s what hit him the most. And now he’s trying to protect against it 25 years later. Here’s a report straight out of the Dow Jones website “Europe’s debt woes and signs of an anemic recovery in the US job market have stoked worries of deflation on Thursday…” this last week …” reducing the appeal of US Treasury Inflation-Protected Securities.” I swear this guy was in my office on Wednesday telling me how wonderful TIPS were. “This week’s weaker-than-expected US inflation data galvanized the view that inflation will not be an economic threat…” for a long time. “The risk is skewed towards deflation right now” says Demitri Dilis, fixed income strategist at BMO Capital Markets in Chicago. “The spread between US 10-year TIPS and regular 10-year Treasury notes is down to 1.92%” The ten-year breakevens is actually at 1.87%, so what this says is your advantage is .05% over regular bonds. Does that sound like a real winning strategy to you?

Patrick: Well, isn’t there a downside risk as well, that a lot of people are totally stepping over?

Richard: It’s deflation. They’re not guarding against deflation.

Patrick: So if we start to have deflation, what will that mean and how will it manifest in the economy?

Richard: It’s going to manifest itself in falling prices. And as a result of that, the falling prices mean that the only things that you’re going to be able to make money on are things outside of the bond market.

Patrick: Right. Now I know that we are seeing the falling prices in a lot of things and a lot of us would think that falling prices, you mean like on commodities and goods like that. But really, we’re seeing it first on things like, in real estate in that area as well?

Richard: Absolutely.

Patrick: What are some other things that we should be watching for in that arena?

Richard: Another thing that we see quite frequently with self investors is status quo bias. And this is the tendency for an investor to avoid making changes. He had a strategy that worked in the 90s when we had the best bull market that we probably had in 75 years and they think that strategy is going to come back for some strange reason and work again.

Patrick: Where would they even get the ideas of something like that?

Richard: Well, again, most people get their information off of the mass media. And the mass media is controlled by people who write for a living. They are not professional investors. Their job is to produce 600 words and stuff it into a newspaper column or maybe 1200 to 2000 words and stuff it into a magazine article once every week or once every month. They are not experts. They might be good at math, they might be good at what worked in the past, and we see that a lot in the local news writing here in Dallas. We’ve got a guy here that says you can just lay on the couch and reallocate your portfolio once a year and beat all the mutual funds out there. I mean it’s just nonsense.

Patrick: Well, aren’t they also getting their information from the brokerage industry and such?

Richard: Of course. The brokerage industry is driven by commissions, along with the commission sales industry. So if you go to a seminar or you walk into someone’s office and the answer to everything that you have for a financial problem is either all annuities or all mutual funds, those are both the highest commission products in the financial services industry. Whoops I forgot one, life settlements. So these are guys whose interests are primarily their own first, and yours second. And the SEC allows this because they’ve created a special category of advisor in 1940 and the SEC believes that your father or grandfather told you about this. But really the top 5% of advisors belong to this category, which we do, that are used by the wealthy or the smart investors, and it’s called a Registered Investment Advisor. The confusion comes in, in that 95% of these registered advisors also carry brokerage licenses, so that operate every day with a conflict of interest.

Pat: Well I was concerned about that too, because it would seem that registered investment advisors are the people that folks should be working with, why aren’t there more registered investment advisors?

Richard: Well, it’s pretty simple, you don’t get rich fast. It’s a steady job of building clients and adding clients through references and testimonials, that’s primarily how we add clients. And you don’t get paid the big commissions to manage accounts. People that sell mutual funds get paid five times as highly up front in the first year, or annuities, than the people that are registered investment advisors. And let’s face it, America is all about success, instant gratification, me, me, me first, right?

Pat: That’s exactly right.

Richard: That’s the nature of what’s going on in the financial services industry and why people consistently lose money when they do use the wrong kind of professional advice.

Pat: Well, I know that you’ve got a couple of workshops coming up.

Richard: We do.

Pat: Tell us about those.

Richard: We’ll be at Southlake Timarron Country Club for the next two Wednesdays, May 26 and June 2 at 6:30 PM. I give you time to get home and change clothes and zip over there. We’ll feed you after the seminar. We are going to cover about five topics really fast, about how the wealthy invest differently, and they don’t invest out of fear and greed. They invest logically and rationally by using professional advisors.

Pat: I know that, having been through that workshop, I was really stunned at how it isn’t a sales pitch. It really is all about giving you good information so that people can make good decisions. One of the ways that you can get registered for that is to call the registration number which is 972-325-1700.

Richard: That’s correct.

Pat: And what do they need to give him a call?

Richard: We’ll send them a confirmation letter if they’ll be kind enough to leave their name, address and phone number.

Pat: Very good. Now I know that a lot of people may also have questions for you directly.

Richard: Absolutely. Please call my trading desk directly at 972-758-4484 and just know that if it’s during the trading day up until about three o’clock, I maybe with a client or busy operating a trade so if that’s the case, just know that I’ll get back to you after three. Just leave a message.

Pat: 972-758-4484. The one thing I was curious about is that you said something about trading. You actually don’t do a lot of actual transactional type things, trading and things like that, I mean I know you’re more of a long-term guy aren’t you?

Richard: Most of my clients want to invest in something for at least a year so that they only pay capital gains tax rates. That’s part of the strategies we create for them.

Pat: So it’s 972-758-4484, that’s 972-758-4484. And then to register for the workshop it’s 972-325-1700, that’s 972-325-1700. Register for the workshop coming up the next two Wednesdays, that’s the 26th and June 2. We’ve got so much more of a show to talk about exactly how the wise investors win. We’ll be right back.

Pat: And welcome back To Financial Fortress Radio. We’re so thankful that you’re listening. We have so much information to give and I know a lot of people might be wondering “Can I call this guy?” and the answer is yes. Just call 866-660-5759 if you’re outside the DFW area; inside the DFW area it’s metro 972-299-5759 and get your questions answered. When you get into the financial services industry, so to speak, when you get into that arena, it gets as clear as mud. There’s just so many options, and so many ways to miss it and really fail. And of course we’ve covered some of that, what are some of the reasons why self investors fail. Richard, what are some of the other things that you’ve seen that keep people from success in investing?

Richard: well, the primary thing is that they invest on emotions. Emotions are based on the way you feel, instead of the way you think and we in best on formulas. We make decisions without the emotion. We take the emotion out of it. It’s a lot easier for me to make decisions when it’s not my money, using quantitative analysis. We’ve got strategies that automatically adjust to moving market conditions on a regular basis and they are designed to create positive market beating returns that beat the indexes whether it’s a bull or bear market. Pat, do you think it’s a bull or bear market after this last three weeks?

Pat: (laughing) You’re asking the wrong person. I sit there and go bull and bear; they are two animals in the woods. But I do understand the difference, bull up trending, bear down trending and I have to admit personally, it’s as clear as mud. I look out there into that arena and I don’t know. What do you think?

Richard: Well, I think for most people, it’s pretty scary right now. Because let’s just look at the top 10 stories from this last week and see if you can make sense on whether we’ve got an uptrend or a downtrend. First “initial jobless claims jump by 25,000″ secondly “housing starts were up 5.8%” but permits plunged 11.5%. “The European union finance ministers weigh tougher budget enforcement standards” but they haven’t actually created them yet. The nuclear option is back on the table for Sweden. Remember Sweden. They are kind of like Switzerland, you know, peace loving.

Pat: Stay out of everything. Neutral on it all. Just hold the money.

Richard: That’s it, right. The Senate passed sweeping reforms of big bank regulations and it’s going to make a big difference in a lot of the ways that reporting gets done, and a lot of the things that big banks can get involved in. For instance, one of the top four banks, 80% of their profits in the last year were from getting involved in the markets and involving those subprime mortgage bonds, of course that failed and nearly drove 50 or 100 banks to failure, large banks throughout the world. So, they’re not going to be able to get involved in that anymore and still ask the FDIC for support. The fund industry reform is long overdue, but Congress didn’t bother to pass any reforms about the mutual fund industry, where 80% of the gains go to the mutual fund managers, only 20% go to the investors, who are taking 100% of the risk with 100% of the capital. And while we’re at it, mortgage rates fell to the lowest levels this year. Usually, that doesn’t happen until the winter. What does that tell you about the housing industry? The iPad is a runaway success. The China US deal on their currency reform may be in the final round but nobody is willing to bet which way that’s going to go. The default rate hit a record high on loans in foreclosure.

Pat: Wow.

Richard: How about that?

Pat: That’s like I said. Making a decision on that, you can flip a coin. That’s emotionless.

Richard: That’s right. But there are statistical ways to analyze the data and determine where you need to be. And there are ways to hedge your bets without getting involved in options. And we know those ways and we are able to produce superior returns for our clients by doing that.

Pat: Well I know that you have also done a great deal of research on every one of the tools that you use, whether it’s people or information, or the funds that you use, they are typically for a different breed of investor. So, I know that when it comes to some of the funds that I hear you use, they’ve actually done very well in the last 5, 10 even 15 years.

Richard: Correct. There are funds out there that actually are designed to create returns in a bear market, in a down market if you will.

Pat: So what are some of the other things that you are seeing, fallacies that people miss?

Richard: Well a lot of people got scared of the market in ‘08 and there is a theory back in the 80s and 90s that when stocks go up, bonds go down and when stocks go down, bonds go up. So they’ve automatically moved most of their money in the last 18 months into the bond funds or into bonds directly. And guess what? Bond rates are controlled mostly by the government.

Pat: Okay…

Richard: And the government is doing what right now?

Pat: Overspending its income.

Richard: overspending like crazy, so sooner or later they’re going to have to do what?

Pat: Well, you would think print money…

Richard: And… raise rates.

Pat: Right.

Richard: And when they raise rates, the bonds you are holding are going to drop like a rock.

Pat: Now when you say drop like a rock, most people think of bond funds as really low volatility funds.

Richard: Yeah, most people think bonds are the safest thing out there but they’re not. Your principle is at risk just like it is when you’re in the stock market. You have to know when to get in and when to get out of the market. And bonds are the opposite of stocks, you want to buy high and sell low.

Pat: Okay explain that one.

Richard: Okay, so when you look at an average rate for a AAA corporate bond over the last 30 years, it’s around 6.50%. So you want to buy in the AAA, what we call investment grade bonds, when the market is above 6.50%. What do you think it’s at right now?

Pat: I have no idea.

Richard: Generally, it floats around 1% to 1.50% over the 10 year Treasuries, which are right now at about 3.50% so they’re running about 4.50 % to 5%. So let’s say you buy that AAA bond at 5% today and you think you’re getting a great rate because you’re towards the upper end of that range and in two years, treasuries are trading back at their historical average rate around 5.50%. Now the bond market is at 7%, and you go to sell one of your AAA bonds that has a coupon rate of 5%, it’s only paying 5% and the new ones that are coming out are paying 7%, what’s yours worth?

Pat: Well, since I bought at $1000, let me just follow you here, I bought it at $1000 and that produces $500 year.

Richard: He bought it at $10,000, it produces $500 a year, he bought it at $1000 it produces $50 a year.

Pat: So let’s say I bought it with $1000 and so it produces $50 a year, okay, now it’s a couple of years later. Everything that’s new that’s coming to market is now, still offered at $1000 but they pay 7% or $70, or at $10,000 it’s $700. So, you’ve got a much higher, what do you call it, interest rate? I’m going to have to sell mine at a discount.

Richard: Absolutely. And the discount is you divide five by seven. So what’s five divided by seven? It’s about 72%. So you’re happy with that 5% rate you got for two years? You may 10% right. When CDs were only making 1% or 2%, you felt like a king. And now all of the sudden you’ve got to sell this thing and you take a 28% loss. You’ve just lost 18% on your investment. Is that a good deal?

Pat: No.

Richard: Hello.

Pat: Well, especially if we start to get some real racing going, I know, if interest rates go up, they went in the late 70s we went to 21% on one index that I know of, and “ow.” So, there’s so much more to say. I know one thing Richard, let’s talk about your workshop coming up.

Richard: We’ll be at Southlake Timarron Country Club the next two Wednesdays on May 26 and June 2. And we’ll be explaining a lot of these things to investors. It’s an educational program. There will be no selling allowed, so you’re welcome to come at 6:30 PM. Just call 972-325-1700 and if you don’t want to ask your questions in public, you’re welcome to call my trading desk at 972-758-2484.

Pat: That’s 972-325-1700 to register. Now, we’ll talk about who should be there after the break. I know that you don’t want to miss this and it includes dinner so it’s a nice deal, 972-325-1700. You really do want to be at the next workshop with Richard Jordan. And we’ll be right back.

Pat: Welcome back to Financial Fortress. This is Pat Dougher and we have a great show going. There’s so many ways that people invest in the market and we’re really trying to help people learn how to do it smartly. How smart investors will, is professional organizers. I know there’s, we talked about earlier than, Richard, most of the masses out there use brokers.

Richard: Yeah, they use a stockbroker or an insurance broker or both. And they think that’s all we need. And what they’re not getting into this year he. Not getting someone that has to take the client’s interests first. What they’re agreeing to is to work with someone that works on commission and by the regulations of the industries they are allowed to take their own interests first, and then the clients. Does that sound like a smart thing to do? I mean, for instance, when you go to buy a car and you know that guy is on commission and he is only interested in selling the car for the highest possible price, and you’ve got to go in there and dicker with him to try to get a reasonable deal, did you think that that’s what you might have to do in order to get a reasonable deal from your stock broker and your insurance broker? No.

Pat: Well, that’s the thing, you expect people to be massive professionals, is that you really want to deal with.

Richard: Enough with the commercials want to tell you.

Pat: Well, the one thing that’s really tough though is that if you’re entire living is generated from the revenue that you produce, bring in the house, so to speak. You’re getting a percentage of everything you bring into the investments, that means in a sense you’re just a salesperson.

Richard: The commissions that these guys earn on these products is outrageous.

Pat: Well I think back to that old TV show with Michael Douglas and Emilio Estevez, I think, what was the name of the show I think it was like Stock Market or something like that.

Richard: The Wall Street movie?

Pat: Yes, that’s right.

Richard: Yes. Michael Douglas was saying greed is good.

Pat: Greed is good. The other thing that a lot of people miss, is that that’s fairly accurate. In fact there’s even been a show in the last few years with Will Smith, and not to knock as far as Will Smith is amazing, the guy he was portraying was a stockbroker and it didn’t look like he spent a ton of time doing research?

Richard: No. It was all about sell, sell, sell, sell.

Pat: And also, we knew that it was you go to Monday morning meeting and here’s what you’re selling this week. So where does the professionalism come in?

Richard: The only professionalism comes in through the registered advisors. They’re the only ones that have a fiduciary duty to the client. And the confusion comes in, in that most of the major wire line houses, the major brokerage houses have convinced most of the brokers to pick up this license. So now about 95% of the registered advisors still carry brokerage licenses and charge commissions. So they’re operating at a conflict of interest and the SEC says this is okay and the new financial regulations that just got pushed through Congress does not address this. You are not protected still.

Pat: amazing. Why is it that…

Richard: Only the wealthy are smart enough to make sure they are doing business with someone it is only a registered advisor.

Pat: What does that mean that only the wealthy can afford these guys that are the registered investment advisors?

Richard: No, but they are educated, so most of my clients are either better educated people that have tried on their own and failed, and for once they are willing to admit it. And you know what I’ve tried doing this on my own because I got frustrated with brand-name broker one and brand-name broker two and brand-name broker three. I tried it on my own for five years. I couldn’t even beat the indexes so I am looking for the right way, the best way to do it. And they found out about the registered investment advisor and now they’re happy.

Pat: Very good. What are some of the other ways that the smart money use professional advisors?

Richard: Well, obviously they are looking for high returns without stock market risk if you’re scared of the stock market.

Pat: To me that sounds like an oxymoron. High returns without stock market risk. Is it possible to get high returns and not be in the market?

Richard: There are certain periods of time and certain asset classes that can happen, and this is one of those periods.

Pat: What do you mean by that? I know that when I look back over the market for the last 30 or 40 years, it’s been volatile, but it looks like one whale of a ride, but I also realize there have been years when they just went sideways.

Richard: Exactly. So you can achieve true asset diversification if you’ll come to our offices or come to the seminars. Most people have been taught that true asset diversification is buying stocks and bonds period.

Pat: Right, that’s diversification. Stocks and bonds.

Richard: Right. And they are missing other categories that they could be in, like precious metals. If you’d been in precious metals and then hedging your bets against potential inflation over the last five years, you would have tripled your money.

Pat: Right. Now that’s not a large portion of anybody’s portfolio is it?

Richard: No.

Pat: Because usually the only ones that get gold are the ones that apply the 4Gs: God, Guns, Gold, Groceries.

Richard: Exactly. If you are 100% in it then you’re probably one of those survivalists living in the woods worried about when the aliens are going to land the space ships.

Pat: Whatever works. What are some of the other ways that smart money use professional advisors?

Richard: They look to find opportunities that they were not able to find in the brand-name brokers because the opportunities there are all based on commissions. There’s a lot of other financial services and products that are out there that are not at the brokers’ office. And they’re not at the insurance sales offices and I don’t care if it’s a quiet company or if it’s a so-called you know the guy with the blimp and the Peanuts, it doesn’t matter which commercial you think is fascinating that the insurance guys are pushing. Those people are driven by the same things the stockbrokers are driven by. They’re 100% commission driven. Their interests come before yours. Their only requirement is to offer you a suitable product in their opinion, and in their opinion this product fits everybody over age 45.

Pat: Right.

Richard: Does that sound custom fit to you?

Pat: Right. Well I know you’re going to be covering all of this at the seminar on Wednesday, well the next two Wednesdays, Wednesday the 26th and June 2 and you’ll be at Timarron?

Richard: We’ll be centrally located in the Dallas-Fort Worth metro area near Highway 114 and 121, where it splits in Southlake at the Timarron Country Club the next two Wednesdays at 6:30 PM.

Pat: Now tell us who should really attend that meeting?

Richard: People that want are high return low fee investment solutions instead of what they’ve been getting from the brokers for the last 50 years, which is high fee low returns. If you’re interested in finally achieving some gains that fall to your bottom line, you need to show up.

Pat: Right. Now are there any special qualifications other than that?

Richard: Well, I mean most of our clients have a minimum of $250,000 to invest. We’ve got some large multimillionaires in there, but that’s not our primary focus. Our primary focus is the middle class. We wanted to do something for the middle class, that’s part of our mission statement, along with the fact that we want to operate under the Golden rule.

Pat: Very good. I know that in order to register you just call 972-325-1700, that’s 972-325-1700. Register. It’s a free workshop. No sales pitch. It’s a ton of information.

Richard: It is. It’s a bunch of information, please bring a pen will give you some paper. It will have a pen really, if you can’t remember to bring your pen, just kidding.

Pat: and then they get a really nice meal. I’ve been to Timarron many, many times. One of the things I encourage you guys to recognize is there is a difference when using a registered investment advisor. And Richard, folks can call you during the week at your office?

Richard: Yes. You can call my trading desk, 972-758-4484 if you don’t have time for this seminar or you just want to ask a question and you’re scared to ask it on the air or in public.

Pat: 972-758-4484. Now if you did want to call in today, we are taking calls on the show, it’s 972-299-KSKY that’s 5759, or 866-660-KSKY, 5759. And we just encourage you to get with Richard one way or the other. Come and see him talk. Listen to a good hour presentation, get a good meal at Timarron Country Club on this Wednesday and the following Wednesday.

Richard: May 26 or June 2 at 6:30 PM. You will be eating at 7:30 we promise you. We will not run over.

Pat: And they won’t. They are good about that. But the information, you won’t want to miss it. It’s great information to help you achieve your financial goals the way that the smart investors do. We’re always here for you. We’ll come back after the break and answer your questions.

Pat: Welcome back to Financial Fortress Radio this is Pat Dougher with Richard Jordan here in the studio. We are talking about how the smart money invest wisely in one of the things that continues to come up, Richard, is the smart money people hire advisors that use formula based investment strategies, right?

Richard: That’s right.

Pat: So what are some of the, what creates so much success in that arena?

Richard: Well we take the emotion out of investing and a lot of people that read magazines and newspapers read about simple formulas like moving averages and think they can manage their own portfolio that way. But since 1987 when the market crashed in one day 22%, all the simple formulas went out the window that day. Moving averages did not forecast that. They simply didn’t. Moving averages did not forecast the flash crash that happened just this month on May 6, that Thursday a few weeks ago, when it dropped 1000 points in 20 minutes and the SEC and the White House were on the air the next day going “we’re going to get to the bottom of this.” Well, the bottom of this is there’s computerized trading with triggers that are set to go off based on certain formulas, and by the time you get home from work that portfolio can get knocked down 10 or 20% if you’re not working with the formula based advisor who has set up your portfolio correctly, you could lose big.

Pat: Well I know that there have been some real amazing results that some registered investment advisors have been able to produce, one of the ones that you talk about, the guy, that literally his fee was a larger number than I can comprehend.

Richard: Well yes. We’ll talk about one of the PhD’s in this business. You’ll hear about him. He’s on the Forbes 400 list and his minimum investment is $20 million. And he uses the same type of investment logic that we use. The difference is he only wants to deal with the very upper, upper crust and we want to deal with the middle class.

Pat: Very good. $20 million is just a little beyond my pocket book, but you’re saying that the strategies that you’re seeing there are the same things that you’re guys are employing. You’re going to be showing some of this, this week?

Richard: Absolutely. This coming Wednesday, May 26 at 6:30 PM at Southlake Timarron Country Club real close to DFW airport, where 114 and 121 meet, about a mile and a half west of there, so it’s very convenient whether you live in the Dallas or the Fort Worth area.

Pat: Very good. Now to register…

Richard: 972-325-1700 to register, just leave your name, address and phone number and we’ll send you the letter of confirmation that you’ll need to get in the club and into the meeting.

Pat: Now, at this point for this Wednesday the letter might not get there in time. How can they…

Richard: Just call in right away and we’ll send that letter out Monday. It’ll get there by Tuesday.

Pat: Okay, no worries. And I also realize that some people may have questions for you and they don’t want to ask on the air…

Richard: Or they don’t want to talk at the seminar, so they can call my trading desk directly at 972-758-4484.

Pat: That’s 972-758-4484.

Richard: Correct.

Pat: And during the day I know that the best time to catch you is probably after three?

Richard: Yeah, the market closes at three clock.

Pat: But if they call earlier, you’ll still call them back later that day?

Richard: Absolutely. We’ll get to you before five.

Pat: Very good. Now, I know that when we are talking about what are the ways that people win, why the smart money win with a financial advisor, like a registered investment advisor, what are some of the other things that you do this unique and special?

Richard: Well we started out in estate planning, so we can help you set up your legacy for your children, your grandchildren, your charities. We can help you do things that you can’t get done trying to do it yourself because you just don’t have enough information or time to gather the information. I’ll give you an example. I read an article last week that analyzed the retirement calculators that are available on the top 25 financial websites. And these are the all the top financial services or names in the business, and none of them are able to factor in longevity risk. Well one of the questions that we ask people routinely is “how long did your mom and dad live?” Because that will indicate how long you will probably live. Medicine is better, you’re probably going to live 5 to 10 years longer than your parents, you need to plan for that. In fact, over 50% of the people that live to age 65 this year will live to 85. And if they were thinking about planning for retiring the way their parents did back in the 60s and 70s, back then the average person only received about 22 Social Security checks before they checked out. Today, 20 years is a very typical retirement. A lot of people are seeing 30. So our spreadsheets go up to 35 years as a minimum. And that way we can take a 55-year-old to 90, we can take a 70-year-old to 105. The fastest growing class of people in terms of age categories are people in their 80s and 90s, isn’t that amazing?

Pat: That is amazing.

Richard: But we need some health care reform to make sure that doesn’t happen anymore, right Pat?

Pat: I would call that population control at that point. Anyways, okay. By all means folks connect with Richard this week. Make sure that you register for this Wednesday’s workshop or the following Wednesday, that’s Wednesday the 26th or Wednesday, June 2. And it’s a free workshop, it’s an hour of great information followed by a great dinner and you do need to call in and make sure that you’re really qualified to come. It’s really designed for a specific kind of person.

Richard: Well it’s designed for someone that has saved up at least $250,000, because a lot of the strategies that were going to talk about are not going to work for somebody that is just getting started.

Pat: Well I really know that even some of the things that you are able to do for folks, he really need to be qualified to invest in, is that about right?

Richard: Well sure. You want to avoid risk when you first start your initial savings program. One of the biggest mistakes that people make when they self invest is they take on too much risk when the market is at the top when they should be bailing out of the market and they don’t take on enough risk when the markets at the bottom. They’re being driven by fear and greed instead of being driven by statistics and by probabilities by the formulas that are complex, but they consistently outperform the market indexes and the mutual funds.

Pat: In the market right now, are you comfortable with it going up? Were you think

Richard: It depends upon your investment horizon and your appetite for risk. If you’re an aggressive investor, you want to be in right now. It might drop another 10%, but honestly if you can buy within 10% of bottom every time and sell within 10% of the top, you will beat 96% of the mutual funds out there; I don’t care if they are a loaded fund or they’re an unloaded fund. 96% and that’s the kind of performance that we strive to achieve for our clients.

Pat: Now if you are looking in that direction, you obviously in this volatile of a market you need some care.

Richard: Absolutely. It’s just really tricky out there right now.

Pat: So folks can connect with you at, they can call you at 972-758-4484.

Richard: That’s my desk.

Pat: And then register for this workshop or the June 2 workshop at 972-325-1700.

Richard: Sure. Come on out and kick the tires at the seminar. See if you like this, if you do you can agree to a free consultation. If you don’t hail get a free dinner just for showing up and no hard feelings.

Pat: 972-325-1700 to make sure that you’re registered for either this Wednesday on the following Wednesday at Timarron Country Club, 6:30 PM to what about 8:30 PM. And the other thing is what a great place to connect with other folks that are really, just a really good group. A higher savings rate. I just encourage you to connect. It’s 972-325-1700 or 972-758-4484 to connect to Richard Jordan. And this has been Financial Fortress Radio. We’ve been talking about ways that the smart money invest. We’ll see you next week.

Financial Fortress May 16 with Richard Jordan and Patrick Dougher

Patrick: Welcome to Financial Fortress Radio. This is Pat Dougher. Richard Jordan is with me in the studio. He’s a Chief Investment Strategist in the Dallas/Fort Worth area. We are so excited about you listening to the Financial Fortress Radio because we’re going to give you ideas and tools to help you, literally, invest your money better for higher returns and, literally, you’ll get so much more out of your own estate. So with that, Richard, welcome to show.
Richard: Thank you, Pat.
Patrick: Okay, one of the things that I want to make sure that you tell people, Richard, is really, who should be listening to this show?
Richard: Well, anybody that cares about their investments, anybody that wants to know how to do better with their investments, anybody that’s interested in passing on more money over to the next generation, or having more to retire on.
Patrick: Very good. What should someone expect to get out of this radio show?
Richard: Well, we’ll be talking about a number of things today. We’ll be talking about why self-investors fail, why the key strategies that we use are better than they get from any other brokers or any of the self-investors. So, those are the key ways that people invest. They either try and do it themselves, or they hire a broker.
Patrick: Very good. I know that one of the things we really wanted to cover today are the five reasons that self-investors fail, and I know that there’s been some real major changes in the marketplace just in these last couple of weeks, hasn’t there?
Richard: There’s been a tremendous amount of change. We had a Thursday before last where the market took a 1,000-point drop in about 20 minutes and bounced back. Of course, it didn’t bounce back all the way. And the SEC and the White House are just trying to say, “Well, there must have been some sort of technical glitch.”
Patrick: Very good. So, when we look at the five reasons that self-investors fail, what do you see?
Richard: Well, there’s a lot of reasons why they fail ,but it comes down to basically that they invest with their emotions, and they don’t know how to analyze data from the market and make emotionless decisions; decisions that are based on sound facts, the right facts.
Patrick: Well, where would somebody even get that kind of information?
Richard: Well, obviously, I can’t give away all my secrets, Pat.
Patrick: No, I know that a lot of people, when we look at the market as a whole, the information that is available to invest is just voluminous. I mean, it’s just more than you could imagine.
Richard: Yeah. Financial data doubles every nine months.
Patrick: I figured it was about every nine minutes. When I was in that environment, we had a squawk box going, and three computers, and five different literally sources of information flying across our desk all at the same time. And I think about the average investor, I’m thinking they just couldn’t keep up.
Richard: There’s no way. They don’t get the data real-time, and they don’t get the information or the formulas that are going to work. They hear about things that used to work in the past. That’s what they read about in the newspapers and the magazines is what used to work.
And some reporter heard about it and he wrote about it. He thought he was a real hero but it doesn’t work anymore. You’ve got to keep changing it up. You need to keep investigating different formulas, and you have to tweak them all the time. So, it’s a constant battle.
I’m going to compare this to the tortoise and the hare. The self-investors are hares. They like to make quick decisions based on momentum, or some formula that they’ve written about ,or wrote about, read it somewhere and they used that formula.
And then, all of a sudden, it quits working and they get caught in a lot of these emotional traps. The first one is called conformational bias, and this is behavioral economics from a Professor at Duke that studied economics and how psychological behavior effects inveestments for the last 30 years.
Conformational bias is pretty simple. When we make a decision, especially with our money, something that’s so emotional to us, we look for that information that confirms our decision, not the information that conflicts with our decisions.
So, as a result, we can sit at the dinner table with mom or the kids and say, “You know what? I’m such a great genius kind of an investor because look at this, I just read something today that confirms that decision I made last month or last year on this investment is a great decision.”
There were ten other articles about that investment that said it actually ranked in the bottom 20%, but he didn’t want to bother reading those things. He wanted to read the one article that confirmed he made a great decision.
Patrick: Well, isn’t it a little bit like when you buy a car or something, that it seems like you buy a red whatever it might be, a Mustang or something?
Richard: Sure, red F-150.
Patrick: Right. Okay, so you buy a red F-150, and then everybody on the highway has a red F-150 at that point, isn’t that right?
Richard: All of a sudden, you see all the red F-150s, don’t you?
Patrick: I know it’s your reticular activator kicking off and saying, “Hey, there’s another one, there’s another one.” But, the other thing is this that when you first made the decision, we all basically, as much as we don’t like to admit it, we make decision emotionally.
Richard: Absolutely.
Patrick: And then, we back them up with logic.
Richard: Exactly.
Patrick: And isn’t that what you’re saying is that conformation bias is you make the decision, and then you look for all the reasons why that was the most amazing decision ever.
Richard: Absolutely.
Patrick: So, what are some of the other things; reasons why people fail?
Richard: How about short-term memory bias, and this is not a joke about having a senior moment.
Patrick: Okay. So, what do you mean, short-term memory syndrome?
Richard: Okay. We tend to remember all of our short-term gains, but we forget about our historical losing cycles, okay. So, we don’t want to talk about what happened to us in 1987, or from 2000 – 2002, or from 2007 – 2009. We just want to talk about what a genius we’ve been in the last six months while the market’s been generally going up.
And a monkey could sit in a closet blindfolded and throw darts at a map and pick winning stocks in the last six months. Now, it’s gotten tricky in the last two weeks, of course. But ,the market has been moving up in such a regular pace in the last six months that anybody could have been a winner if they just got in.
Patrick: Isn’t that the old thing of most of us would never have more than one children if we could remember the pain that it costs us.
Richard: Right. So, a lot of people lost 50% and 60%. In fact, a lot of people don’t know this, Warren Buffet lost 62.9% in 2008 and a lot of the mutual funds lost between 50% and 60%. People want to forget that.
If their $100,000 is only worth $50,000, they want to talk about the fact that they’re back up since last March. They’re back up 30%. Well, all that means is that their account that was originally $100,000 in 2006, that dropped in 2008 to $50,000, is now worth $70,000. They don’t want to go through the pain of remembering that, “Oh, it used to be $100,000.”
Patrick: Right. So, somebody that has short-term memory bias syndrome, they see that they’ve gained some and they’re excited about the latest gain. What else? What are some other things?
Richard: Status quo. It’s just human nature that I want to keep doing what I’ve been doing. But, if you keep doing what you’ve been doing, you’re going to keep getting what you’ve been getting.
So, I run into this a lot when I see an investor and they come and they say, “Well, I’m at so and so. I’m with this brokerage house and they’re one of the top ten brands, and if they can’t make money, nobody can make money.”
So, I don’t care who you’re with. Brokers have another reason why they tend to fail for their clients and it’s called conflict of interest, and we’re going to talk about that at the next segment.
Patrick: Well, one of the things that I want to make sure that people know is that you have a workshop coming up, right?
Richard: Absolutely.
Patrick: So, tell us about the workshops that are coming up.
Richard: So, at the workshop, we’re going to talk about the five strategies that smart investors use to become wealthier, that wealthy investors use to become even richer. And we’ll talk about those strategies in about an hour and then serve dinner. And we’ll be at Southlake Timarron Country Club on Wednesday, May 26th at 6:30 PM, or Wednesday, June 2nd.
Patrick: Very good. It starts at what time again?
Richard: 6:30 PM.
Patrick: And how would someone get registered?
Richard: 972-325-1700.
Patrick: 972-325-1700, they can get registered. Now, who should make sure that they’re at that event?
Richard: Well, anybody that’s concerned about the way this market has been the last couple of weeks, anybody that’s got significant assets. Most of our clients have between $250,000 on up to about $7 million.
Patrick: Very good. So, it’s best that they have a pretty good idea of where they’ve been, and they’ve got a fairly good asset base.
Richard: Absolutely.
Patrick: Okay. So then, as far as what they should expect – 60 minutes of really good information. I’ve been through your workshop a couple of times, and I was really pleased with the fact that it’s not a sales pitch.
Richard: We’re not selling.
Patrick: It’s all about giving people good information. Now, what would be one or two of the strategies real quick that you might see during that time period?
Richard: Well, I think the first strategy that we get the highest ratings on consistently from people is the fact that we show them high return/low fee investment solutions.
Patrick: High return/low fee. I didn’t know those existed.
Richard: Well, yeah. It’s sort of the opposite to what you’re used to getting, which is high fee/low return investment solutions from a professional. And again, that professional is typically a broker and his conflict of interest is that he’s driven by commissions.
So, the key problem with that is he does not have a fiduciary duty to you. He only has to sell you a product that, in his opinion, is suitable for somebody like you. Well, most brokers think that all products are suitable for somebody over certain age.
Patrick: Well, that is a real key to look at too is there’s a big difference between the definition of a broker versus the definition of a Registered Investment Advisor.
Richard: Exactly. A broker is a salesman whose primary duty is to generate commissions. A Registered Investment Advisor has a fiduciary duty to the client first and foremost. And the key thing is 95% of registered advisors also carry broker’s licenses. We’re in that top 5% that the wealthy use, and the smart investors use, that want to use somebody that does not have a conflict of interest, that is going to win when they win. It’s much better if you’re on a team who has the same motivation. Don’t you think, Pat?
Patrick: Well, I agree. I encourage you to make sure that you register for this event. It’s free. Just make sure you qualify. And the way that you do is just call 972-325-1700. I really just encourage you to make sure that you call, you leave your information. No salesman will call. It’s just a confirmation type of thing.
The other thing is that if you like to join the call today or join the conversation today, you can call in at 972-299-5759. That’s metro number for Dallas and Fort Worth. Or if you’re outside the DFW area, it’s 866-660-5759. We’ll be right back.
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Patrick: Welcome back to Financial Fortress Radio. This is Pat Dougher. I’m really excited about the conversation today because a lot of people don’t realize that there are just so many ways to mess up in the investing arena.
When you think about – we’re just talking about the five biggest ways that people fail with their investments, but there are so many more ways to do it, so we’re just going to talk a little bit about those. Richard, thank you again. What are some of the reasons that people really don’t do well in the market?
Richard: Well, another thing that we’ve talked about that we’ve just got into in last segment was status quo bias. And this is the tendency for the investor to avoid making changes. And as a result of that, well, let’s just ride it out a little longer. And this idea came from the brokers that sold the idea of buy and hold. Well, we call that buy and hope; hope, hope, hope it comes back because guess what? It may never.
If you’re not making decisions based on sound data and sound formulas, you’re going to make wrong decisions time after time again. And the old idea of buy and hold died in 1987 a very bad death on black Monday in October of 1987, and it was reconfirmed in March of 2000 when we had another big hit.
So, the older you get, you also tend to experience more and more status quo bias because you’ve lived through so much of the stock market when buy and hold worked that you think it’s going to somehow magically come back, and it’s not. Buy and hold has been a disastrous failure since 1999.
Patrick: Well, I think a lot of people don’t even realize the differences in how a sideways market works compared to times when it’s been a massive growth. There has only been a couple of seasons in last 100 years when the market was going up for a significant amount of time. Would you agree?
Richard: Yeah. In fact, if you take the longest bull market out of the statistics since 1920 and you compare the numbers for the last 90 years with that one long bull market out of there, we call that in statistics an off-all statistic. It’s so unusual, it’s so far to the right or left side of the graph that you just can never expect it reoccur again.
Once you throw that out, the number of years that the Dow or the S&P 500 has been up compared to the number of years it’s been down is actually almost exactly 50/50.
Patrick: I wouldn’t doubt. Well, I know that even another big statistic that a lot of people overlook is the whole population growth or expansion and the boomers hitting their maximum income years in the last ten years.
Richard: Well, in their maximum investment years. So, the kids are through college, they’ve been able to save up a ton of money, mom and dad may have left them a little bit when they passed on, and now there’s over $3.5 trillion in cash sitting on the sidelines.
There was over $4 trillion as of March last year when the market bottomed out. About half a trillion has come back into the market. But, guess what? That’s cash that’s sick and tired of making a half a percent at the bank, sick and tired of making 2% on a CD.
And so, just because they’ve got nowhere else to throw it, they’ve thrown it at the market for the last year, and they’ve pumped this thing back up to the point where the PE ratios are near the top of a bull market again.
Patrick: That’s really interesting that only a half a trillion dollars would drive the market up 25%, 30%. What’s it been?
Richard: It’s closer to – it’s between 30% and 40% in the last 12 months.
Patrick: See, that’s why it’s your job to do that stuff. I’m just the announcer guy. So, to reiterate just a couple of things real quick, five reasons we’ve been talking about; we’ve said conformational bias. Conformational bias is just looking for data that supports your decision.
Richard: Right, instead of data that conflicts with your decision.
Patrick: Right. Okay, short-term memory syndrome is…
Richard: Basically, that you remember that you made money in the last year or the last six months, but you forgot you’re still down 30% or 40% from where you were in 2006.
Patrick: And the whole short-term – the status quo bias is really what caused the 50% decline in 2008, didn’t it?
Richard: Well, it’s got a lot to do with it. The professional investors like us have a tendency to move fast because we’re not basing our decisions on emotions; we’re basing it on data.
So, when we see data that says it’s time to get in, or it’s time to get out or it’s time to moderate our holdings and start cutting back or start putting money back in, that’s when we act.
Patrick: Well, isn’t that the definition though of a Registered Investment Advisor?
Richard: Exactly. We have a fiduciary duty to the client to treat their interest first and foremost. So, we measure the amount of risk they want to take. If they want a foundational product with guaranteed interest to take care of them for the rest of their lives, and they want to put the rest in the market which is how most of our investors are; they’re conservative and they want to make sure that their bills get paid.
And then whatever goes to the kids or the grandkids, we’ll have a tendency to move up and down with the market. But, we’re going to do a better job for them that they’re going to get from the mutual fund managers, or they’re going to get from the brokers at all the top brokerage houses because we don’t have a conflict of interest. We have their best interest at heart.
Vince Lombardi once said that a football player that’s worth keeping on the field is one that plays not only with his feet, he has good quick feet, has a good mind, but he has a good heart.
And we have a good heart for our clients because that’s just our nature. Our nature is to treat people like we want to be treated. The golden rule is part of our mission statement, and I don’t think you’re going to find that if you look at the mission statements of the brokerage houses.
In fact, one of the biggest laughs I got was listening to a guy from Goldman Sachs talking to Congress, and the guy asked them, he said, “So, let me get this right. You had most of your people that were professional ready to go short against this investment that you were selling to some of the largest banks in the world. It basically bankrupted the eighth largest bank in Germany. And you knew that and yet, you went out there and pushed that product with that conflict of interest.”
And the guy just looked at him like a deer in the headlights when he said conflict of interest. He just paused and he just stared at him like he couldn’t believe that the guy said the term conflict of interest.
And finally, he said, “Well, yeah, but that’s our job. Everybody understands it. Our job is to collect commissions, and we’re going to be selling buyers and sellers on the both sides of the transaction. So, we don’t care where we get these buyers and seller from. We just want to be able to put them together so that we make the most commissions. Everybody knows that.”
Patrick: Ow! That hurts all under.
Richard: Doesn’t it? Is that the way you think about your broker?
Patrick: I don’t use brokers.
Richard: Good for you.
Patrick: Well, it really is about time to make sure that people know that you do workshops, and you’ve got a couple of them coming up. When’s your next workshop?
Richard: Yeah. It will give you a chance to get to meet us and see if you like us. We’re going to talk about the five key strategies that smart investors use to invest money at Southlake Timarron Country Club, Wednesday, May 26th and Wednesday, June 2nd at 6:30 PM. Call 972-325-1700 to register. No salesman is going to call you back. Just leave your name, phone number and address so we can send you a confirmation letter. You’ll need that to get into the club.
Patrick: Okay. So, it’s 972-325-1700 to give you all of the information so that you can send a confirmation letter to get into Timarron Country Club either May 26th, Wednesday the 26th or June 2nd which is also a Wednesday a week later. They’re going to get about an hour worth of presentation, and then typically you’ll share a meal with them as well.
Richard: Purely educational. We’re not selling anything. We don’t push products. We could care less what products you currently own or what holdings you currently own. We’re just going to talk in general about things that people don’t understand, or psychology that’s different between the average person and the smart investor.
Patrick: Very good. A couple of numbers that you also may want to keep – I encourage you to take these numbers down. One is direct to Richard Jordan. He’s got offices all over the Dallas/Fort Worth area, but you can get right to his desk at 972-758-4484.
If you’d like to join the conversation today, it’s real simple. Just call in 972-299-5759. If you’re outside the DFW area, it’s 866-660-5759. If you’ve got a question about your investments, or your strategy, or anything that would have to do with your future in the marketplace, then call Richard and ask him about what we’re doing here. We’ll be right back.
[commercial]
Patrick: Welcome back to Financial Fortress Radio. This is Pat Dougher. Richard Jordan is the co-host of this event. We’re so thankful that you’re listening to ways that you can learn the strategies that smart investors use to grow their money, to transfer their wealth. I know we’ve been talking a lot about the five reasons self-investors fail.
We’ve covered a couple of different things that have to do with conformational bias, short-term memory syndrome, status quo bias. There’s so much more to it. Now, I want you to know that Richard is the Chief Investment Strategist in the Dallas/Fort Worth area. Richard, thank you so much for all you do.
Richard: Thank you, Pat.
Patrick: I want to know more about the reasons why self-investors fail.
Richard: The next reason we see is something called the sunken cost fallacy. So, I bought this stock – let’s take Nortel. It was 100 bucks. I bought it when it was a real bargain. I bought it when it was $30. I had an engineer from Richardson come in and tell me this.
He worked in the telecom industry. He knew everything about telecom. He knew everything about engineering. He knew everything about investing in things based on formulas and analysis. But, guess what? When Nortel started tanking, he couldn’t sell it.
Patrick: Now, why? What’s the reasoning that’s going in people’s head when something starts to falter? What’s going on?
Richard: They’re not making a sell decision based on reason; it’s emotion and the emotion is pride. “Okay, I put $30 a share into this thing and there’s no way I’m going to let it go for less than that. By golly, I don’t make bad decisions. So, I don’t care if it’s at $24 and still dropping, I’m going to hang on to it.”
I get clients walking into my office all the time with bad investments that their broker decided, or even they, with top brand names, “I bought General Motors,” or, “I bought,” whatever, “I bought this speculative thing that was supposed to get blessed by the FDA and they were going to be worth 100 times more in two years if the FDA blessed their medical product.”
Guess what? It didn’t happen. Cut your losses short, get out, set a sell point. If it drops below that, cut your losses. At least sell half of it if you think it’s got a chance to bounce back because you’re waiting for an FDA event or something like that to occur.
But, look at Nortel now, what is it; 30 cents? I mean, this guy lost 99 cents on a dollar and he’s sitting here telling me how smart he is with all the other stuff in his portfolio. Well, when I analyzed his portfolio and his holdings for rate of return on the last ten years, and the last five years, and the last three years, and the last year, and the last six months, he didn’t even do as well as any of the indexes.
Patrick: Now, I hear that and I’m sitting there just thinking surely, somebody would know, you need to have a stop loss.
Richard: This is how important pride is in investing.
Patrick: Well, what about dollar cost averaging down?
Richard: There are all sorts of mathematical ways to improve your odds when you’re investing, and you can read about them, and you can implement some of them. But, the toughest thing to do is to admit that “You know what? 20% of the decisions I make are bad, 20% are mediocre, maybe 20% are really good, and rest fall somewhere in between.”
It’s being able to sell your losses fast, and cut them and say, “You know what? Forget my pride.” This is about producing the best rate of return overall for the client.
Patrick: I remember years ago, I interviewed or helped interview – I think it was Clint Murchison’s wife – wonderful lady. And she was talking about the way that he used to make decisions, and it was amazing. Nine decisions would be just poo, and one decision would just knock it out of the park. But, he knew that going in. That was something that he had an analysis that he went through that made sense. But, most people, they don’t do that, do they?
Richard: No.
Patrick: They don’t get it; they don’t understand how to sell it and cut something short.
Richard: Most people buy and sell based on emotion, and this sunken cost fallacy paralyzes people at the thought of sitting at the dinner table and saying, “Martha, we lost our butt on Nortel, but we got out and only lost 20%,” instead of riding that puppy all the way down into the basement, and all the way into the grave in this case.
Patrick: Right. Well, I know that years ago, that people would say, “Well, I lost everything I had in the market.” That was $646.28.
Richard: Oh, my God.
Patrick: But, that was the mindset of our grandparents, my grandparents.
Richard: I’ll give you another example. I’ve got a friend who self-manages portfolio, one of the smartest guys I’ve ever known; on the board of GTE, on the board of Nortel, on the board of McCaw Cellular, on the board of Sprint.
We’re talking the guy that’s got insider information in telecom like nobody’s business, right. Worth over $10 million when the market peaked in $2,000. I sat at his kitchen table the other day and I said, “So hey, what’s your portfolio worth these days?” Take a guess, Pat.
Patrick: A million, maybe.
Richard: About $400,000, and he’s living off pension and Social Security. He hasn’t touched this thing. It’s just for the kids. He’s lost 96%.
Patrick: Because he just wouldn’t sell?
Richard: Sunken cost fallacy. When these things started dropping, he knew people internally at the highest levels that said, “Don’t worry, George, this thing’s going to come back.”
Patrick: Buy and hold, right?
Richard: Buy and hold, and listen to emotional information rather than logical data analysis.
Patrick: Well, it sounds like he’s done them all though; the conformational bias – he’s probably still looking at reasons why he was right, not the number, not the dollars, but the reasons.
Richard: Smart guy, high-level guy.
Patrick: And short-term memory, status quo bias, sunken cost fallacy. The things that we’re talking about here we’re just trying to highlight. I know some of the key strategies. I know that you do a workshop several times – well, I know coming up; we’ve got several coming up.
Richard: We usually do about two weeks a month.
Patrick: Two a month?
Richard: Yeah.
Patrick: Okay. So you’ve got one coming up on May 26th and June 2nd, both of those are Wednesdays.
Richard: Correct.
Patrick: How would someone register?
Richard: 972-325-1700. The lady there will tell you to leave your name, phone number and address so we can send you a letter of confirmation. You’ll need that to get into the club. So, please leave the information.
No salesman will call. We’re not going to try and sell you anything. If you meet us at the event and you decide want to engage us for a free consultation, that’s your choice. We don’t sell at the event; we offer free information based on things that investors need to know.
Patrick: What are some of the things that they’ll walk away with, Richard?
Richard: Well, they’ll learn about the key strategies that smart investors use to become wealthy and wealth investors use to become much more wealthy. They’ll learn, for instance, about how to get high returns without stock market risk. They’ll learn about opportunities that they won’t see at any of the big brand named brokers.
Why? Because these opportunities don’t pay commission. And remember the difference between a broker and a registered advisor. A broker is driven by commissions first, and taking care of you second. We’re driven by finding you the best low cost/high return investment solution.
Patrick: Now, when someone attends this, they do need to somewhat qualify, right?
Richard: Yes. Most of our clients are people that have assets in the market, or investable assets with CDs and everything, that are in the range from $250,000 on up to $7 million.
Patrick: Very good. Now, is there any cost associated with this?
Richard: No, this a free event. It’s strictly educational. And obviously, we offer a free dinner so there’s a little something in it for you. You can take an hour of your time to listen and you can decide, “Hey, I don’t like this guy. I don’t like the way they approach the market.” That’s fine. Enjoy your dinner, enjoy the company of the people you’re with, trade some phone numbers, make some new friends, and you won’t hurt our feelings if you say no.
Patrick: Well, having been to a few of them, I would highly encourage people to pay attention to who’s in the room because a lot of people that are there are really – well, they’re class act.
Richard: Yeah, we draw an educated crow; absolutely.
Patrick: Yeah, you do. So, to register, it’s just 972-325-1700. Now also, people may want to contact you directly.
Richard: If they have a personal question and they don’t want to ask it over the air, call my desk, 972-758-4484, and I will return all calls typically after the market closes at 3:00 PM. So, if you don’t get me right away, I’m in a meeting, just leave it on the voicemail, I’ll be happy to get back to you later in the day.
Patrick: The other thing though that’s really important is that I know you do a ton of research. You probably spend 30 – 40 hours a week just on the research rather than selling. I appreciate that about you.
972-758-4484. We’re talking about the five reasons self-investors fail, and you just want to make sure that you connect with Richard and you stay tuned. We have more coming up after the break.
[commercial]
Patrick: Welcome back to Financial Fortress Radio. This is Patrick Dougher. Richard Jordan is with me here as the co-host of this event, and we’re really thankful that you’re listening. There’s so much information that most people really – well, not just want to know, need to know, on what’s going on with their investments, on what are the real secrets, the key strategies that smart investors use to invest their money, and to pass on their assets from one generation to the next.
I know that we want to talk about some of the key strategies even right now. I know, Richard, you have a couple of other keys that you use and that you teach in your workshops and stuff. What are some other ones that you use?
Richard: Well, one of the key ones is opportunities that they won’t find at the brand name brokers. In fact, they won’t find them at the low-end brokers either. They won’t find them at Schwab, they won’t find them at TDA, they won’t find them at Scottrade because they don’t have access to them.
These are funds whose information is only available to Registered Investment Advisors, and the reasons brokers know about these things, but they won’t tell you about them, is because they don’t pay commissions.
Patrick: Well, again, it goes back to the definition though, doesn’t it? A broker is a salesperson. Registered Investment Advisor – that whole industry or that category of the Registered Investment Advisor was actually set up by the government, wasn’t it?
Richard: In 1940, they set it up for the wealthy.
Patrick: So, today, though a lot of people don’t realize what that really means because for a lot of people, somebody that’s a Registered Investment Advisor can still carry some of those other licenses, can’t they?
Richard: Well, 95% of the Registered Advisors also carry a 6 and a 7 which gives them the right to collect commissions on the sale of stocks, bonds, mutual funds, and annuities. And the fact that the commissions they collect are typically five times or more what they would earn as Registered Investment Advisors, these are the guys that want to get rich quick on your money, using other people’s money, they’re going to get rich quick and you’re going to suffer the consequences of their poor decisions.
Patrick: Now, a lot of people wouldn’t see that though initially because the different prospectuses show a different picture, don’t they?
Richard: Well, the prospectus is kind of a funny animal. It has to tell them some of their costs. For instance, in mutual funds, the range of cost that we uncover typically range up to 8% on a fund; 8.2% is pretty typical.
But, the disclosed funds and the prospectus are typically only around 2% or 2.5%. But, there’s another category called undisclosed fees, and the undisclosed fees are usually two to three times higher than the disclosed fees, and the undisclosed fees are only referred to in vague generalities and the prospectus as operating costs, or variable expenses, or spread expenses. Do you know another word for spread expenses, Pat?
Patrick: No.
Richard: Commissions.
Patrick: Oh, okay. Well, it makes sense because the spread typically is the different between what you buy and you can sell it for.
Richard: How about incentives? What is an incentive for in the prospectus?
Patrick: Again, I would imagine some form of commission.
Richard: It is. It’s you sell so much of our fund and you get the free trip to Haiti, or Fiji, or whatever.
Patrick: Very good. Yeah, I understand what you’re saying. So, you’ve got this conflict even though they say they’re Registered Investment Advisors, but yet you don’t participate in any of that. Is that right?
Richard: Right. So, that’s what the big brokers have learned to do is they call themselves a private banker or a personal banker. They carry the registered advisory license, but they also carry all the commission license. It’s clearly a conflict of interest, and the SEC allows it.
There was a professor at Duke that wrote a book called Predictably Irrational. It’s a great book. And he talks about how the self-investors fail which you would expect. They fail 92% of the time in a bull market, 96% of the time in a bear market – pretty dismal odds of you ask me.
But, the scary part is that the fund managers, the pension funds and mutual fund managers, fail because of a conflict of interest. Now, he, being a Professor from a liberal university – he, of course adds that it’s terrible that they put him in such a position that they have a tendency to fail just because of human nature. Oh, poor them. Poor fund manager is making $10 million, $20 million, $50 million or $100 million a year. I really feel for them. Don’t you, Pat?
Patrick: Oh, it hurts all under.
Richard: Yeah, it does.
Patrick: But, I know that you’ve seen and used strategies and tools that have actually produced good rates of return.
Richard: Yes.
Patrick: In fact, one of the things that I was really surprised – in your workshop, you talk about how a lot of the prospectuses will actually post returns that are not what someone would experience. What do they call that?
Richard: Well, they post top-line returns. The SEC allows them to post gross returns which is the return that the fund experienced before the costs. The costs they buried in that 100 or 200 page prospectus. You have to find out what those costs are.
There was a study by Morningstar that ended about at the end of the last bull market over a really good 10-year period, that ended right around beginning of 2007, and it said that the average fund in the top 50% averaged 9.65% per year compounded rate of return, but that’s the advertised rate.
Patrick: So, what was the reality?
Richard: The reality, Morningstar went through the prospectuses, just like we do, and they found that the actual rate after fees was 1.45%.
Patrick: Each year?
Richard: Yes. It dropped 8.2%.
Patrick: Wow! That’s scary. What are a couple other things real quick on the other strategies that you teach?
Richard: We’ll talk about some nontraditional asset allocations like hard assets, what you should do with real estate right now, what you should be doing with precious metals. A lot of people think gold’s got to run to 2,000. Some people are saying it won’t. It’s getting kind of frothy at 1,240. What do you think, Pat
Patrick: Well, I just look at what’s happened in Greece, and Europe, and England, and America with a slight amount of overspending. I mean, you have what? Greece nearly went bankrupt, and there’s this European Union that may just disintegrate.
Richard: And Germany is threatening to jump out of the EU.
Patrick: That’s right. Germany is threatening that. I know that, recently, there were some really interesting reports on who would be next if Greece defaults, who has such a high rate of indebtedness to GDP.
Richard: Well, the obvious answers are the other countries that are highly socialistic like Spain like France, like Portugal, but I guess the surprising one that’s on the top ten list is right all here in the United States of America since we elected, what’s his name?
Patrick: Yeah, really. Well, in fact, I know England was above us, and then it was.
Richard: England’s now in the top five along with us. Yeah, it’s pretty dismal.
Patrick: The only ones that were kind of a little better was I know Australia and Switzerland.
Richard: And Canada was at the bottom on the list too.
Patrick: Yeah, that’s really good. Well, I want people to get in touch with you, Richard. They can call your number direct, 972-758-4484. They can also learn about the strategies at your workshop on the 26th. That would be Wednesday the 26th, Timarron Country Club.
Richard: Southlake.
Patrick: In Southlake. And then, June 2nd, same thing, Wednesday night, starts at …
Richard: 6:30 PM, plenty of time after work.
Patrick: About an hour of good information.
Richard: Strictly educational.
Patrick: And then, dinner with a great group of folks.
Richard: Great folks.
Patrick: There’s no cost, but you do need to qualify, right?
Richard: Absolutely. We would like to see you, like most of our clients, with at least $250,000 on up to about $7 million. That’s our typical client base.
Patrick: Very good. We want to make sure you’ve got the number; it’s 972-325-1700. That will register you. No salesman will call you. They just want to make sure that you get your name, your address and your phone number so there can be a letter of confirmation.
Richard: Confirmation letter so they get in the club, yeah.
Patrick: 972-325-1700. And I just want to make sure, again, call Richard if you have a question direct if you not want to air it over the show here, it’s 972-758-4484. You can also look at FinancialFortressOnline.com to get a copy of the transcript of this radio show. We’re so thankful. We’ll talk to you next week.
Transcript by:
Lainie Cotell
www.magiscript.com

Financial Fortress May 9th with Richard Jordan and Patrick Dougher

Financial Fortress 5-9-10

Welcome to financial Fortress radio. This is Pat Dougher. Richard Jordan in the house and Richard I know we want to talk about ways that the “smart money” invests and retain their wealth in ways that most people really realize. Richard welcome to the show.

Richard: Thank you Pat.

Pat: We want to go right into some of the things that a lot of folks are not really aware of is that there’s a big difference between a broker and a registered investment advisor out there. And one of the things that a lot of people do not realize is that a broker is a sales guy and a registered investment advisor was actually set up by the government initially, wasn’t it in 1940?

Richard: It was. The Registered Investment Advisor Act dates to 1940 and it was set up for the wealthy.

Pat: Very good. What are some of the other reasons why people would want to listen to Financial Fortress Radio?

Richard: Well, we’ll have some interesting material every week that is current. We operate without a conflict of interest, unlike the brokers and the insurance only sales people that will tell you that annuities solve all problems. Anybody that’s tired of hearing that stuff needs to listen in. Our mission statement includes the Golden Rule so we will treat you just like we want to be treated ourselves, as if we knew nothing about financial services. Also want to mention that we have offices in North and Northeast Dallas, Plano, Addison, Arlington and the Grapevine Southlake area. Our next seminar is at Southlake Timarron Country Club on May 27 and June 2 at 6:30 PM.

Pat: What are some of the things that you would expect to receive at your seminar?

Richard: Well, we’ll talk about how the wealthy and the smart investors use personal advisers to identify high return, low fee investment solutions, which is a little different from the usually get from the brokerage industry isn’t it?

Patrick: Well, usually it’s high fee, low return.

Richard: And conflicts of interest. I mean, look at the mess that Goldman is in, and I wish I could say that they are the only ones that way but they operate that way because they have an inherent conflict of interest in their business model.

Patrick: Very good. I know that you also use a variety of different investments and tools to help people build their wealth.

Richard: Absolutely. We offer true diversification in the nontraditional asset allocation, including hard as said like metals, precious metals and other ways that you can get high returns without stock market risk. After the meltdown this last week, I would think there’s a few people out there that might be interested.

Patrick: Can you believe that went out far in that amount of time.

Richard: And they are still trying to find out why Pat. In a nutshell, when you’ve got all the triggers set on the computers at all the big mutual funds and pension funds to sell, sell, sell when it drops quickly, you get that kind of a response from the market. Now luckily, a lot of the people that are in the market day trading jumped in to buy things when it looked obvious to them that there were some good buys out there. So, I think that they actually helped reverse the trend quickly.

Patrick: One of the things that I was surprised at, is back when I was doing financial planning and stuff, this was billions of years ago it feels like, and they were beginning to move more and more to the automated trading and we had a big selloff. It was like a 200 point day and people were freaking out and it was after the ‘87, but it was beyond that. They said well we’ve got stuff in place now but that could never happen again.

Richard: Right. They put the circuit breakers in place at the New York Stock Exchange. NASDAQ doesn’t have them, so if you were listening Friday to financial television, you heard the NASDAQ and the NYSE executives trading punches about who had a better system. But, really they need to set those circuit breakers on individual stocks because there were certain times when you could have bought Accenture for pennies, and you could have bought Proctor and Gamble at about a 40% discount.

Patrick: What?

Richard: Procter & Gamble. That’s right, at about a 40% discount in a 20 minute time frame.

Patrick: I guess that’s one of those things where opportunity came flying by you at the speed of light and if you weren’t paying attention, you missed it.

Richard: Well, and the scarier thing is if you were paying attention and bought it at 40 bucks and then turned around and sold it later at 50 just to capture a quick profit 30 minutes later, what the stock exchanges both decided to do after the fact, was disallow trades in that 20 minute period that were more than 60% off the mark that the stocks were set at a 2:40 PM Eastern. And as a result of that, a lot of people ended up buying cheap and selling high, only their trade where they bought cheap was discounted, so that means they sold a bunch of stock they didn’t own and they had a go back in the market and buy it at a higher price to close the day.

Patrick: That seems illegal. I mean you are saying that if I was paying attention and I sold something that I would get penalized because I was on the mark.

Richard: Absolutely. So it’s going to take a while to straighten the mess out. And of course they’re going through it trade by trade. There was all sorts of speculation about somebody hitting the B instead the M, trading 1 billion shares instead of 1 million. But so far they haven’t found any of that evidence. None of the large brokerage houses have found it looking individually. And the news as of just before the show started, I could find nothing that indicated that they really understood what happened.

Patrick: I don’t doubt. I mean, that’s one of those things that it shows you how razor thin the margin is, so to speak, when emotions are as cranked up as they are right now in the market.

Richard: Well, and it scared a lot of people because their returns, if they are in large caps are in indexes like the S&P 500, or they are in indexed annuities that are tied to the S&P 500, basically, what’s happened is they’re under water now from January 1 until this point of the year.

Patrick: Now, how does that affect the market overall, though, I mean does it give any major signals and change in direction?

Richard: It’s really hard to say that the traders are going to be set to continue to cause a decline at this point in time. I think the biggest trigger was the liquidity crisis in Europe. What was going on in Greece, and the fact that Greece was about to declare bankruptcy without some assistance. The International Monetary Fund agreed to give them $40 billion Friday night. The rest of Europe is committed to about another $100 billion, so they should be fine. They’re going to give them about, as I understand, a one or 2% loan rate for the next year, or two years to pay it off. I heard two different stories on that. And as a result of that interest rates are going to stay low. So if you thought bonds were going to go up in the near term, probably not.

Patrick: Isn’t it going to affect the euro in a pretty massive way? Weakening it overall?

Richard: It’s been weakened. It hit some record lows on Thursday for the last couple years. The euro may continue to decline but I think the fact that they’ve shored up Greece puts a finger in the Dyke for now. There’s other countries of course that we are worried about over there. There’s four or five, but I don’t want to name them now. But, as a result of that, we still believe that the market overall is going to be poised to move back up this coming week, once the concern for Greece is over. Some of the small traders, some of the individuals are trading themselves are running in fear and they may continue to drop the ball, but remember, two thirds of the stock is owned by the mutual funds in the pension funds and they really set the pace for the market.

Pat: That’s the one thing a lot of people don’t realize, is that the very large investors actually carry more weight than all of the rest of the investors combined.

Richard: Well sure, you’re out there as an individual investor trading 100 or at the most 1000 shares of something and they’re out there trading blocks of 10, 20 and 50,000 shares.

Patrick: Very good. So, what else will you be covering in your workshop? By the way what’s the next workshop date?

Richard: Again it will be May 27 and June 2. Those are both Wednesdays, at 6:30 PM at Southlake Timarron Country Club.

Patrick: Beautiful place by the way.

Richard: It’s a very nice club.

Patrick: In what do they expect to receive at those workshops?

Richard: Well, we’ll talk about key strategies that smart and wealthy investors use to invest their money and how that’s different than the way the self traitor or the average person receives information from the standard brokerage houses.

Patrick: Now who really should attend that workshop?

Richard: We typically have clients that range in size from about $250,000 in assets up to about $7 million.

Patrick: Very good. And the one thing I’ve seen, from being through that workshop, is that it’s not a sales pitch. It’s a real value, upon value, upon value of information given to help you see new ideas of preserving wealth and maintaining a tremendous, it if you want to call it, continuity from one generation to the next.

Richard: Absolutely. We talk about ways to extend wealth to multiple generations, will talk about ways to extend your IRA into a Roth and extended to many generations tax free. That’s an awesome legacy that you can create right now.

Patrick: I was really surprised with the Roth, is just how much information, or misinformation, is going on out there on the Roth. I know that after the break we’re going to be talking about a little bit more about how and why someone might convert. Because a lot of people don’t realize that the Roth creates a tax-free tool. Isn’t that correct Richard? It’s a tax-free tool for multiple generations?

Richard: Absolutely. You can extend it for multiple generations. There’s a number of ways to do that, and we have access to some of the best estate planning attorneys and CPAs that have Masters in taxation that really understand the five points of the tax code to help explain all this to you.

Patrick: Very good. I know to register you just go to 972-325-1700, that’s 972-325-1700. If you’d like to join the call tonight or join the conversation tonight, just call into 972-299-5759, that’s 972-299-5759. Or if you’re outside of the area, it’s 866-660-5759 and we’ll be right back.

Pat: Welcome back to Financial Fortress Radio. This Patrick Dougher, Richard Jordan. I want to talk about the Roth IRA. I think that it’s one of the most misunderstood new good things that’s come out in a long time. A lot of people don’t realize the benefit that you can receive by converting your IRA’s to a Roth IRA. Tell us about that.

Richard: Well Pat, I guess there’s just a lot of misconceptions out there in the market and a lot of them come from the newspaper and the magazine writers, who obviously only work at the business about 30 minutes a week so they can crank out a column.

Pat: I understand that. I know that there has been a lot of misinformation when it comes to the Roth IRA. What are some examples you’ve seen?

Richard: So if you’re interested in hearing about it from somebody that works at doing research 30 hours a week, instead of 30 minutes, listen to some of the myths that I’ve read in the papers and magazines that just aren’t true. The most common one I hear “You can’t touch the money for five years.”

Pat: Why would that even be an issue? What’s the truth about that, I should say?

Richard: Well the truth is you can touch it the next day.

Pat: I guess what you ought to do really, a lot of people have heard about this and maybe they have even heard that last show or two, at what is a Roth IRA? What makes it different than a regular IRA?

Richard: Okay, a regular IRA, you put money a way that has never been taxed. So, it is money that gets excluded from your income all the time that you’re working up until you retire. So that will’s either a 401(k), which you turn into an IRA, or it’s an IRA that you have created yourself. So, the result of this is all the money that you put in there and all the money that it’s been earning all these years is taxable. All of it when it comes out. And the problem is, according to the tax foundation is that the tax rates are going to double in the next 10 years for a 10 year period. In order to pay off the deficits that we’ve already accumulated by January 1 of this year and… and they’re still spending in Congress.

Patrick: As I understand it, that overspending trend is continuing for the next several years. It’s whip out the bigger credit card and with the almost endless limit so that you can try to buy yourself into prosperity, or spend yourself into prosperity, which doesn’t make any sense at all.

Richard: It’s never worked, it never worked in history. Socialism has never worked long term in history. So Obama was on the television last week talking about deficits expected to be $8 trillion more in the next 10 years if he stays in office and has anything to do with the economy. So, you may want to consider that when you’re voting this fall.

Pat: All I can do is just cringe because I know that if you look at, if we don’t learn anything from history we’re doomed to repeat it.

Richard: Absolutely.

Pat: We should be looking at what’s going on in Greece right now, what’s going on in many other Latin American countries.

Richard: Portugal, Spain, Italy, France.

Pat: All these countries literally were given a blank check, no limit to their spending, which really is no limit to their borrowing.

Richard: Let’s just apply common sense to it. Let’s take $100,000 a year, okay, and your credit card debt is $80,000 a year, and you have to pay whatever the short-term interest rate is to carry that debt. Well that’s analogous to where the United States is today. We’re at $14 trillion in gross domestic product and we’re just about to hit the $12 trillion mark in debt. Now if the people that are in Congress and the administration have their way, we are going to end up exceeding our gross domestic product in the next couple of years and that means we’re going to have an upside down balance sheet. The Japanese and the Chinese who buy 50% of our debt have already said they’re cutting back on buying our treasuries, which is going to push the cost of our treasuries up. They yield on the treasuries will have to go up. And that means that the cost and interest to the United States citizen has to go up and that means we have to raise taxes. You can only print so much money.

Pat: Well, that’s the key. You can only print so much money and granted, it probably won’t even print greenbacks, they’re going to just add more electronic blips into a computer. What we’re doing, again, it’s my own little study of history is we’re giving up rights for what’s become entitlements.

Richard: It’s just gotten crazy. So let’s get back to the IRA. Your IRA is an IOU to the IRS. If you like listening to Dave Ramsey and he says stay out of debt, maybe you should pay attention to this, because you have a debt to the IRS if you have an IRA that’s not a Roth IRA. And the amount of debt you have is unknown. You just know that the rates you’re going to pay are going to be much higher in the future. The original idea of the IRA is that you would be taking out just small pieces of it every year after you retire and you would end up in a lower tax bracket. Now it appears you would be in a higher tax bracket. So you’re better off converting it now to a Roth IRA, paying the tax. The IRS will give you two years to pay it, interest-free and right now with us being in the middle of a bull market, your odds are that you can pay this kind out of the gains in the stock market that you’re going to experience between now and next October and that if you don’t get a large enough rise to do that with, you can flip it back to a traditional IRA. In fact, we can show you ways to segment that and make sure that you have some winners and they are not all classified as a loser. It’s a little difficult to explain on a short show like this, but if you’ll call my desk or if you’ll come to a seminar we can explain it to you. The seminar is at the Southlake country club at Timarron Country Club this coming May 27, that’s a Wednesday, or June 2, that’s the following Wednesday at 6:30 PM.

Pat: And you register at the 972-325-1700. And then call that 24 hours a day any time. No salesman will call you.

Richard: You can call anytime day or night and our privacy policy, by the way, is we share information with nobody. We do not sell it to anybody. The only time that we have to share information is of course under a court order or if one of your trustees or guardians demands it. I think that’s a pretty reasonable privacy policy don’t you Pat?

Pat: Very good. It is. Now if they wanted to contact you directly during the week, your desk number is what?

Richard: 972-758-4484.

Pat: That’s 972-758-4484, call you direct, Monday through Friday during the day. And then also register anytime 972-325-1700. That’s 972-325-1700 to register for May 27 or June 2 at Timarron Country Club. Folks this is not a sales pitch. This is a presentation on ways that the wealthy have built their assets and send them through from generation to generation without letting the IRS take too much of it. I tell you, you won’t want to miss it. We’ll be right back.

Pat: And welcome back to Financial Fortress Radio. This is Pat Dougher, Richard Jordan talking about ways that you can make more money, and the ways that the wealthy do this, the ways that the “smart money” invests. And so far we’ve gone through a few things on the Roth IRA and how the conversion is so important that a lot of people see kind of the last great thing the government has done for us in a long, long time. They’ve actually opened a window for you to take and convert an IRA, an old regular IRA over into a Roth IRA and never pay taxes on it again. A lot of people may miss it they may think why would I want to do that and Richard let me ask you real quick, why would someone change the way they’re doing things at this moment in time?

Richard: Well, just to make a short point of it, to get higher returns and pay less fees and no commissions.

Patrick: Right but I know also with the IRA, in converting an IRA to a Roth IRA, they are going to pay taxes, but they’re going to pay taxes according to what we’ve seen at a lower rate, more current rate than what we’re going to see in the next 10 years, correct?

Richards: Absolutely. There’s no way around it. They will print some extra money, which will drive up the inflation rate, of course. They can’t increase the taxes completely to pay for the old bill; they’ll do a little bit of both. It’s sort of like when you put the frog in cold water and you turn the heat up slowly as compared to just drop them in the boiling water, people will see an increase in the money supply, it was up over 12% last year, it was up over 12% the year before it was up almost 15% the year before that. Sooner or later, we are going to see this cause inflation, so there’s a limit to how much they can increase the money supply. They have to increase taxes.

Patrick: And so with that. Somebody can liquidate their IRA and pay the tax over a two-year period, 0% interest during that time., so that it does actually raise money for the government, so to speak but then once that money is in a Roth IRA, what are some of the massive benefits of being in a Roth IRA?

Richard: Okay, in the first place, every dime after you make after that in a Roth is not taxable, ever, number one. Number two, you do not have to take a required minimum distribution. So if you have a pension and a Social Security check coming and it’s going to cover your living expenses, why would you want to take money out and pay taxes on it if you don’t need it. If you’re goal is to leave that to the next generation, now you can leave them a tax-free legacy. And in fact we can show you ways to combine that with legal entities in order to stretch that legacy over multiple generations.

Patrick: Very good. And I know some of the stuff you’re going to be talking about in your upcoming workshops correct?

Richard: Absolutely.

Patrick: And the dates on those are the 27th?

Richard: May 27 and June 2, those are both Wednesdays at Southlake Timarron Country Club, 6:30 PM.

Patrick: Very good. And, they are going to hear your presentation and it is a valuable presentation, not a sales pitch. It’s all about giving you tools and keys for building your wealth and transferring your wealth down to the next generations. So that’s going to be excellent. And also, you’re going to feed them right.

Richard: Yes. There will be a meal afterwards and hopefully that’s not the only thing you’re coming for, but if you’re kind of sitting on the fence, saying “I’m not sure it’s worth my time,” great food at Timarron Country Club. Enjoy the dinner and if you like what you hear, you can schedule a meeting. And if not you can just say “Hey you know what, I got some good information and there was a couple of things that I learned that were new and I am just going to continue to do what I’m doing.” Of course, if you continue to do what you’ve been doing, you’re going to continue to get what you’ve been getting.

Pat: Right. Now I know there is also some stipulation on, you want to have a certain kind of person there. Who do you want to come to the workshop?

Richard: Our typical client has between $250,000 and $7 million to invest in assets. So, it’s in that range. We aren’t necessarily able to do justice for someone who has less than that, and we don’t have any clients larger than that. So I wouldn’t want to tell you that we’re ready to take on a fund that’s over $10 million.

Patrick: Very good. So, one of the things that’s real key to your success is the way, not only you invest in funds, or use funds, that you have a real good group, I don’t know how to say this, your investments, tell us about your investments in that area.

Richard: Well, because I am a registered investment advisor, I have to take a fiduciary duty, and when I got into the business I said “How do I want to have my money invested?” Obviously, with the lowest cost and the highest predictable returns. And the problem that most people get into is, they use mutual funds or individual equity selections, and it’s hard to bet on any individual horse if you’ve ever been to a horse race. And if you want to bet on a predictable horses, like the Dow Jones stocks, you know the largest 30 stocks, actually have a predictable rate of return, but it’s pretty low. As a result of that, I got started looking at computerized formulas that would select the best stocks in a particular category. For instance, if you bought the S&P 500 index a year ago, you’re up 27% through last Friday, over the last 12 months and you’re pretty happy with yourself. Of course, if you lost over 50% in the previous 18 months, you’re probably not back to even yet, but pretty good last 12 months. Our comparable formula-based large cap selection fund selects the best hundred stocks out at the S&P 500, and that is up over 42%. And more importantly during this last downturn, when the S&P 500 was actually down about a little less than 1% since January 1, our formula-based large cap selection fund is up over 12%. So it’s a little more impervious to these downturns and it has a much higher rate of return when the market is moving up. So, it helps you in a down market, it helps you in the sideways markets and it helps you in the up markets. Other funds we have selected have ranged up to 78% increases over the last 12 months and those were in individual sectors of the economy. So, if you use Fortress in the future, you very likely will be able to pay your Roth bill out of the returns you’re going to make in the next two years. In fact, if you had chosen to use one of our fund selections on January 4 of this year, you would be up well over 23% and probably considering writing that tax check soon. But, you’ve got two years to write it with no interest, so why hurry.

Patrick: Yeah, no kidding. When does the IRS ever do anything without charging more than your share of interest?

Richard: Exactly. So for the average investor that doesn’t understand why they should be in a Roth, come to the seminar and we’ll explain this in much more detail.

Patrick: And the way that they will register is call 972-325-1700, that’s 972-325-1700. That phone works 24/7. No salesperson, right?

Richard: Nobody is going to call you. Our privacy policy is not to share information for any commercial purpose, we won’t sell your name, you won’t be getting calls from oil and gas salesman at nine o’clock on Friday night.

Patrick: Very good. A lot of people may want to ask you a question. I want to encourage you, if you want to ask Richard a question call now on the 972-299-5759 and join the show. It’s 972-299-5759. Or if you’re outside the DFW area it’s 866-660-5759. So let me just say it again, if you want to call and ask Richard a question right now, it’s 972-299-5759 or if you need to call him during the week, it’s 972-758-4484, that’s 972-758-4484 and that’s right to your desk Richard, right?

Richard: That’s correct. I could be in the middle of a trade, I could be in with a client. So don’t be scared to leave a voicemail. I’ll get back to you as soon as I can. I will return all my calls after 3 PM when the market closes.

Patrick: Now, you’ve actually got offices all over the Metroplex right?

Richard: That’s true. We’ve got offices in North Dallas, Northeast Dallas. We’ve got them in Addison, in Arlington, in the Grapevine Southlake area. Our primary headquarters is in Plano, so we can cover a lot of area for you if you don’t want to drive too far, we sure understand that. And if you register for the seminar, remember you won’t have to talk to a salesman, just leave your name, address and phone number and we’ll send you out the confirmation. It’s May 27 and June 2 at 6:30 PM. Call 972-325-1700 and you’ll get a chance to hear from somebody that will act as a fiduciary with your money, act like it’s their own money and be careful with it, and not be driven by commissions. No conflict of interest here.

Patrick: And that’s because you are a Registered Investment Advisor, not a broker. A lot of people don’t understand that brokers, it’s not that they’re bad people; it’s that they do have a conflict of interest, right?

Richard: They do have a conflict of interest because they get to keep their job if they generate enough commissions. They don’t get to keep their job if they don’t. So these formula-based funds that I’ve talked about earlier, they don’t pay commissions. And unfortunately, that means your broker, if he knows about them, if he’s ever even heard about them, will not recommend them. Now, he may put his mom in them, he may put his brother in them, but he’s not going to put you in them I don’t care if you ride the country club cart with him every week.

Pat: Well, and I mean really, why should he?

Richard: Yeah, would you risk losing your job over a recommendation? Of course not. It’s the way they operate, the FCC created the Registered Investment Advisor for people that were smart enough to warrant a fiduciary to take care of their money.

Patrick: That’s right and typically they were the more affluent that were using the folks in that area.

Richard: More affluent and more educated.

Pat: And they understood that there is a difference. So one of the things that I wanted to encourage you to do is get registered for the 27th or June 2 for the upcoming workshop and the way to do that is just call 972-325-1700 that’s 972-325-1700. If you want to call and ask Richard a question next week or meet with him it’s 972-758-4484, 972-758-4484. I just want to encourage you, you need to get registered, you need to go to one of these workshops because in about an hour, Richard’s going to tell you some keys to creating massive wealth for yourself and for generations to come. We’ll be right back.

Pat: Welcome back to Financial Fortress Radio with Pat Dougher and Richard Jordan. We’re talking about ways that you can build, keep, and transfer wealth successfully. I know that a lot of people have been listening to us and they hear us talk about the IRA Roth conversion. We’ve given several of the myths, we’ve talked about several of the reasons why this is probably the last great bastion of opportunity in a way, that the government is going to kiss us with. Because after this, it will get interesting in the tax realm, the coming tax tsunami. And it will be huge, talking doubling the tax rates that we have right now. And that sounds outlandish but we have had high tax rates in the past.

Richard: Oh sure, in the 60s, our top tax rate was 70%. Britain, two weeks ago raised their tax rate from 40% to 50%. We think that’s going to give Obama any ideas?

Pat: I’m telling you, there’s a lot of fear out there that we are going to have higher tax rates. If that’s the case, then why, why would you not convert your IRA right away?

Richard: I guess just because you’ve got a problem with procrastination. This is nothing to procrastinate over folks. And there’s no good reason to over analyze it. What a lot of people have done is they have started building spreadsheets, or they’ve gone to a certified financial planner, and they get the “Well, it can be really complicated. Let me see if I can build a couple hundred spreadsheets for you and try to explain it to you.” Can anybody look through an inch and a half or 2 inches of material? It is just unbelievable to think that the average investor is going to read all that garbage. There’s really only three things that can happen to your investment account in the market, right? You can go up enough to pay the tax. They can go up not quite enough, but it will still be worth it to convert some of it. They can go straight across, stay the same in other words. Or it can drop. But you’ve got until next October to decide whether or not to keep it in a Roth. So the sooner you convert it, especially now that the numbers dropped a little bit, this next week would be an ideal time. Convert it now and you don’t have to make the final decision until October 17.

Pat: Of 2011? It’s not next October but the next, next October?

Richard: It’s 17 months away.

Pat: Which is enough time to analyze your investment, see if it’s gone up, stay the same, or fallen.

Richard: Exactly.

Pat: And if it’s gone the same, or fallen, you just transfer it back right?

Richard: Flip it back to a traditional IRA. Don’t pay any taxes on it. 30 days later you can try to convert it to a Roth again and let it run for another year. Listen, imagine if you could go to Las Vegas, roll the dice, and see what number comes up before you placed your bet. That’s kind of what this is like.

Pat: That’s a good illustration. I have to admit, you sit there and so often we think “Well, I’ve got to think about that. No you don’t really. You ought to move on this.

Richard: Quit over analyzing it.

Pat: Well, it goes back to what we were talking about earlier in the show. There was a window earlier this week where the market ran away with itself for a few hours, okay, because of some electronic glitch, whatever you want to call it. It fell. But there were people that moved during that time. Now some of them get to keep all their stuff, but a lot of people made a lot of money as they were there when the opportunity was available. Isn’t that right?

Richard: Absolutely.

Pat: And that’s what we are really talking about. The Roth IRA conversion.

Richard: And we can show you how in less than one hour at the seminar on May 27 or June 2. Southlake Timarron Country Club, 6:30 PM. How you cannot afford to let this opportunity go by. All you have to do is call 972-325-1700 to register.

Pat: That’s 972-325-1700. No salesman will call you back. It’s just a matter of 24/7. Just leave your registration. It’s totally private. Now I know that a lot of people will probably want to ask Richard a question and they can call you direct to your line at 972-758-4484.

Richard: Correct. That goes right to my desk. If I’m down the hall in the conference room, or busy with a client, or doing a trade, of course I will not pick up the phone at that point in time. But I will try to get back to everybody that same day after 3 PM after the market closes.

Pat: Very good. Register for the workshop at 972-325-1700 as quickly as you can. You don’t want to miss this and really I know that a lot of people don’t understand that what you’re going to be talking about, Richard, are The Seven Keys to Smart Investors and what they use to invest their money, isn’t that right?

Richard: That’s right. How they use it to invest with and how they pass it on to the next generation. High return, low fee investment solutions. High returns without stock market risk. Safe and hidden income opportunities that are out there right now. Huge estate and income tax saving ideas. Anybody listening out there want to pay more than their fair share in taxes? Because that’s my definition of a true patriot. You know I ask that question in many of my seminars and I rarely get a hand on that one.

Pat: And those that do are just waking up or something from their nap.

Richard: If they raise their hand on that one, usually they have got kind of wild eyes. And I think we’ve had the guys with the funny suits come in, you know in the funny white suits, to cart them off because if you want to pay more than your fair share of taxes, I mean God bless you.

Pat: I mean, here’s the one thing about it. I heard one CPA say having a tax problem, as, in order to have to pay taxes meant that you had to earn something. So I guess that’s a good thing. But most of us look at IRS and KGB and think they’re the same letters. So what else will they get?

Richard: They’ll find out that their IRA is an IOU to the IRS. So you really need to consider this Roth conversion. They’re going to find out how to enter and exit the stock and bond markets and to make money. Well, they won’t find out everything of course because we’re not going to give away all our secrets, but we use formulaic investment decision making criteria so that we can help our clients and take the emotion out of the investing. It’s been proven that the average investor, and in fact almost all investors are predictably irrational. A professor at Duke wrote a book about that that came out earlier this year. And he said it’s the reason that self traders failed to beat the index averages over 90% of the time. And you would expect that because they’re not pros. They only work at it an hour or two a week. But what you wouldn’t expect is that the guys that run the big funds also failed to beat the averages over 80% of the time because they have a conflict of interest. Their compensation is based primarily on the size of the fund not the performance of the fund. What that means is they are doing it for a different reason than you’re doing it. You’re putting money in to try to make money, they are just trying to drag as much money into the fund is possible to get the highest possible paycheck. Does that sound like a smart place to put your money?

Pat: No. And in fact, that’s the one thing that people need to learn, how to do it right and how to bring in the right advisors, and that’s the real key, advisors around you. Because I do believe that with a multitude of counselors there is a great deal of profit to be gained and protection. So I know that you want to call right now and register for the workshop at 972-325-1700. Register for the upcoming workshop on the 27th or June 2 right?

Richard: Yes.

Pat: Wednesdays at Timarron Country Club and real quickly, Richard who really should be in attendance?

Richard: Again, most of our clients and people that come to our seminars have from $250,000 to $7 million to invest in today know there’s a difference between a broker in a Registered Investment Advisor. They are looking for someone to care about their goals and retirement needs like we do, someone that has the Golden rule in our mission statement like we do, someone that would treat you just like you would want to be treated yourself. So, if that’s what they’re looking for, that so we deliver. And we’ve got offices all over the area. So you can see us in northeast Dallas, Plano, Addison, Arlington or the Grapevine Southlake area. We would appreciate seeing you at the seminar May 27 or June 2 6:30 PM. Just call 972-325-1700. It’ll be at 6:30 PM.

Patrick: 972-325-1700, that’s 972-325-1700. Or call Richard direct 972-758-4484, that’s 972-758-4484. We’ll talk to you next week.

Financial Fortress Radio May 2 with Richard Jordan and Patrick Dougher on the 10 ROTH IRA Myths

Patrick: Welcome to Financial Fortress radio. This is Pat Dougher and Richard Jordan in the studio. We’re talking today about your retirement, your investments. Richard is a Registered Investment Adviser which usually puts him in the category of someone’s personal adviser for the wealthy. He’s the smart money investor. He really is the guy that can help you with higher rates of return with lower investment risks and solutions.
One of the things that I’m really pleased about Richard is the he is constantly studying the market to help you in your investments. Richard, welcome to the show.
Richard: Thank you, Pat.
Patrick: I want to get right into the Roth IRA. We had so many questions and so much interest last week on the whole concept of taking someone’s IRA that they built over the last however many years. You’re actually encouraging people to liquidate that and pay the tax on it to put something in a Roth IRA. Is that correct?
Richard: Well, not liquidate it, but roll it over into a Roth Designation. So, if you roll it over into a Roth designation IRA, you have until next October to decide whether to keep it a Roth.
Now, if you’re in the market, and especially if you’re with an experienced, successful adviser like us, chances are you’re going to make the 30 or 33% it’s going to take to pay the tax on that Roth and then you’re going to have a legitimately completely tax free fund for your retirement, and if you’re not going to use it all in your lifetime, for your heirs for up to several generations.
Typically, it can be extended for five, but there are ways with trusts to extend it past that. It depends on how much money we’re talking about here. But, it is a tremendous opportunity and one I don’t think anybody should miss.
The problem is the magazine writers, the newspaper writers don’t really understand the law. They read a couple of press releases that they get from a brokerage house and they create an article that just talks about part of the problem. They get so confused, they end up with more questions than answers in the article.
Patrick: That strikes a chord with me that there are bunch of myths on these things is what you’re saying.
Richard: Absolutely. There’s a ton of myths and if you try and over-analyze this, you’re not going to make the right decision because let’s say you go to a certified planner of some sort like we are and you find out that there are hundreds of potential scenarios that the market could do in the next year and a half; hence you can create hundreds of spreadsheets on those potential scenarios.
Well, which one is most likely to occur? You can do Monte Carlo simulations and you can just basically fall asleep at the computer night after night trying to figure out what to do.
Patrick: Well, aren’t there basically just three things that can happen?
Richard: Exactly. The market can go up enough for you to pay the tax. The market can go up enough that you still think you ought to pay the tax and roll the account over, or the market is going to go down and you’re going to re-designate it again as a traditional IRA and you then will not have to pay the Roth IRA tax.
So, you’ve got the opportunity to roll the dice and wait to see what happens with the market. And since we’re in a bull market, 50% of the gains occur in the first year. The next 50% usually occur in the next two years.
So, if this market is up 30% in the next year and a half, and it’s likely it will be, even if you’re just an average investor, chances are, you’re going to be able to pay this.
Now, if you’re with us, we’re producing returns that are typically 1.5 – 2x what people are getting in the S&P 500 index. And remember, the mutual funds don’t beat the S&P 500 index about 80% of the time.
Patrick: Right. Well, I know that when I think about the whole Roth IRA thing, what I’m hearing is if you wait, you’re probably going to pay extreme taxes because Obama and his taxation policies – this tax tsunami as I like to describe it – is coming in the next three, four years.
If you push it off and you don’t take this window of opportunity, you may actually be paying what kind of rates? 50–60% like we saw in the 60s?
Richard: Exactly. The Tax Foundation report that I read last month said that we would have to effectively close to double the tax rates for the next ten years just to pay the deficits we’ve accumulated so far, and the White House was on TV last week talking about adding another $8 or $9 trillion to that – they’re not sure – putting us effectively with a balance sheet that’s bankrupt as a government.
In other words, we would owe more as a country than our annual gross domestic product. That’s what put Greece in the trouble they’re in now. That’s why they’re worried about Portugal, Spain, Italy, and it goes on and on in Europe.
Patrick: Well, I imagine that that would put even the euro currency at risk in the future, doesn’t it?
Richard: Well, it has already put it at risk. That’s the reason the dollar has been rising against the euro is not that we’re doing a great job with the dollar. They’re doing a worse job with the euro.
Patrick: Interesting. Well, it’s management by committee. It will always kill you.
Richard: Yeah. That’s right.
Patrick: So, what are some of the other pitfalls or even myths that you hear with the Roth IRA? Because there is a reason why we’re hammering this and that is that most people don’t know anything about the Roth IRA.
Richard: Well, that’s true.
Patrick: They hear about it, but they just don’t get it.
Richard: It’s an unprecedented opportunity. It used to be if you made over $100,000, you couldn’t convert to a Roth. You can only convert small portions; maybe $4,000 or $5,000 a year. Now, you can convert the whole thing and you’ve got two years to pay the taxes on it. Two years. When was the last time IRS gave you a tax free loan for two years? Call them up and ask them if they’re going to do that for you on anything else.
Patrick: Well, last I heard, IRS and KGB were the same letter system. Well, you get it.
Richard: Yeah.
Patrick: So, what are some of the other things you want to share about that?
Richard: Most typical I hear that you can’t touch it for five years after you convert it and that’s just not true. You can touch the money. You can touch it the next day. So, if you’re under 59 1/2, obviously it’s a qualified fund and all qualified funds you can’t touch until after you’re 59 1/2 without paying a penalty, but assuming that you’re over 59 1/2, you can touch it.
But, more importantly, if you’re 70 1/2 or about to be and you’re thinking about, “I don’t need to take this money for a required minimum distribution on my standard IRA, but I have to take it or pay a double tax.” There’s a double penalty on that. It’s a huge penalty if you don’t take your required minimum distribution.
Now, with a Roth, you don’t have to take a required distribution. In fact, you can pass it on completely to the next generation if you like.
Patrick: So, what they’re saying is once you pay the tax on these dollars that are in your IRA right now, then if you take that money and you put it back into this container or this Roth IRA, that it’s exempt from taxes then on.
Richard: Forever. For you, your family, multiple generations, and with the correct use of legal entities like trusts, IRA trusts, you can extend it past multiple generations. So, it’s pretty much limitless and it’s just a tremendous opportunity. I hate to see people pass it by because of all of the myths. I read them all the time in the magazines and newspapers.
Patrick: Well, the thing that I keep hammering and the reason I want to do this is that I see this great opportunity for people to totally essentially take an IRA and squeeze out the taxes that would be in there and then now, grow something magnificent that could be passed on from generation to generation. That’s amazing. What a great opportunity.
Richard: It is. So, don’t pass up the chance and if you want to hear more or you want the Tax Foundation report, you can call my direct line 972-758-4484 begin_of_the_skype_highlighting              972-758-4484      end_of_the_skype_highlighting. And if you just want to hear more about the strategies that we have at Fortress, you can come to my next seminar.
Patrick: When is the next seminar, Richard?
Richard: It will be this Tuesday at Brookhaven Country Club in north Dallas at 6:30 PM and if you can’t make that, on the last Wednesday of this month, we’ll be out in South Lake at Timarron Country Club, also at 6:30 PM.
Patrick: Very good. So, they come, they hear you talk about all these different aspects of smart money and how to maximize your estate and maximize what you pass to your heirs and protect your investment along the way.
Richard: Exactly and we’ll talk about lots of high return, low fee investment solutions, how to get high returns without stock market risk, how to find the opportunities that are not at the big brand name brokers.
And I don’t care if you’re in a no load fund or whatever you think you’re doing to cut your costs, I can show you how you can net more on the bottom line with our selections then you ever will by using any of the big brand name brokers.
Patrick: Well, isn’t that because the brokers really have a conflict of interest?
Richard: Well, that’s right. The Registered Investment Adviser Act was passed in 1940 to create a category of adviser for the wealthy that had a fiduciary duty to the investor and since that law was passed so long ago, the SEC assumes that you were told by your grandfather what the difference is and as a result the broker doesn’t have to tell you that there is a better way to invest your money.
The broker’s primary job is to generate commissions for himself and the brokerage firm. He only has to provide you with a suitable product and many brokers think that all people over 50 belong in all these suitable products that they get the highest commission rates on.
So, that’s the way the market works and that’s why the Goldman Sachs conflict of interest charges were made and that’s why they’re talking about potential criminal fraud charges, and it’s going to go on and on.
They’re not the only large broker that’s going to get caught in this deal. All the large brokers operate this way.
Patrick: Well, it’s because they’re sales agents, isn’t it?
Richard: Exactly. They’re the same as a guy at a Chevy store. They’ve just got a fancier office and they probably belong to the country club whereas the guy at the Chevy store doesn’t.
Patrick: Well, I think of a couple of movies that really illustrate this. These guys are dialing for dollars all day long whether it was Will Smith or back with Michael Douglas. I think he did one back in the 80. The thing is that they were all about just dialing for dollars, turning the money, turning the money, turning the money. What an offense.
Richard: And you could have a fiduciary, someone that is interested in you and your family’s goals and needs instead. Isn’t that smart way to invest?
Patrick: Right. Well, I know that folks can get a hold of you at 972-758-4484 and also register for the upcoming seminar 972-325-1700. We’ve got more of the show to come. We’re going to be talking about your investments and how to maximize your return. We’ll be right back.
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Patrick: Welcome back to Financial Fortress radio. This is Pat Dougher. Richard Jordan, a Registered Investment Adviser and investment strategist in the Dallas, Fort Worth area bringing you answers to your questions and your concerns about investments and strategies that make money in the future.
One of the things we’ve been talking about is the Roth IRA and a lot of you might be a little bit confused with that. It just sounds like another way for the government to entrap us into something, but the fact is that there’s a conversion opportunity that is in front of us and I really would hate for people to miss out on that.
You can pay the lowest taxes that you’re going to pay by transferring your IRA investments into a Roth IRA. That’s one of the things we’ve been talking about, right Richard?
Richard: Absolutely. Now is the time.
Patrick: Now is the time. One of the things that I hear a lot of people concerned about is that the market has not done us any favors this last ten years.
Richard: No.
Patrick: And so, they’re concerned about, “How do I make up what I’ve lost?” And especially if we’re talking about possibly paying tax on this too. What’s the solution?
Richard: Well, the solution is that you don’t have to decide to stay in a Roth IRA until next October of 2011. You can change the fund over, put a Roth designation on it, put that label on it, get a smart adviser like us to maximize your returns. And if we can get you a 30% or more, you’ll have enough money to pay those taxes.
Looking at historically how we’ve done against the S&P 500 index, we believe we can get that done for you.
Patrick: So, you’re talking 16, 18 – almost 18 months before you have to really make the decision to switch it back?
Richard: 17 1/2 months right now.
Patrick: So, you’ve got the opportunity to change it, move it over almost a year and a half from now.
Richard: Exactly.
Patrick: Make a decision whether you keep it there or switch it back.
Richard: Absolutely.
Patrick: So, if you keep it there, you start paying the tax.
Richard: You’ve got two years to pay it.
Patrick: You’ve got two years to pay it and then, after that, never taxed again.
Richard: Never taxed again. So, the only people I do an analysis for that can’t make this work are the people that want to keep their money only in CDs earning 2% a year. If you’re making 2% a year and you’ve got a 25% marginal tax rate, guess what?
It’s going to take you ten years to pay it off, but if you will believe that we’re in a bull and the statistics say that half of the bull market run up occurs the first year, the other half occurs in the next 18 – 30 months, chances are we’re going to make another 50% beyond where we’re at right now over the next 18 to 30 months. So, if that’s 30% in 18 months, guess what? You know have a tax free fund.
Patrick: Right, and it can go on. Now, one of the things that’s really important is that – I know that you use a lot of formulas because even when you talk about the next year or so of it being a bull market or an up trending market in the stock market and such, there’s sectors that do better, but then even beyond that, I see that you don’t leave it to chance in the sense of following the market. If something changes, you make an adjustment, don’t you?
Richard: We do and we call our investors all the time if there’s a change so that they can make a decision. We don’t do anything without advising them what the opportunities are, but we use quantitative analysis and we use a lot of different algorithms and formulas to create strategies that automatically adjust to the moving market conditions on a regular basis.
The strategies are designed to produce positive market baiting returns in bull markets, but also in the worst bear markets and in the sideways markets. And the key thing is if you’ve got a strategy that is designed to do all these things plus tell you when to avoid the market in its entirety, then you’ve got a great advisor and that’s what we try and do for our clients.
Patrick: Well, isn’t it true that most investors usually get damaged in the market or make a very low rate of return?
Richard: Yeah. The actual facts are – and there are all sorts of articles out there. There was one recently last year in Money Magazine talking about the self trading advisor and how often they lie to themselves and their families about their performance, constantly saying they’re beating the market when, in fact, they typically trail the S&P 500 index just like 82% of the mutual funds do every year.
They’re worse than the mutual funds because they often trail by 5% a year up to 15% a year. So, at least the funds will get close in a lot of cases. They’ll be more in that 3 – 5% less than the S&P 500 index because, by the way, that’s about what their fees and commissions are per year typically, but the self-investor is a person that tends to buy on emotion and sell on emotion.
So, they buy when the market’s high and they sell when the market’s low. They’re driven by greed long past the time the market’s already started up and they’re driven by fear long after the time the market’s already turned down.
Patrick: Well, isn’t that because most people want to do – they don’t want to get damaged in the market, and so they’ll wait until the social proof is all around them like everybody and their brother has made money in a certain investment.
Richard: Right.
Patrick: And when that happens…
Richard: It’s already too late.
Patrick: It’s already too late. I’ve said before that one of the better indicators I’ve seen, just watch the cover of Money Magazine. Goodness gracious. They usually put whatever is best to get fried in on the front cover because that’s where the lemmings are.
Richard: Exactly. By the time that a guy, that only writes an article once a month, notices that a sector or a particular stock has done well for a year or two, the game’s over. The run has already occurred. You’re getting in way too late.
Patrick: Well, and it’s that whole security thing. People think there’s security in a herd, but last time I checked, herds run off cliffs.
Richard: All the time.
Patrick: What are some of the markets that – without getting specific or too specific. I know there are some things that have done okay in this last year that you monitor.
Richard: Actually, most of the sectors have done well.
Patrick: That you’ve been following?
Richard: Yeah. Most of the major sectors have done well. A lot of people that we talk to that come to our seminars or call us and show up in our office are still scared to come back in the market even though it’s up roughly 50% in the last year, but consumer discretionaries, for instance.
I’ve got a fund that I selected in the last year there is up 93%. An energy fund – it’s up 82. Now, that’s lagged in the last three months, so that may be an opportunity. That’s lagged the S&P. Financials are up in the last year. Healthcare, industrials, materials, even technology which tends to be a lagger is up.
Patrick: Well, I know that you’re going to cover a lot of this information at your workshop. Aren’t you?
Richard: Absolutely.
Patrick: Now, when are the workshops again?
Richard: We’ve got one coming up this Tuesday at Brookhaven Country Club at 6:30 PM and another one at Timarron Country Club in South Lake on May 26th at 6:30 PM.
Patrick: And how would they get registered for that?
Richard: Call 972-325-1700.
Patrick: Now, I know a lot of people want to ask you questions and we haven’t even pushed the phone lines today and I do want to make sure that you have the opportunity. If you want to ask Richard a question, it’s 972-299-5759. That’s a metro number, so Dallas or Fort Worth you can call there or if you’re outside the DFW area, it’s 866-660-5759 which is KSKY if you’re looking at the numbers.
But, the other thing I do want to make sure is that if people want to ask you a question, you’ll take calls typically – well, Monday through Friday on the number 972-758-4484.
Richard: That’s right, Pat. And if I’m with a client or I’m in the market trading, just leave a voicemail. I’ll get back to you typically the same day.
Patrick: Very good. I know there’s so many people that need to know this information when it’s coming to investments and taxes and all of these things we’re looking at in the market today. There’s some real opportunities and some real minefields out there because if you take a wrong step right now and you don’t pay attention to what’s going on, you can get your head handed to you and we don’t want that.
We want you to do well, invest wisely and retain your money and, in fact, build your wealth and hand it down to your heirs in the appropriate time the way that will make the most sense, pay the least taxes, and do the best for your family.
Again, you can get a hold of Richard at 972-758-4484. Register for his workshop at 972-325-1700 or join call today, join the show today at 972-299-5759. We’ll be right back.
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Patrick: Welcome back to Financial Fortress radio. This is Pat Dougher. Richard Jordan is in the studio. Richard is a Registered Investment Advisor. He is an investment strategist in the DFW area. He does workshops on wealth; how the smart money build their wealth, keep their wealth, pass their wealth, and we just want to make sure that you understand some of the key ingredients to the ways that you too can invest like they do and keep more of what you make. I know it’s the old saying.
Richard: It’s not what you make. It’s what you keep.
Patrick: It’s not what you make. It’s what you keep. The more you know, the more you get to keep. So, with that, Richard, I want to talk a little bit more. We were talking about some of the investments that had done really well and I know you use formula base. Was there any in there that you were really surprised that had done well?
Richard: Well, one of the REE funds that we looked at last year, we didn’t really think would do well because of the downturn in residential real estate. We were expecting commercial real estate to drop like a rock right behind it and indeed, that’s what most of the headlines were in the last 12 months.
Locally, we’ve got record numbers of foreclosures in commercial properties, but this REE fund did 110% in the last year and it’s up 10% the first three months of this year.
Patrick: That’s amazing. I would not – personally, I just think about the whole investment in real estate right now and think, “Ow.”
Richard: But, if you’re picking the best of the winners by using an unemotional formula to slice and dice the data down to the finest point and picking the very best of the very best, you can win even in a down market.
Patrick: Well, I do believe that, that even in a market where they’re sideways or down, there’s always opportunities. They’ve said many times in the last few years that some of the best companies of today came out of recessions of yesterday.
Richard: Absolutely.
Patrick: So, with that, I just want to encourage you guys to come hear Richard speak. Your next workshops are coming up. You’ve got one this next week and one later in the month.
Richard: Yeah. One this coming Tuesday at Brookhaven Country Club in North Dallas at 6:30 PM and another one at South Lake Timarron Country Club the last Wednesday of the month; the 26th of May at 6:30 PM. We’ll talk for one hour and then we’ll shut up and let you eat dinner. Is that a pretty good deal?
Patrick: Well, I’ve been to your workshops. I appreciate the fact that you load a lot on their plate before you load their plate.
Richard: Exactly.
Patrick: You give them value upon value as far as information. By the way, a lot of people think, “I’m going come and I’m going to hear a sales pitch.” You know what? I was blown away. Richard gave an hour presentation and it had everything to do with how I could do the best.
Richard: Absolutely.
Patrick: And it wasn’t a sales pitch. It was just, “Here’s the information. We want to help you if we can. We’d love to work with you, but the fact is you’re going to do what you want to do and that’s okay. Enjoy your dinner.” And I was really thankful for that.
So, if you want to register for that, just call the registration line at 972-325-1700 or they could call you and ask you a question. Right, Richard?
Richard: Sure. They could call me anytime at my desk 972-758-4484 and if I’m not with a client or trading in the market, I’ll give them a call back right away if I am. Leave a voicemail. The market shuts down at 3:00. I’ll be happy to get back to you after that.
Patrick: Very good. Well, I know that one of the things that a lot of people do not understand is the idea of a personal advisor. I know that people are used to brokers. We were talking about even the TV shows that have come out where it’s dialing for dollars and hammering stuff. But, a personal advisor spends most of their time in research, don’t they?
Richard: That’s true. The broker is a salesperson that is compensated primarily by commissions. So, they have to spend over 90% of their time in a selling mode on the phone or in a meeting with a client. Their idea of gathering intelligence is going to the branch meeting and finding out which products they’re pushing because it’s paying extra commissions. That’s their idea of doing research.
I spend the majority of my time in research and less than half my time sitting down with clients. That doesn’t mean I don’t love my clients and I don’t try and do the best I can do for them. I have a fiduciary duty and I have a very Christian attitude about how I treat my clients.
I am very interested in producing the best possible rates of return for them with the lowest possible fees because it’s a lot less expensive to get a reference from a customer than it is to spend the marketing money to go get another one. It’s common business sense.
Patrick: Well, that’s the thing is that you want to do it right. You want to do your client right, not do them in. Now, when you think about non-traditional asset allocation, I know you do a lot of things that – let’s just say the average investor just wouldn’t get. You have opportunities in front of you and funds that you use that the average investor would never see.
Richard: Right. For instance, we’ve recommended a material fund quite a bit lately. That is selected, again, by these complicated formulas. That fund’s up over 103% in the last year and almost 11% the first three months of this year.
But, if you want to go specifically to a particular type of precious metal, like you want to invest in platinum, we’ve got some platinum indexes out there that, again, invest in certain platinum-producing companies based on complicated formulas – or copper. Copper has to be used when there is an economic expansion.
China is buying record amounts of copper and that’s why we quit printing the penny. We quit minting it with pure copper or mostly copper. Now, it’s just copper-clad.
Patrick: Yeah. I heard that it costs like $180,000 to create $80,000 worth of pennies.
Richard: Yeah. It’s gotten out of control and people have been melting them down like crazy, so the mint just gave up and finally decided that there’s going to be long-term shortage of copper. Copper is a good investment in an economic expansion cycle and we’re definitely in an economic expansion.
A lot of people would like it to come back roaring as fast as it did the last couple of recessions. It’s going to take a little longer, but that still means that the upside is good and it’s not overbought yet. Copper is not overbought yet. There’s still great opportunities there. Gold might be overbought temporarily for a short period of time here. Over the next three years, I still think there’s money to be made there. Platinum is not overbought.
So, there’s certain precious metals and what I call nontraditional asset allocation that makes sense right now.
Patrick: I agree. I know that when I look at China, a lot of people don’t get that they are the workbox of the world. They are the economy that will rip and roar no matter what right now because you’ve got a billion people that want to work. They built cities with no one in them. That’s the thing. The city would hold over a million people, but there’s no one there.
Richard: Not yet.
Patrick: Not yet.
Richard: But, it’s coming. And India has also got the fastest growing middle-class in the world and that means record demand for all the stuff that we take for granted. Our average household has five televisions. The average Indian household has none. Our average garage has 2 1/2 cars in it. Theirs has .2.
Patrick: Does that mean it’s a bicycle?
Richard: That means only one out of five households has a car. So, think about the expansion opportunity there. And China is even worse. The numbers are even lower there.
Patrick: Yeah. Again, you’re looking at over two billion people that are in an expansion. The reality is that they kind of have the issue of they want to be like us.
Richard: Exactly.
Patrick: So, that’s awesome. What are some of the other opportunities you see in front of us?
Richard: Well, there’s still a lot of room to run in consumer discretionaries. Healthcare, in spite of all the damage Obama’s tried to do it, is still up over 10% the first three months of this year. We’ve just got a lot of room to grow because we dropped so far last year.
Patrick: Well, I know that the other thing that you look at is the liquidity factor, or maybe illiquidity, that’s been kind of forced on us in the last few years has forced everybody to get creative. They can’t just go get quick money from their credit card, or AMEX, or whatever.
I have guys that I run with that had $50,000 lines with AMEX and it was shut down to like $2,000 overnight.
Richard: Yep. That’s what’s happening.
Patrick: And they were floating their business on that money, so they had to pull it out of their stuff. I want to make sure as we’re coming here to the next break that you have an opportunity to connect with Richard. You can call him at 972-758-4484 or – and more importantly – go to his workshop. 972-325-1700.
He’s got a workshop this Tuesday night out of Brookhaven. It starts at 6:30; an hour of education and then you’ve got a wonderful meal afterwards. I want to make sure that you join us there. 972-325-1700 is the registration line. You want to make sure you leave all your information so that you can get confirmed to have a seat in these valuable workshops. I know you won’t want to miss it. We’re so thankful for you listening. We’ll be right back.
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Patrick: Welcome back to Financial Fortress radio. This is Patrick Dougher, Richard Jordan in the house. One of the things that we want to go back to is I really want to make sure that people understand this whole Roth IRA thing and that they see the opportunities and the benefits.
I know that you were looking at the different myths that were out there. I know a lot of people are going, “Well… I may not pay much taxes because I’m going to be in a lower tax bracket.” Is that what people are thinking?
Richard: Well, I hear that all the time and it’s just not likely to be true because the Tax Foundation report – and they can call if they want to get a copy of that – says clearly just what the deficits that we had as of January 1st of this year. We pretty much have to double our tax rates or double the amount of money we print every year.
Now, think about it. If we double the amount of money we print every year, what’s that going to do to our inflation rate? We’ll be like Argentina.
Patrick: [48:13 inaudible] roof.
Richard: Yeah. It’ll be crazy.
Patrick: Greece, Argentina.
Richard: It just won’t work. So, we’re going to have to hike our tax rates tremendously and we’re still going to have to cut spending. You know how hard it is for politicians to cut spending. That’s how they get reelected. What are the two things politicians care about? Getting elected and getting reelected.
And I don’t care which party you’re for. This is not a political commercial. Politicians are all about power and elections. And the money that flows into those campaigns comes from two sources. It comes from large corporate funds and it comes from wealthy individuals.
The wealthy individuals have already converted their money as much as they can that a Roth because they know this is the best deal they’re ever going to see in their lifetime. It is the people that are overanalyzing that have failed to jump in.
Patrick: Well, I know some people might think, “Well, this sounds like a really good opportunity for government to collect a whole bunch in taxes.” I suppose it probably is if you look at all the money that’s in the IRAs. If people were to take them out of that doorway and put them into a Roth, they have to pay the taxes over a two year period as I understand it, Richard, right?
Richard: Correct.
Patrick: Okay. And no interest or penalty. Just pay the tax over two years and they’ve got lots of opportunities to even jump back. But, the fact is, yes, it’s going to generate some tax revenue. However, compared to where the rates will be – oh, my goodness.
Richard: Right.
Patrick: You’ve got so much less that you can pay right now. Isn’t that right?
Richard: Absolutely. A lot of the people that are betting on being in a 15% tax bracket when they retire are going to be in a 28 or a 30% bracket. There’s no way around this.
Patrick: Well, I heard something earlier today about even the dividend income that people had been historically only paying 15%, they’re talking about popping that up to like 43%.
Richard: Exactly.
Patrick: With all the extra bells and whistles added on. But, it’s like “Oh, my goodness.” They’re going triple – almost triple – taxes to folks that produce an income off their investments in the way of dividends. I’m stunned.
Richard: It is. And we’re just going to see some very high tax rates in the next 10 – 20 years to make up for the fact that you’ve got so many people retiring and just not enough tax money coming into carry the lull.
I’ve looked at this thing six different ways. I read reports on taxation all the time, so I can advise people on when to invest and how to invest so that they take the most home and Uncle Sam gets only his fair share. I’m sure you want him to get his fair share – well, maybe not.
Patrick: Well, like I said, IRS, KGB – what’s the difference? But, I do have a question for you. If somebody wanted to move forward with the transition you’re talking about; taking the money out of their IRA, put it into a Roth IRA, they wanted to do it with you, how would that process work?
Richard: Well, you would sit down with me. We would analyze their situation first to determine what their budget is, what their rate of return is on their current investments, what their inflation rate is and then we would start looking at ways to earn the minimum amount of money necessary to make that money last until they’re 95 or 100 years old because the last thing you want to do is run out of life before you run out of money.
Patrick: Right. You mean run out of money before you run out of life? Yeah. That one confused me. I’m an Aggie; whatever. The biggest thing is folks can connect with you several ways. I know you invite people to your workshops.
Richard: Right. And that’s a good place to get the overview on how the wealthy and the smart investors invest their money. We’ll talk about high return, low fee investment solutions. We’ll talk about things that do better than ETFs at the same kind of costs as ETFs and much higher rates of returns than anything else out there.
Patrick: What’s an ETF?
Richard: An exchange traded fund which is the current rate in the market and, basically, they’re compromises of different sectors, or multi-caps, or whatever and I don’t want to get into all those definitions.
Patrick: Yeah. It’s all good. I just wanted to make sure I understood what you were saying. So, you’ll take care of somebody, walk them through the process. They can get a hold of you just calling your line, right?
Richard: 072-758-4474 or if you want to come to the seminar, 972-325-1700. The next one is at Brookhaven this coming Tuesday night – that’s in two days – at 6:30 PM. Or you can come out to South Lake Timarron Country Club on the 26th of May at 6:30 PM and you’ll hear about not just high returns, but low fees. You’ll hear about ways to get consistently high returns without any stock market risk.
We actually run into a lot of people lately that don’t want any risk on a portion of their money so that they are sure they’ve got the money to pay all their bills for their utilities and to buy the kids and grandkids their presents every year and take their travel every year, and then the money they put in the market, who cares. Is it going to go up? Is it going to go down? What’s it going to be at when they pass? Who cares. It’s all for the kids anyway.
You’ll hear about opportunities you won’t find at big brand name brokers because they don’t pay any commissions, so they aren’t interested in selling them. You’ll hear about nontraditional asset allocation including hard assets like precious metals and finally, again, whether or not you should convert your 401K or an IRA to a Roth IRA.
Now, a lot of people don’t believe or know that you can actually take your 401K and roll it over into an IRA now, but the Enron Act which was the Pension Protection Act of 2006 went into effect at the beginning of 2007 and a lot of these big companies have not been forthright in explaining to their employees that they’ve got the right to convert out of that 401K – which the company essentially owns. That’s why when Enron went bankrupt, those people lost all their money.
So, to protect their pension, essentially their 401k, you’ve got the right to roll that over and it makes sense to do that if you have already met the minimum amount of time to get that portion that the company is also adding on for you.
So, if you’ve passed that period of time – for instance, you’ve been there five years or longer; that’s typically the case – then it makes sense to look at it because in order to keep the costs on 401Ks low, they limit you to a selection of only 20 or 30 mutual funds – and they aren’t the best funds in the market by the way. As a result of that, you can’t get the kinds of returns that we can get for you.
Patrick: Really? One of the things that I wanted to make sure is that people can get a hold of you and hear you talk. I know that you’ve got the workshop. You said there’s one this Tuesday night. 972-325-1700 to register.
Richard: Brookhaven Country Club this Tuesday night.
Patrick: Now, what’s the cost on that one?
Richard: No charge. We’ll throw in a dinner if you’re willing to sit and listen to me for an hour.
Patrick: Who should make sure they’re there?
Richard: Anybody that has investments that total $250,000 or more will find it valuable to learn how the wealthy invest their money differently than the average investor.
Patrick: Okay. So, you’ve got strategies for folks that have $250,000 or above that will really help them build their wealth, retain their wealth, and even transfer their wealth the right way.
I know that, folks, you want to be there. It’s free. You’re going to hear Richard talk. You’re going to get a feel for what his heart is and I will tell you, you will enjoy it. You’ll get a lot of information. It’s 972-325-1700.
Like we said earlier, he’ll fill your intellectual plate before he fills your physical plate with the tools and the keys to saving you money and building your wealth. We’ll talk to you next week.

Financial Fortress Radio with Richard Jordan on Roth IRA’s

Patrick: And welcome to this Sunday’s edition of Financial Fortress Radio. This is Pat Dougher. My co-host in the show, of course, is Richard Jordan.
He’s an investment strategist in the DFW area and he’s here to answer your questions and help you understand how the really smart money invests. Not just invest, but invest with better than average rates of return and even more profitable ways of doing things in the market arena. Richard, it’s always good to have you on the show.
Richard: Thank you, Pat.
Patrick: I know that one of the things we want to talk about is the fact that you do help people get higher rates of return with lower investment fees and better rates of return solutions, so go ahead.
Richard: Absolutely. Pat, the reason I got into this business is I spent a lot of years in the estate planning business. The biggest complain I heard, both from the heirs of the people that inherited the estates and the people that were getting close to doing their final wills and final trust, is that they put money into an investment vehicle like a 401 or a brokerage account and they put it in for 25 years or 30 years.
They look back and they added it all up and they had just about penny for penny exactly what they put in there. All the so called gains, that 11% gain the broker promised every year in the market, somehow had gone to fees and commissions. It just wasn’t fair. Where did the money go and why didn’t they get the returns they were promised?
Patrick: Well, it’s even hard to fathom, but I understand what you’re saying because there’s just a huge difference in what they publish because I thought the brokerage firms were telling the truth.
Richard: Well, they tell the truth according to the SEC, but the SEC lets them run a little fast and loose with the numbers which is why the White House is looking at some financial regulatory reform right now.
Patrick: What do you mean by that?
Richard: Well, for instance, on mutual funds they are allowed to advertise the gross return. The gross return. Not the bottom line. Not what you get after all the fees, expenses and commissions. All the fees, expenses and commissions they’re allowed to hide in the thing called “the prospectus” and very few people will read a prospectus cover to cover because it takes hours and it’s written in legalese.
Unless you’re an attorney, it’s really hard to figure out what it is saying, but it’s usually saying that your money is at risk and you could lose 100% of it and the fees and commissions are going to reduce your returns. That’s common sense. But, figuring out which fees and commissions apply to your account is a nightmare.
Patrick: I wouldn’t doubt. I know at lot of you may have dealt with brokers in the past and they’ve given you prospectuses and you’ve tried to analyze it with your investment strategy and you might be just confused. So, you might have a question for Richard.
If you do, just call in to 972-299-5759 or if you’re outside the area it’s 866-660-5759 (KSKY) if you’re dialing it. But Richard, I know that a lot of your clients are really looking for safe returns, aren’t they?
Richard: They are, especially after the two bear markets we’ve had in the last 10 years. After all, the market is still 10% or more depending upon the index you’re looking at below where it was 10 years ago. So, where is that so-called guaranteed return if you’d just stay in the market long enough? Well, buy and hold just doesn’t work anymore.
Patrick: And doesn’t buy and hold, even over the last 100 years, it’s been a painful process where you’ll have almost a generation, or in 25 years sometimes, of nothing.
Richard: Well, I’m a numbers guy and I like to look at statistics and when you look at the statistics since about 1925 – that’s a pretty good time period. You look back at all the bear markets and bull markets. If you take out the off falls, the numbers at the extremes; in other words, the numbers that were tremendously bad and tremendously good and you take out the long period of time, the one long period of time that we had a long consistent bull market, what you’ll find is that we are only in bear market and bull markets pretty much exactly 50% of the time.
Patrick: Well, and this will sound dumb, but a lot of people might be thinking bear market, bull market, I get confused. Just to clarify, bear’s the one that rips things apart and it goes down. Bulls charge up. So, the bull is a market that’s ascending. A bear is one descending.
Richard: Absolutely.
Patrick: And I know that when the market does start to fall it typically will fall three times faster. Is that about right? Is that the right number?
Richard: Two to three times faster because fear is a much stronger emotion than greed.
Patrick: Well, sure I mean people – they think of Will Rogers – I’d like to have a return of my investment rather than just on it.
Richard: Exactly, but what happens is people invest in the market based on their emotions. People are emotional about their money, so by the time they think it’s safe to get in the market and be a little greedy, the market’s already experienced, like it has in the last year, half of the run up that it’s going to experience in a bull market. And the next 50% is going to trail out over the next two or three years.
So, the rate of return isn’t going to be near what it was in the last year but you’re sitting there with your little calculator thinking, “Maybe I’ll get a 50% return in the next year because that’s what it was in the last year.” No, you won’t. You’re going to get that same return in the last year over about a two or three year period if we do not have a double dip recession.
Patrick: What’s the double dip recession?
Richard: Well, like we had in the early 80’s when we had a lot of expenses from the Vietnam War hit as a tax burden and it caused major budget deficits and as a result, the tax rates had to be bumped up temporarily. We had high energy cost. We had high unemployment.
Does any of this sound like what we’re experiencing right now? And as a result to that, people didn’t have the additional income, the discretionary income to go out and spend on it like they usually do. And since this is a consumer-driven stock market, 2/3 of the results are from consumers. When consumers pull back, the market pulls back.
Patrick: Sounds like things are fairly predictably irrational.
Richard: And that’s the problem. Not only are the investors irrational, but the people that manage the funds, the pension funds, the mutual funds, because they have such high commissions at stake. These mutual fund managers can make tens of millions of dollars managing these funds based on the size of the fund primarily instead of the performance of the fund.
So, they are motivated to act just like a salesman and unfortunately, according to a professor at Duke that spent 30 years studying it and his recent book indicates, when there’s that much money at stake, even the most trusted people will tend to see things through rose glasses.
Patrick: Well, isn’t that pretty much even in any industry that when you get into the bigger dollar incomes that sometimes your ways of thinking can be a little bit foggier or corrupted.
Richard: Absolutely. So, the way out of this is you steer clear of the people that are driven by commissions only. So, the two categories of people that call themselves financial services people that you get involved with that are driven primarily or 100% by commissions are the brokers and the insurance guys.
The brokers are going to try and sell you the highest commission products whether it’s a mutual fund or a highly compensated stock that they’ve got too much in their own inventory that they’re trying to unload.
An insurance guy, since he only has insurance products to sell you, is just going to focus on selling only insurance products and they’re basically limiting you. There’s a much wider world of potential investments out there that you could be making.
Patrick: Very good. Well, I know a lot of you may want to join the call and join in on the show and just call in at 972-299-5759 or 866-660-5759 and I know that you, Richard, are a part of a fairly elite team of advisors.
Richard: That’s correct.
Patrick: That was setup what in the 30’s, right?
Richard: Actually, the law was passed in 1940. It’s the Registered Investment Advisor Act and it created a separate category of investment advisors for the wealthy. And the big difference is a broker’s primary duty is to the brokerage house and to earn commissions and the registered investment advisor has a fiduciary duty to the client first and foremost period, end of story.
And of all the registered investment advisors out there, only the top 5% are only advisors. The other 95% carry brokers’ licenses and they wear two hats at the same time causing this conflict of interest and the SEC allows it.
So, most people think that the SEC should not allow it when they hear about it, but the SEC thinks, that since this law was passed so long ago, that your parents or grandparents told you about this risk and you should know.
Patrick: Oh, just a kind of intrinsically I should know.
Richard: Because it was passed in 1940.
Patrick: Well, that’s a long time ago. That was a little before I was born.
Richard: It is.
Patrick: But, one of the things that I do want to make sure is that people know that you have a workshop coming up.
Richard: Absolutely.
Patrick: Can you tell us about that, Richard?
Richard: We’ve got a workshop coming up this next Tuesday and the following Tuesday at Brookhaven Country Club. It’ll be at 6:30 PM and we’ll talk about the ways the wealthy invest their money differently.
Patrick: Very good. Well, what will somebody walk away with, with that?
Richard: Well, they’ll walk away with several key strategies that the wealthy used to get high returns while paying low fees. We’re all about low fees and lost cost.
Patrick: Very good. Well, we got a caller on the line. Let me go ahead and try to go to…Kelly you’re on the air?
Kelly: Yes, I am.
Patrick: Very good. What’s your question, Kelly?
Kelly: Well, I recently was laid off from my job and I have 401K there that I need to rollover and I don’t know if I should put it into a Roth or leave it in a traditional IRA?
Richard: Well, that’s a tough question without doing a budget, Kelly, but assuming that you’ve got enough money set aside to take care of the potential downtime between your layoff and your next job you should consider converting some or all that into a Roth IRA. Right now, the benefit of converting to a Roth is awesome and we’re going to get into that more in the next segment.
We’re going to have to go to a break here in about 30 seconds, so the key thing is that you’ve got two years to pay the taxes if you convert to a Roth now. A lot of people are scared to convert because they thought that they’d be in a lower tax bracket later and maybe this traditional IRA would be better for them, but Congress is running up record deficits, tax rates have to go up to cover that and you’re going to be in a higher tax bracket later.
So, you need to convert now and that’s the most important message I can give you in the short amount of time I’ve got and then we’ll get back to you here after the break.
Patrick: Hey thanks, Kelly. We’ll let you listen offline.
Very good. Well, thanks for joining us this section of Financial Fortress Radio and if you’ll call in at 972-299-5759 to join the show. We’ll be right back.
[commercial]

Patrick: And welcome back to Financial Fortress Radio, this is Pat Dougher. Rich Jordan, investment strategist for the DFW area and we were just talking to Kelly and she was telling us about her 401K that she converted to an IRA. You said, “Convert that to a Roth assuming certain parameters are in place.” Now, I’ve heard a bunch of mythology when it comes to Roth’s. I mean, there is a lot of noise out there.
Richard: There is.
Patrick: Can you set us straight?
Richard: Sure. Well, first to get back to Kelly. She needs to have enough set aside in an emergency fund, so she can take care of herself for the typical six months it’s going to take to find another job in this economy. But, beyond that, she can convert the rest into a Roth and she should do it because she’s going to be in a higher tax bracket later, I can almost guarantee you.
Now, the typical myth that you’re going to get from a lot of the financial planners, and the magazine articles, and the newspapers is that you have to run the numbers and it’s really complicated. There are all these potential scenarios and you’re going to end up with dozens and hundreds of spreadsheets. You’re going to get so confused by the data you’ll be paralyzed that you won’t be able to make a decision. Look, there are only three things that can happen.
You’re account value is going to go up, it’s going to stay the same or it’s going to go down. If it goes up then you can make the decision to go ahead with the Roth IRA and keep it a Roth IRA. If it stays the same and you can’t afford to pay the tax, then you’ve got till October of next year to un-convert it back to a traditional IRA and a lot of people don’t know that. Same thing if it goes down.
Patrick: Now, wait a minute. So, if it goes sideways or down, they actually could convert it back into a regular IRA.
Richard: Absolutely. Exactly and then 30 days later, they can, for the following tax year, re-convert it back to a Roth and run that time period again to see if it’s going to go up.
Patrick: Okay, but here’s one of the things that I would be curious about. Why would I even want to convert a regular IRA that I’ve been paying in for the last several years or a 401K that now it’s in an IRA? It’s still tax deferred. Isn’t a Roth IRA tax deferred? Why would I even want to go there?
Richard: Well, a Roth IRA basically continues to accumulate in value without any further taxation. So, the difference is you never paid a dime in taxes on your standard traditional IRA or 401K. It all went in tax exempt and all the gains were tax exempt. So, Uncle Sam wants his money on that.
Well, this is the first time in history you can convert whatever you want out of that to a Roth and take two years to pay them back with no interest. Where else can you get no interest loan?
Patrick: Well, but my fear if that was me, if I had an IRA that I was converting and you’re saying take it out of the container that’s called IRA and we’re going to put it into another container called Roth IRA.
Richard: Correct.
Patrick: When I pull it out of that regular IRA, the IRS or KGB or whatever they call those people, they will tend to – I’m thinking penalties and ordinary income. I mean, that’s 35%, 38%, 48% of an IRA being taken by the IRS.
Richard: Yeah. Well, the top category right now is about 33%, but if you look at the tax foundation reports with all the run ups with the current administration in budget deficits just to pay off the budget deficits that they’ve accumulated in the last year. We’re going to end up with a tax rate that’s nearly double that within 10 years. In fact, to pay off all of our current deficits, we would have to nearly double the tax rates for 10 years. Now, sooner or later we’re going to have to pay the bill on this folks. It’s just common sense.
Patrick: Okay, but the penalty issue. Are they going to experience the 10% penalty?
Richard: The 10% penalty is for people that take money out before 59 ½.
Patrick: Right.
Richard: That’s a separate issue entirely.
Patrick: But, if you’re taking it out of an IRA and putting it into a Roth IRA it’s leaving the doors of an IRA.
Richard: It’s still an IRA.
Patrick: So, there’s no problem with the penalty? You’re just paying ordinary income tax on what you take out.
Richard: Exactly. And you’re paying it over two years with no interest.
Patrick: Okay, so let’s say that it is worst case 33%.
Richard: Right.
Patrick: You’re paying 15, a little over 15% a year with zero percent interest on that distribution, is that what I’m hearing?
Richard: I guess you could look at that way, but basically, you’re in a certain tax bracket. You’re incremental bracket, what they call a marginal bracket, and chances are if you’re making any money at all, you’re in the 25% bracket. Well, that bracket in order to pay off our budget deficit is going to have to go to between 48 and 60% in the next 10 years.
Patrick: So, that’s what you’re really saying is if you have the opportunity to take your money, pay 25% income tax or so.
Richard: Even 33.
Patrick: Even 33 over a two year period or you could leave it in that IRA and within 10 years, you’re going to be hit with a 50-60% instead of a 25 or 33%. Is that what you’re saying?
Richard: That’s what I’m saying. You’re way better off. Since we’re in a bull market, since we’ve already experienced a solid year of a bull market and they typically run for about three years, chances are the market’s going to go up at least another 30% in the next two years and your gain is going to end up paying off the taxes on this thing.
Patrick: So, on the Roth IRA, what happens there is once the money is in there, it never gets taxed again.
Richard: It never gets taxed again, exactly. You can continue to grow tax-free and the money comes out tax-free. You can give it to your heirs and they can continue to use it for multiple generations tax-free. It’s just an unbelievable benefit to people that really look at it. It’s a gift from the federal government, but it’s only for people that are smart enough to understand the basics.
Now, there’s a lot myths around this. For instance, I have had people tell me, “Oh, but you can’t touch it for five years after you convert it.” That’s not true. That’s just a bunch of gobbledygook that some magazine writer or newspaper writer thought he read somewhere and it’s been a propagated myth for months.
Patrick: Or they put it into a B shares type of mutual fund that had a backend charge.
Richard: Well, that’s an entirely different issue. That’s getting back to the way brokers collect excess fees and commissions from you on your investments and that, again, gets back to the argument of should you be using a broker at all? You should be using an investment advisor that takes a fiduciary interest in your interest. In other words, he’s interested in your goals first and his goals second.
Patrick: Very good. Well, I know that you’ll be talking about a lot of this information at your workshop.
Richard: Absolutely.
Patrick: And when’s your workshop again?
Richard: We’ve got them coming up the next two Tuesdays the 27th of April and May 4th at Brookhaven Country Club at 6:30 PM and you can register at 972-325-1700.
Patrick: What was that number again?
Richard: 972-325-1700 and by the way, our privacy policy is that we never share information with anybody for any commercial purposes. So, simply leave your name, address and phone number. We’ll send you a letter of confirmation. We won’t share your information with anybody. You won’t be getting calls from oil and gas salesman at 8:30 at night. That’s our policy. We follow it to a tee.
Patrick: And I know that during this workshop – I’ve been to one – and I really highly recommend you attend because, Richard, you really pour a lot of information on the folks. It’s not a sales pitch. It’s really an information dump from you in a sense. Just an outpour. Here’s the information you make good better decisions.
Richard: Absolutely and what I’d recommend is if you’re a senior and you’re just expecting to hear the same old stuff that you hear going to these seminars which is that annuities solve all your problems, or life settlements solve all your problems, or no load funds solve all your problems. No one thing solves everybody’s problems.
So, I cover a lot of topics fast. I suggest if you’re a senior, take a nap, and get ready. There’s a big download coming. We give a lot of information out in an hour. Be prepared to take some notes and I know that not everything is going to be for everybody, but there are always one or two good ideas in there for every single person that comes.
Patrick: Real quickly, Richard. Who should attend?
Richard: Anybody that has an investment account that’s over 250 or more typically gets benefit out of my workshop because they’re a middle class person that wants to understand how to grow that account into a million dollars or more. So, they need to start investing like the wealthy people, the people that already have a million.
Patrick: That’s good. Well, like Richard said register for his event 972-325-1700 and join the call. To join this show today, just call in at 972-299-5759 or 866-660-5759 (KSKY). I’m so thankful for this half of the show, Richard. I know we’ve got a lot more coming on converting the IRA to the Roth IRA and beyond.
[commercial]

Patrick: Welcome back to Financial Fortress Radio. This is Pat Dougher. Richard Jordan and we are talking about the Roth IRA conversion. Should you? Shouldn’t you? What’s the mythology on the whole thing because there’s a bunch of disinformation out there or just too much information?
I know that Richard’s going to go over exactly what are some of the myths, but then even what are some of the steps and why would anybody want to do this because of the confusion that’s out there you wonder is it really a good deal?
So, with that, Richard, why don’t you talk to us a little bit further about the myth, the mythology of the Roth IRA conversion? You said a little bit. You mentioned that there’s a five year holding. No, there’s not. There’s a real value in going from an IRA to a Roth IRA because taxes have to go up and you can get those taxes paid for and the Roth IRA allows you to have tax – essentially a real tax-free investment because the tax that I’ve paid on the dollars that are in there and the growth is tax-free as well.
Richard: Absolutely.
Patrick: So, what are some of the other myths that you have there?
Richard: Well, another myth I hear a lot about is it’s a trick. Congress is going to change the law and somehow find a way to tax Roth IRA’s later.
Patrick: It’s not like the governments ever changed its mind on something.
Richard: No, I understand, but they’ve never, ever done that on retirement accounts and they can’t afford to because guess who ends up paying the bill when they do things like that with retirement accounts. Uncle Sam ends up paying the bill. They end up right an IOU back to themselves and right now what you’ve got is your 401K or your IRA is an IOU to the IRS.
In other words, if you’re the kind of person that likes to listen to Dave Ramsey and you believe in being debt free, if you have an IRA or a 401K, you have a future debt to the IRS and you just don’t know how high the bill can get.
Patrick: Oh, I mean tax rates in the past have been significantly higher than we are seeing right now, haven’t they?
Richard: Absolutely. We saw a tax rates as high as 70% back in the 60’s and we could get back to that. In fact, Great Britain just raised their top tax rate from 40% to 50% last week and that’s going to give some stimulus to the White House to think about following and doing the same thing.
So, how long is it going to be before he decides, “Well, we don’t want as much budget deficit. We need to be fiscally responsible. The dollar is sliding too much.” Greece is going belly up and we’re having trouble getting our bonds sold. The Chinese and the Japanese have both said, “They’re not going to buy our treasury bonds anymore unless the rates go up”. So, what they’re saying is that our balance sheet looks terrible as a company.
Patrick: Well, I mean who would take their money and invest in a company – I don’t care how you cut it. The American government is a form of a company. It’s like just any other company out there. It’s an entity.
Richard: Financial organization.
Patrick: Financial organization.
Richard: That’s right.
Patrick: Okay and who would say, “Oh, yes. Please just print your way into oblivion.”
Richard: Print some more money.
Patrick: I still remember – I’m a big student of history. I love history and I studied things like this in the past and one of the things that you always see is that people will give up their rights for provision. I mean, the Israelites gave up their rights for provision and ended up in slavery.
Richard: Absolutely.
Patrick: And we’ve seen it in Europe and the early part of last century. We’ve seen it over and over again where people will give up – well, the Russians they gave up their rights for provision and I just see this trend. I’m going, “Does anybody else notice we’re diving headlong into socialism?”
Richard: It’s just unbelievable what’s going on, but you can’t control that. You and I can’t control these things that are going on at the level of Congress. What we can control is our IRA and our 401K.
Here’s another myth. A lot of people think you can’t take your 401K that’s in a company and convert that to a Roth IRA. Well, you can and you should.
There was the pension protection act that was passed in 2006 and it became law in January 2007 and the reason it did is because of the ENRON problem. In fact it’s colloquially, in the law business, called the ENRON law.
All those poor people that lost all their retirement funds because the 401K you’ve got is actually an asset that belongs to your company. Until you get it out of their holding account and into your personal holding account called an IRA, you’re stuck with their financials. If they go belly up, the creditors can have access to your account. I know that’s not fair, but that’s how it works.
So, the law says you can convert this to an IRA and you should because most 401K’s only have 20 or 30 funds as options that you can invest in. There are 11,000 funds out there and there are a lot of funds that we have access to that have much higher rates or returns and cost factors that are below 1%.
So, you need to take a look at those kinds of approaches to investing and not be stuck in 20 or 30 Fidelity funds or 20 or 30 Dreyfus Funds because that’s just way too limited of an investment option.
Patrick: Well, let me make sure that I understand you correctly. Somebody’s working for GM and GM’s got a big retirement fund.
Richard: Yep and it’s at risk.
Patrick: Yeah. It’s evidently less than it used to be at risk. I understand they recently paid off their debt to the government and I couldn’t be more thrilled. It sounds like a Chrysler rerun which is fine, but here’s the thing though. They have a – I don’t know if they call it 401K…
Richard: It’s the 401K you’re concerned about. The pension fund you can’t control, but your 401K, you can do something about it. You have the right to convert that into an IRA and any money that’s vested you should pull it out of there and put it in a separate IRA.
If you’re still vesting, you’re working there five years or less, and they’re matching, you want to wait till they’re done matching and get your vested amount, that matching amount vested. But, if you’re past that period of vesting on any of that money, you should pull out the money that’s vested and put it on IRA because you’ve got way more options.
You’ve got a much higher potential that you can invest in and you could convert it to a Roth and pay the taxes over the next two years. Excuse me, but when was the last time the IRS gave you two years to pay a bill with no interest?
Patrick: Never.
[laughter]
Richard: Exactly.
Patrick: I’m thinking, the last time I heard their interest rate were somewhere around 36% a year or some unbelievable. I know it’s like a percent per month plus. Anyway it is way up there.
Richard: It’s the penalties.
Patrick: The penalties really sting you.
Richard: The penalties run it up. The effect interest rates just make it crazy.
Patrick: So, if you do not have to do that, that’s amazing.
Richard: So, you’ve got two years now to pay this bill and chances are if you’re with a good advisor like me, you’re going to do much better than the market, but even the market I think is going to go up in the 20-30% range in the next two years.
That means that all your tax that’s due is basically going to be paid for by these gains and then you’re going to have an account that’s really tax-free. You won’t have an IOU to the IRS. You won’t be pulling this money out in 10 or 20 years going, “Oh, I can’t believe I’m paying 52% on this money. I should have converted to a Roth 10 years ago like Rich said.” Don’t do that.
You can convert now and if the numbers don’t make sense by October of next year you can convert it back to a traditional IRA, wait 30 days and then try the same thing the following year. You can keep going back, converting it, and un-converting it until you get a year where the numbers have enough gain in them to pay the tax bill.
Take advantage of this. Don’t let this opportunity slip by. A lot of advisors don’t really understand how this law works, but I’ve studied it closely.
Patrick: Very good. I know that a lot of people might be going, “Can I talk to somebody about this?” Can they call you, Richard?
Richard: Absolutely.
Patrick: They’ll call you at your direct line.
Richard: You can call me direct if you want to have a personal analysis of your holdings or if you want to determine whether or not this law makes sense for you converting to a Roth IRA 972-758-4484.
Patrick: It’s 972-758-4484. And that goes straight to your desk, is that correct?
Richard: Yeah, if I’m not in a meeting, I’ll pick it up.
Patrick: Very good. I know that a lot of you may be really kind of questioning this whole IRA, Roth IRA, and 401K. There’s just so many “Ks” out there that you really need to analyze what’s the right way to do. So, I encourage you to talk to Richard about that. Like he said, you can call him at 972-758-4484 to setup…
Richard: Or you can come to the workshop.
Patrick: I was going to say, you might want them to come to the workshop. So, to register for the workshop is 972-325-1700. What’s one big benefit they’re going to get from you, Richard, before we go to break?
Richard: Well, the biggest benefit they’re going to get is they’re really going to understand that there really are high return low-fee investment solutions out there.
Patrick: Very good. And where’s that going to be again?
Richard: Brookhaven Country Club, Tuesday, April 27th or May 4th, 6:30 PM.
Patrick: And there’s no cost, is that correct?
Richard: No cost whatsoever.
Patrick: Call and register. 972-325-1700. We’ll be right back.
[commercial]

Patrick: Welcome back to Financial Fortress Radio. Pat Dougher. Rich Jordan. You have the answers. You’re the man. You’re the guy with the investment strategies to help people begin to invest smart, like the wealthy, in every area of their life. Right now we’ve been talking about the IRA to Roth IRA conversion. There’s still some mythology we haven’t covered.
Richard: That’s true.
Patrick: What are we missing?
Richard: Well, one of the things that I hear a lot is that it’ll take years for me to make up the taxes I’ll have to pay on that conversion. It’s just not true. We’re in a bull market.
Now, there’s a small risk that we’re going to have a double dip and you’re not going to make as much in the next two years as you think, but if you convert today you’ve got till next October to un-convert this thing and not have to pay the taxes.
Think about that. You’ve got a year and a half to roll the dice like you do in Las Vegas. That’s what you do in the market. You’re taking some risk. You’re gambling a little bit. You’ve got a chance to wait to make the decision till then. You don’t have to make it and it’s not cut in stone. You can make it and uncut the stone.
Patrick: So, it’s October 2011?
Richard: Yes.
Patrick: So, it’s like almost 18 months that you can do your thing – invest, make money or not…
Richard: Right.
Patrick: If you don’t, you – in a sense – sweep it back into the IRA.
Richard: Sweep it back into a traditional.
Patrick: And all is good. If you do make money, in a sense use enough to pay the penalties and then go on from there.
Richard: Not the penalties, just the taxes.
Patrick: That’s what I meant, the taxes.
Richard: Right. And here’s an even smarter strategy. You can subdivide your accounts and make each one of those a separate IRA. So, you can decide, “Okay, I’ve got an asset allocation strategy where I’m divided into 10 different market sectors. I can make each of those 10 market sectors a separate Roth IRA.
The ones that go up, I’m going to go ahead and pay the tax on them and have that money tax free in the future. The ones that go down, I’m obviously going to convert back to a traditional IRA. The ones that stay the same – if I’ve got enough money left over from the other ones I’ve converted that made money, then I’m going to go ahead and allow those to fall over on the tax-free side, so that basically I walk away with a real tax-free account for the rest of my life and for multiple generations.”
If you’ve got about a half a million dollars and you are already going to have social security and a pension coming in, you’re never going to spend your IRA in your lifetime. Most people just aren’t going to have enough bills once they retire to spend all that. It’s going to go to the heirs.
Now, how would you like that half a million to grow into one, two, three, maybe $5 million over the next 50 years and be available for your heirs tax-free?
Patrick: That’s really amazing. I know that a lot of people are concerned about the tax issue and when we look forward – I think all of us realize we’re going to be paying a lot more taxes. There’s a tax tsunami that’s heading in our direction.
Richard: It’s inevitable. Anybody that’s interested, I’ve got a special report that shows exactly what the tax rates are going to have to be to cover the budget deficits. That’s just based on the numbers through January 1st of this year. Do you think we’re going to run another budget deficit in 2010? You bet we are.
Patrick: How would they get a hold of that by the way?
Richard: They can just call 972-758-4484 and I’ll be happy to send them a copy of this Tax Foundations Report that basically tells them in excruciatingly, nauseating detail how high these tax rates would have to get.
In fact, if we want to pay it all off in one year we can, but the top tax rate would end up being about 85%. I think that’s probably too much for the voting public to stomach, don’t you, Pat?
[laughter]
Patrick: You think?
Richard: But, what if it goes to 58% for 10 years? That’s another scenario they’ve got in this report. What is going to happen to America then?
Patrick: I am just dumbfounded because if they go to that kind of tax rate, you’re going to grind the economy to almost a complete halt. Then you’ve got all kinds of fallout with essentially bankruptcies or declarations of, “I can’t pay you.”
Richard: Absolutely.
Patrick: And that’s going to be a bit of a problem.
Richard: But, we can’t control the government. What we can control is our investment account. We can do a smart thing with it and right now converting and just waiting to see which of those accounts are worth leaving in that mode, in their Roth IRA designation, paying the bill on it, and being tax-free forever. Man, think about the freedom in that.
Patrick: And you can help folks with this whole conversion process because the thing you just outlined, that strategy of 10 different Roth IRA’s, that takes a little bit of help for a lot of people.
Richard: Yep. That’s right.
Patrick: So, they could call you at the 972-758-4484, connect with you and get some information on that correct?
Richard: That goes direct to the desk. Exactly.
Patrick: Very good.
Richard: Now, if you call the number that ends in 00, you’re going to talk to the secretaries. They’re going to send you to voice mail. That’s okay, but if I’m at my desk, I’ll answer that number.
Patrick: That’s good. That’s good. I know that you try to maximize your time. A lot of times after three is a better time to call than most.
Richard: Well, because I’m trying to maximize the returns for my current clients while the market’s still open. It’s nothing personal. If you’re a client, you’re going to appreciate that.
Patrick: I understand. I’ve called you and had that experience of, “Can I call you back? I’m in a middle of a trade.”
So, now to register for your workshop where you’ll be covering some of this information and beyond.
Richard: Yes.
Patrick: 972-325-1700.
Richard: Absolutely. We’re going to get into some huge estate and income tax savings ideas at the seminar that even go beyond this. These are ideas that the wealthy have used for years. They’re used by the Buffest, and the Gates, and the Kennedy Foundations. These people understand how to manage money, so you can put it way out there in terms of taxation or Uncle Sam’s ability to collect on an estate.
The biggest sin, I think, that we have on our tax code is the idea that you pay taxes your whole life and then after you pass away, you’re not there to object to Uncle Sam ripping into your estate and pulling a huge chunk out.
Now, the estate tax rate was 57% a few years ago and they’ve knocked it down to 46%. Woo-woo, right? Thank you so much, Washington.
Patrick: It still feels like half.
Richard: It still feels like half to me and it was as high as over 70%; 72% at one time. So, in order to pay these deficits they’re going to have to raise taxes every way they can and print more money than you can believe which is going to cause a huge amount of pain in terms of inflation.
So, if you’re not prepared to grow your money tax-free in a Roth IRA, you’re going to be left holding the bag.
Patrick: I understand. So, have we missed any of the mythology that you wanted to cover today?
Richard: Well, I think a lot of people also tell me, “Well, my IRA distributions – I don’t have to take that much out. My minimum required distribution the first year – I looked at it, it’s not much. It’s only about 3%.”
Yeah, it’s only 3% but by the time you’re 80, it’s 11%. In the first 14 years, you’re going to have to take half the money out of your IRA between 70 and 84.
So, how about if you had to take none of the money out just as you do on a Roth IRA. Take it out when you need it, grow it tax-free, and take it out tax-free. What a beautiful life that’s going to be for the people who are smart enough to do it now.
Patrick: I agree. I want to make sure that folks can get registered for your event. It’s 972-325-1700. The event is going to be what days and times again?
Richard: This coming Tuesday, April 27th and the following Tuesday, May 4th, Brookhaven Country Club, 6:30 PM. If you don’t have time to get over there without eating dinner, don’t worry about it, we’ll feed you right after the seminar.
Patrick: Very good. And who should really be attending?
Richard: Anybody that has a sizable investment account and wants to invest like the wealthy. Our typical client has anywhere from $2.5 million up to $7, 8, 10 million, so it’s a pretty wide range. But, if you’ve done well in your life building up some accounts, you need the best advice. You don’t need to be taking the standard advice you get from the brokers and the insurance sales guys.
Patrick: That is awesome. Well, like you said 972-325-1700. Get yourself registered. If you want to talk to Richard directly, 972-758-4484. This has been Financial Fortress Radio. This is Pat Dougher. Rich Jordan. Rich, is there anything that you wanted to say on the way out today?
Richard: You need to deal with somebody that doesn’t have a conflict of interest. Stay away from the guys that are commission-driven and you’re going to end up much better with your investment accounts.
Patrick: Well, that’s been Financial Fortress Radio. We’ll talk to you all next week.

Financial Fortress Radio April 18 2010 with Richard Jordan and Pat Dougher

Patrick: Welcome to Financial Fortress Radio. This is Pat Dougher. Richard Jordan here with me and we’re going to talk about the way that the smart investors not just make more, keep more – and then transfer more to their heirs.
Financial Fortress radio is all about showing you how the smart money get ahead with less risk, better returns and really do it right. Richard, thanks for being on the show.
Richard: Thank you, Pat.
Patrick: I understand we wanted to talk about the Professor from Duke University this week about the conflicts of interest he runs into. Tell us a little bit more about that one.
Richard: There was a book put out recently by a Professor at Duke that has 30 years in behavioral economic behind him. His book Predictably Irrational talks about the fact that all investors are far less rational than the standard economic theory assumes that people have too much of the wrong kinds of emotions at the wrong time in investing.
For instance, if you had been able to invest back in the market last March when it bottomed out, you would have been much better off, but if you even read recently the report about the money that is still sitting on the sidelines – over $3 almost $4 trillion in cash sitting on the sidelines.
And most of the money last year and up through March of this year have been poured into bond funds which are a really terrible investment with the upcoming inflation and the record amounts of deficit spending that the Federal government is doing.
So, wrong emotion; wrong time. That’s the biggest problem for investors. And the surprise in the book is it’s not just the self-investors who don’t even match the indexes over 90% of the time whether the market is going up or down, but the actual fund managers are the mutual funds and pension funds as well as, as you would expect, the stock brokers who have a conflict of interest since they’re commission driven.
Patrick: Well, I know that on Wall Street – years ago, I was a trader as in trading stocks. I worked at a broker/dealer. I was on a trading desk and we could see – we called it down the throat of almost every investment house in the country. And it was always interesting to see how these guys moved money because it wasn’t the way you’d expect it.
Richard: No, it isn’t.
Patrick: A lot of times, you’ve seen it with the funds. What do they end up doing? In order to look good, they sell what? What do they sell, Richard?
Richard: Well, they sell whatever they’re told to sell; whatever is the highest commission rate.
Patrick: Well, that’s the broker, but when it comes to the fund managers, they end up shooting their what?
Richard: Well, they end up selling their winners when the market is going down so that they can still advertise their rate of return as higher than their competition. So, rather than selling their deadwood in the losers, which you are always taught to do first when the market turns downward, they’re doing the opposite because they’re trying to maintain their fund which maintains their paycheck. It’s all about their money, not your money.
Patrick: And that’s a real key here because one of the things I notice is if a person earns a commission, they’re called a what? In your industry, it’s called a…
Richard: A broker; a stock broker.
Patrick: Or an investment broker, right?
Richard: Right.
Patrick: And they’re going to earn a commission on what they sell you.
Richard: Exactly. But, there are many examples of those, of people in the financial services industry that call themselves financial planners or financial advisors – a loosely used term – when, in fact, they’re just commissioned salespeople.
So, that list is not just stock brokers. It’s people pushing these life settlements. It’s guys that only have life insurance products. There’s a broad range of people out there. Your banker, basically, has a very limited portfolio that he can show you down there, so he’s going to show you CDs and whatever the bank is pushing that week in terms of funds. And all these people are based on commissions.
Patrick: But, that is a conflict of interest though.
Richard: Absolutely. And that’s one of the things that the administration is trying to work against; coming up with new financial regulation. Of course, it’s very difficult because of the amount of money that gets poured into the political action funds.
Patrick: The one thing that’s kind of odd is the industry, the financial planning industry, has more regulation than anything I’ve ever seen.
Richard: Oh, sure. We kill more trees than any business on Earth.
Patrick: Just the IRS beats you.
Richard: That’s it. And not by much.
Patrick: I just noticed that you guys really do a lot. And when it comes to this Predictably Irrational, they’re talking about herds, aren’t they?
Richard: Yeah, exactly. So, if you take a look at the average investor today, they’re still fearful to put their money back in the market. If you look at the fears in today’s market and why we might have a down turn in the market, it’s because the small investor hasn’t come back in.
The big funds have come in since March 9th when the market bottomed, but it’s gone up over 50% because of the big boys playing in the market. The little guys are still scared.
Patrick: Well, help me with that because that would tell me that it’s still a better than average time to be in that arena for a season with careful guard. But, the reason why I’m saying that is that there’s so much money on the sideline.
Richard: Exactly.
Patrick: And the little guy doesn’t determine the direction. He just ends up holding the bag when it gets too hot, doesn’t he?
Richard: Exactly. And so, if you don’t have an advisor that takes the emotion out of investing for you and makes those decisions without emotion, then you’re just going to follow the herd.
Patrick: Well, I know that title actually came from some – I don’t want to say litigation. That’s not the right word. Congress set it up years ago in the 30s, didn’t they?
Richard: Yeah, exactly. The difference between the brokers, which are commission driven, and the advisor, the professional advisor that Congress set up for the wealthy is that the advisor, the professional is called Registered Investment Advisor. At the country club, they often call that a private banker.
If you’re at a cocktail party or something and somebody says they’re a private banker, that’s often what they are, but sometimes, they’re just a stock broker too. So, you have to ask them, “Are you a Registered Investment Advisor?” because they take the fiduciary interest in the client first and foremost.
The client’s goals come before the advisor’s goals. The client’s goals are first and foremost. If the client wants to set a certain level of risk – and they all do – all investments for that client have to be within the range of that level of risk, whereas the commission driven people only have to operate under a guideline of suitability.
Well, suitability is like, “I think anybody over 50 ought to buy one of these, so I’m going to recommend it because it’s got a great commission on it.”
Patrick: So, if it meets certain specs, they’re saying – as far as if they have a certain amount of money or whatever, and once they meet that technical term ‘suitability’ not necessarily really suitable for the client. But, just as long as they meet it and a lot of brokers will just say, “Let’s go for it.”
Richard: Suitable for a whole category of people. And trust me, you may ride in a golf cart with a guy every week for 40 years and think that your risk structures are about the same, but when I get those two people together in a room, they often feel quite differently about money even if they’re next door neighbors, even if they belong to the same club, go to the same church or synagogue, oftentimes their risk appetite varies dramatically.
Patrick: Now, you have a seminar coming up, right?
Richard: We have two coming up on Tuesdays; one in April on the 27th and one May 4th at Brookhaven Country Club in North Dallas at 6:30 PM.
Patrick: Now, I’ve been to that, but how would you describe what they’re going to walk away with from that?
Richard: They’re going to hear about how smart and wealthy investors invest their money differently and do it without emotion by using what the public calls private bankers, but really is a Registered Investment Advisor.
How do they find a guy that takes the fiduciary interest of the client at heart first and foremost and does the right thing for the investor?
Patrick: Very good. And how would they register for that?
Richard: They would call 972-325-1700.
Patrick: Okay. That’s 972-325-1700.
Richard: Exactly.
Patrick: Now, I know a lot of people may want to get into the conversation – with your background, you’re an investment strategist and Registered Investment Advisor. You have been in this field for many years and you work with some very wealthy clients.
I know they might want to ask you a question about how some people got there or maybe they’re already there and they’d like to ask some questions about maybe where they’ve got certain things possibly – without getting too specific – but as far as they might have some things that they want to talk about, they could call in at 972-299-KSKY (5759).
That will join the conversation here. You can ask Richard about your situation or if your IRA is an IOU to the IRS.
Richard: Which it is.
Patrick: For a lot of people, it is. With that, join us at 972-299-5759. Richard, I know we’ve got a couple of minutes before we go to break, but I want to make sure that we really cover this conflict of interest thing. And Predictably Irrational is one of those that you can see a herd going off a cliff if they’re a bunch of lemmings.
Richard: Absolutely.
Patrick: Okay. But, how does someone see that without being in the middle of the herd because, a lot of times, when you’re in the middle of the herd, you just don’t see the edge until it’s too late.
Richard: Well, again, you’ve got to use an unemotional approach and that basically means a statistical approach to analyzing the situation. So, whatever situation you’re in, the market situation currently, a personal portfolio – how do you meld those two and combine them to get the best possible rate of return for the investor within the range of risk they’re willing to take? That’s really what the question is, isn’t it?
Patrick: Well, I think so. Most people, they want to grow their money as fast as they can with the least amount of risk. That’s a given. But, most investors don’t do it, do they?
Richard: No. A lot of them just rely on the big brand names. And as you’ve heard in the news, if you heard the news on Friday, Goldman Sachs is being sued by the government for fraud and deceptive practices in relation to the subprime mortgage bond business, and it’s just a horrible mess that they created.
And they weren’t the only one. All the major brokerage houses and banks were involved in it. And any time you’ve got an investment bank on one side of the house and brokers on the other side of the house, you’ve got a conflict of interest. One’s creating products and the other is getting paid commissions to sell those same products. And that’s the problem.
Patrick: Very good. Well, I know that a lot of people want to join you on that seminar, so just call 972-325-1700. And if you’d like to join us on the show, it’s 972-299-5759. We’ll be right back.
[commercial]
Patrick: Welcome back to Financial Fortress radio. This is Pat Dougher. Rich, we’ve been talking about Goldman Sachs. They’re in the news again. And this time, it’s a bit of a nightmare.
Richard: It’s not pretty.
Patrick: So, tell me more. SEC is coming after them. What did they do that was so offensive?
Richard: Well, they created these products with an affiliated outside company that they have a vested interest in. And basically, these products are in the category called collateralized debt obligations or collateralized mortgage operations otherwise known as mortgage bonds.
Now, the bonds people are familiar with are the ones sold by Fannie Mae and Freddie Mac which also, by the way, almost went belly up and the Federal government had to rescue them.
And it all had to do with the subprime mortgage bonds being grouped together and sold and rated as a AAA investment by the bond business and, as a result of that, people bought into them. And not just people, but major investment banks around the world. It’s affected the economies of almost all the industrialized nations globally.
So, certainly, there’s been damages done and the SEC would like to get money back for investors here in the US which will run into the billions of dollars.
But, they’re also individual banks – large investment banks – that have been run out of business because of this and others whose stock have dropped like a rock.
Patrick: Now, isn’t this the first domino, though? When you think about Goldman Sachs, that’s the big boy – or one of the big boys on the block. But, this problem of – they’re another kind of derivative I imagine of a bond, aren’t they?
Richard: Exactly. It is that whole category called derivatives that the government now wants to regulate under Obama and it’s very difficult to do because it gets into the area of commodities and options. And as a result of that, it’s going to include a very big area because commodities and options are used effectively to manage risk for agriculture and for the mining business.
But, collateralized mortgages, that grouping turned out to be a total nightmare. It was very similar to what happened in the savings and loan crisis in the early 80s. People bet too much on real estate going up. And as a result of that, somebody got left holding the bag.
Patrick: Now, as far as this real estate debacle, it’s really just in its infancy, isn’t it? A lot of people are hurting and I’m not trying to bring bad news, I’m just going – we’ve got a whole slew in the next few years of adjustable rate loans that are going to start falling into this black hole.
Richard: Exactly.
Patrick: Wow.
Richard: Yeah. There are still more foreclosures to come. I heard from somebody in the mortgage business that has 25 years experience just Friday that the business, the top 10 or 20 mortgage banks that sell mortgages in the Dallas/Fort Worth metro are about to release 90,000 foreclosures onto the market.
If you drive down the streets of many subdivisions, you’ll see houses where the weeds are growing up – and in nice areas as well as poor areas – and they’ve got a white sticker in the window that says there’s antifreeze in the pipes and please don’t try and drink the water.
That’s a house that’s been foreclosed on, but it’s empty. And rather than sell it when the market was down, the banks have been holding onto them. Now, they’re ready to dump them on the market, so we’re going to see another wave of real estate pricing attacked by this strategy because the banks didn’t want to take the big hit for their bad decisions.
Patrick: Well, who’s going to take the hit?
Richard: Well, obviously, the people that still own real estate in those subdivisions. And some of these subdivisions are golf course communities. They’re wealthy communities along lakes, they’re not just middle-class neighborhoods. This going to his across all socioeconomic boundaries. It’s not just in poor neighborhoods.
Patrick: Well, it would seem to me that if that happens, the government may actually have a vested interest in trying to keep some property values up. And the only reason I’m thinking that – let’s say in my subdivision 25 homes were sold, dumped; well then, my resale value drops to the floor.
Richard: Exactly.
Patrick: But, if my resale value drops to the floor, then the tax bracket, or the tax value, that the area has assessed on my community, I can fight, right?
Richard: No, not really, because what happens is you go to the committee that assesses that personal property tax and they say, “I’m sorry. That was a distressed home sale. We consider that an [21:37 inaudible] statistic and we won’t count it in the average value of homes in your community. Your tax is still as high as it was last year.” Oh, my God. Yeah.
Patrick: And it’ll probably even get raised higher.
Richard: Well, it can, but mostly they’re staying flat. But, it’s still unrealistic because of the property that’s been dumped on the market in the last couple of years. So, a lot of people have gone to fight these property values have been severely disappointed in taxes.
Patrick: Wow. That is amazing. Well, I will tell you, you should come to Richard’s event. It’s April 27th and May 4th. It will be at Brookhaven Country Club. Start at 6:30. Call and register. It’s 972-325-1700. And Richard, who should really attend this?
Richard: Really, anybody who is interested in becoming a smart investment advisor, anyone that is interested in doing a better job of getting returns with their money with the same amount of risk, much higher returns or anybody that wants to reduce the amount of risk they’re taking and get the same kinds of returns they used to get several years ago before we went through this big bear market.
Patrick: Now, to attend, you really need to have a little bit of a head start. You’re not looking for somebody that’s just beginning the process. You’re really looking for folks that have an IRA – well, actually, between the husband and wife, have an IRA and it has a significant value. What’s a good range for you?
Richard: Typically, $250,000 or more.
Patrick: Very good. So, that’s 972-325-1700. If you’re really looking for the right kind of advice to get you where you want to go in the next few years, then you’ll want to come to this event. If you want to join the conversation, it’s 972-299-KSKY (5759).
Richard, I know that this conflict of interest that Goldman has gotten involved in, it’s not even the tip. There are a lot of other ones out there is I guess what I’m trying to say, aren’t there?
Richard: Basically, the top 50 banks were involved in this subprime mortgage crisis. They’re just getting singled out because they were one of the companies that first created this kind of instrument. They were also involved in creating the insurance instrument called the credit default swap that basically guaranteed those investments.
Unfortunately, for about three or four trillion dollars in bad real estate loans, there’s over $64 trillion in credit default swaps that have been sold back and forth in a spider web between the top 50 – 100 banks.
And if I call yours, you’re going to call mine, and then he’s going to call his and all these banks are going to make demands on each other and it would bring the whole system down, so it’s never going to happen. These insurance policies that were created for the subprime mortgage business will never be collected on because it would literally decimate the financial system. So, it’s just one big joke on the investor that put his money in it in the first place.
Patrick: My goodness. That is just amazing to me. I know that a lot of people are thinking, to a great degree, that the worst is over.
Richard: Right.
Patrick: But, you’re saying that it may just be getting started in some areas. Is that what I’m hearing?
Richard: Well, like I said, that value of your real estate is really probably not going to go anywhere fast anytime soon. And a lot of the reason we’ve seen increases in the market in this first quarter was the stimulus that the Federal government put out there for first-time buyers and also for people moving up.
Now, that stimulus package ends at the end of this month. If you don’t go out and buy a house by the end of April, all that’s gone. And we’ll see what the real numbers are after that.
Patrick: What’s the opportunity in this? What do you think is the opportunity that either investors or people with money have when everybody is running in the other direction right now in real estate?
Richard: Well, again, when it looks like the market is going to be dropping, you want to be shorting the market. And when it looks like it’s going to come up, you want to be investing in it. So, I would still be shorting real estate investments like real estate trusts.
You may notice that the number of commercial foreclosures is still going up and that’s a direct result of the lack of consumer spending.
Patrick: Man. I understand. I know that you’re going to be covering a lot of this information at the next workshop.
Richard: Absolutely.
Patrick: And that’s April 27th and May 4th are the next two that are coming up. You can register at 972-325-1700. Now also, if somebody wanted to get in touch with you directly, they can call you at 972-758-4484. Is that right?
Richard: That goes direct to my desk. If I’m not in a meeting, I’ll take that call.
Patrick: Excellent. I know that for some people that are not calling in right now, but they do want to connect with you, I want to make sure that they have your number which is 972-758-4484. And Richard, you cover all of the Dallas/Fort Worth area, so if you’re in the area, give him a call. I know that you’ll enjoy working with Richard. I have, and you will too. We’ll be right back.
[commercial]
Patrick: And welcome back to Financial Fortress radio. This is Patrick Dougher and Richard Jordan here. We are talking about investing the smart way. What I’m really talking about are ways that smart money invests to lower risk, increase return and, really, then transfer that wealth that they built to the next generation.
Richard, I know you’re an investment strategist in the Dallas/Fort Worth area. You have been after this for a long time. You’ve worked with very wealthy individuals and you found that there are some keys to investing the smart way. What are some of those keys?
Richard: These keys work whether you’re wealthy or just middle-class. So, we’re not interested just in working with wealthy clients, but the secrets that we’ve learned to keep the wealthy happy are the same ones that the middle-class are ecstatic about.
The first, of course, is how to get high returns with low fees. The problem is, in the current scenario, most people that get into the stocks and bonds market are sold funds, mutual funds of various sorts by the brokers because that represents a high commission environment for them, and that isn’t the best place to make money.
Patrick: Well, tell me a little bit about that because when I think of mutual funds whether they have charges up front, or internal, or whatever, but I know you’ve done some research on this and found that the returns that they post are not always the truth in investing.
Richard: It’s not the whole truth I guess is the best way to put it. The SEC allows them to advertise their gross return, which is the top line, and all their costs are buried in a 100+ page prospectus.
As a result of that, the costs of an average mutual fund range from 5 – 8%. And so, when you look at a fund and it says it’s been making 10% the last ten years and you’re paying 8% in costs, you’re really only getting a net, bottom line, about 2% on that fund, but you’ve got to go through over 100 pages of material to find that.
Now, I know how to go through a prospectus and rip it up in about an hour, but most people won’t even touch it because it just looks too intimidating.
Patrick: Now, is that also assuming that they’re in a tax free investment like an IRA? Because if they’re just in a regular investment, wouldn’t taxes and inflation be eating those things alive?
Richard: Well that’s, of course, always true that taxes and inflation affect your investments just as much as fees do.
Patrick: Wow. So, what’s another key that the wealthy use?
Richard: Well, they’re always looking for a way to get high returns without stock market risks so that they can balance out their assets across multiple areas. So, a lot of the things that are pushed today to get that by the commission marketplace includes things like life settlements and we know that that is a conflict of interest environment.
It’s kind of like the Wild West out there. It’s very thinly regulated, the returns are hard to verify, and the cost of doing business is very high, and the liquidity is almost nonexistent. If you buy are share of somebody’s life insurance policy and you need to cash it in right away before that person matures – that’s what they call it in the business. It’s kind of a joke, isn’t it? Matures?
Patrick: Sure.
Richard: Before they pass away, what’s it worth? Well, there is no secondary market to sell that thing on.
Patrick: Well, one of the things that we might be doing is losing some people on this term. A life settlement – how would you define it?
Richard: It’s a share of a life insurance policy that you bought into for the purpose of an investment hoping that person would pass on.
Patrick: And they try to buy them with the expectation that that person will live…
Richard: A certain life expectancy.
Patrick: Three to five years or something like that.
Richard: Typically, that’s the range. Yes.
Patrick: But, if someone invests in that – in fact, didn’t you have a client that they had invested in it and then they needed money?
Richard: Well, I had a lady come to one of my seminars and she bought almost a half million dollars worth of these things from a guy that’s on the radio on another station on Saturday mornings and this guy always pushes nothing but life settlements. It solves all financial problems.
Well, it didn’t solve hers because less than a year after she spent 95% of her retirement money on this concept, she needed cash for her husband’s health and she couldn’t cash these things in. There was no way for her to cash in. She needed money because the health insurance company wouldn’t invest in procedures that he needed to guarantee his life was going to be extended.
They call them experimental procedures because he was in a rare category of disease, so anything that you treat it with, obviously, doesn’t have enough statistics so they can call all treatment for that kind of a disease experimental – funny how that works.
Patrick: Interesting. I know that there is a lot of money that’s running into that arena. I also know that, right now, it’s fairly unregulated and that usually is a future landing spot for the SEC or somebody like that anyway, isn’t it?
Richard: Yeah. We certainly hope that there is some regulation done soon there to protect the investor. Now, other things we talk about at the seminars is huge estate and income tax savings ideas because, for some reason, people that have already paid taxes accumulating an estate don’t want to see that estate evaporate when they pass away because Uncle Sam wants to attack the estate and collect taxes from somebody that’s already gone. Uncle Sam finds it pretty easy to collect taxes from somebody that isn’t around to object to it.
Patrick: Right. I know that there are some easy strategies to put in place – structures if you will – to protect someone’s investment. What’s sad is that some of the biggest boys in America throughout the years, have said, “I know more than those guys. I can set it up myself.” And then guys like Disney and the Vanderbilts, they get just walloped with sometimes 10, 20, 30, 40% of their estate going to the government.
Richard: Over half.
Patrick: Over half.
Richard: In fact, we could see estate taxes up over 50% again because only 10% of the people pass on with more than a million dollars and the other 90% of the population considers those people wealthy even though the book, The Millionaire Next Door, says that two out of three of those millionaires started with nothing. They just did a good job of saving their money and investing it prudently.
Patrick: Wow. Well, I do want to make sure that people know about your workshop. It’s coming up April 27th and May 4th. It’s at the Brookhaven Country Club. Starts about 6:30, but you have to register for it. If you want to come, register at 972-325-1700. Now, is there any cost associated with this?
Richard: No, there is no cost.
Patrick: Okay. And you’re going to be teaching about these principles that we’re talking about right now and more, a lot more, because there’s a ton more information that you present that is really insider secrets that they walk away with some massive value.
Richard: Absolutely.
Patrick: So, it’ll be a great workshop. I hope you come. If you want to join the conversation today, it’s 972-299-5759 (KSKY). Just call in. You can ask Richard about your situation, how he might be able to help you get clarity and maybe get you some better options than you might currently have.
So, I know that there’s a few more secrets, some more keys. I want to make sure that we go to those. So, what’s next?
Richard: Well, one of the things we talk about is taking the emotion out of investing. If you take the emotion out of investing and use mathematical analysis, you can determine much better when to enter and exit the stock and bond markets because if you use your emotions, you’re going to want to buy high and sell low.
By the time you think it’s okay to get back in, the market is already run-up. Most of the run-up it’s going to have in a bull market and by the time you’re willing to admit you made a mistake and the market’s slid, often most investors that self-invest and even their advisors, because they invest with emotion and don’t use mathematical formulas, sell their stuff when it’s near a low.
That’s the opposite of how you want to make money. You want to buy low and sell high obviously. So, you need to use mathematical constructs in order to make those decisions and that’s the toughest part in advising a client is for me to go against their nature and emotions and tell them, “Look, you have to trust me on this. This decision is made best mathematically.”
Patrick: Right. But, the only thing about that is that usually the buy or the sell signals come at the exact emotional moment when that’s a wrestling match. Wouldn’t you agree?
Richard: Absolutely. In fact, there are reports out there that consistently indicated in the last 75 years that when 60% of the advisors are telling you to buy, you need to sell. When 60% are to telling you to sell, you need to buy.
Patrick: I’ve also seen that one of the best sell signals is when the investment shows up on the cover of Time Magazine. That’s it. It died.
Richard: It’s already over. That’s right.
Patrick: Well, I know that you’ll want to go to Richard’s workshop. You can register at 972-325-1700. It’s April 27th and May 4th at Brookhaven Country Club 6:30. You’ll want to be there.
You can also connect with Richard directly if you have a question for him Monday through Friday at 972-758-4484. It’s his direct line.
[commercial]
Patrick: Welcome to Financial Fortress. This is Patrick Dougher and Richard Jordan. We are talking about the way that smart investors preserve their capital, invest right, really weather these financial storms, and we’re helping people create a financial fortress.
Richard: Absolutely.
Patrick: I know a lot of the stuff we’ve been talking about, Richard, is emotion versus systems. You use formulas. Everything you do is formula based.
Richard: Absolutely.
Patrick: And I know that you’ve seen how that really does create the best returns and the smart money tends to use formula based investing. So, who’s one of your – I want to call it icons. Who’s one of your people you look at and go, “That guy does it right”?
Richard: One of the heroes of the business is a fellow that figure out that the simple formulas that everybody was using like 200 day moving averages back in the 70s and 80s didn’t work anymore when we had the market crash in 1987 on Black Monday – 22% drop in one day.
Patrick: Well, I will tell you. I was there. I had just gotten into the industry. I’m not a financial advisor anymore, but back then, fresh in, 200 day moving average on Friday gives the signal to close, but what happens on Monday?
Richard: 22% drop and most brokers you couldn’t even reach until Thursday after the market had dropped 31%.
Patrick: 508 points. That’s all I remember. 508 points in one day.
Richard: More important, it was 31% drop.
Patrick: No one could get a hold of anything. You couldn’t get a hold of your broker until Wednesday anyways.
Richard: No. He was either hiding under the desk or he’s already thrown himself out the window.
Patrick: It was really bad.
Richard: It was.
Patrick: There was a lot of people that were really shocked. Now, today, 508 doesn’t sound bad.
Richard: No, not out of 12,000 or 11,000, which is where we’re at right now, but back then one of the professors at Harvard had figured out – he had been tracking his formulas against the market for years and he created a fund back in ’88 that was just for the wealthy. Minimum investment $10 million, and now it’s $20 million, and it’s made consistently over 30% a year after fees.
Now, remember mutual funds talk about gross returns and they hide their costs in a prospectus, but when you come to my seminar, you’re going to hear about what the returns are after fees. Does that sound like a smart way to get information?
Patrick: Well, it seems to me like the right way to look at anything.
Richard: Wouldn’t you want the bottom line first?
Patrick: Well, it’s the only one that counts last time I checked. That’s the one that actually means something. And by the way, I just want to make sure people know. You can go to Richard’s April 27th or May 4th workshop at Brookhaven Country Club by calling 972-325-1700. Now, I know that he’s done really well.
Richard: He has for really wealthy people.
Patrick: Right, but that’s one of the keys is that he did it right from the beginning. He just worked with the people that understood his game and it made all the difference.
Richard: And now, smart investors have gotten behind that too, but they still represent a small percentage of the market. So many people just want to buy from a brand name because it’s easy. They see the name on television a lot. They got familiar with the name, perhaps, as the provider or guardian of their 401K at the big company they worked at, so they assume that this must be the best place to keep their money, but the private funds that are mathematically based do much better.
Patrick: Is it hard to find people that use that approach?
Richard: Well, there aren’t many out there because these funds are not commission driven, so the brokers don’t want to sell them. They know about them. They may put their mom in them. They put their brother in them, but they’re sure not going to put you in them because they’re not willing to lose their job over it or work for nothing.
Patrick: So, what you’re really rolling out of these different workshops are the secrets that the brokers, don’t want you to know.
Richard: Exactly. They don’t want you to find out that there’s a better way to invest your money. They’d rather that you just keep watching the commercials on the golf tournaments, on the sporting events, on the 6:00 news, and think that that big brand name is going to take care of you and help you walk along the beach after you retire for 40 years, and it’s just not going to work because they take care of themselves first.
Patrick: But, Richard, I was told that I was supposed to buy and hold.
Richard: I understand. Buy and hold worked pretty good back in the 50s, and 60s, and even into the 70s, but by the time we got into the late 80s – well, Black Monday 1987 was a perfect example of why buy and hold didn’t work because it took six years to get that money back. And if you did buy and hold during this last spare market, you’re still not back up to $14,000 are you?
Patrick: Well, and that’s the thing is that you seem to go sideways and there’s a ton of bad debt that’s out there. Wouldn’t you agree?
Richard: Right.
Patrick: So, what are the things that people will really walk away with at this workshop coming up?
Richard: Well, not only buy and hold won’t work, but all these suggestions that you read about in the newspapers and magazines about, “It’s simple. You can just lay on your couch and divide your portfolio into two or ten pieces and invest it in the certain categories of assets and fall asleep and just rebalance it once a year and become wealthy,” doesn’t work because most of those strategies pretty much follow the S&P 500 or one of the other major indexes like the Russell 3000, and all of those have lost money in the last ten years.
Patrick: But, I always thought that you could use some fund analysis service out there and find the very best.
Richard: Unfortunately, the services, that you can find on the Internet for free, are the ones that help you chase the returns in the past. You can’t determine how to do investing for the future and that’s the problem.
If you’re chasing returns that have already occurred, you’re going to be following the herd. You’re not going to be using formula based investments. You’re going to be using your own emotions to make the decision.
Patrick: Right. Well, I’ve never seen driving looking out my rearview mirror as the way to live long and prosper.
Richard: Good way to smack into a semi.
Patrick: Yeah. That’s a good way. We’ve seen that around here. Okay. So, we’ve got not real good returns in the last ten years. Buy and hold doesn’t work real well. Formula based makes all the difference.
Richard: Absolutely.
Patrick: I know that there’s also some, well, some opportunities that the big brand companies don’t look at. What would be examples of some of that type of investing?
Richard: Well, again, the big brand name brokers are driven by commissions and commissions are found mostly in the mutual funds and the variable annuities. And I’m not saying that annuities by themselves as a category is a bad idea for an investor, but once an investor gets older and he wants to preserve his capital, a variable annuity is just another way to buy a mutual fund. That represents a lot of risk.
So, the fixed annuities are the better way to buy annuities for people who have already arrived. Variable annuities really are more suitable for people in their 40s.
Patrick: Now, I know you also promote certain nontraditional asset allocation. What would be an example of some nontraditional investments that you might consider at this time?
Richard: Well, one of the things you should look at right now, of course with the record spending with all of the governments around the world, not just the Federal Government of the United States, is you should look at precious metals right now.
Precious metals are important, but you may not want to buy them and hold them in a safe in your house and then worry about how many guys you’ve got to hide in your house to protect yourself.
Patrick: Well, there is the old adage – God, gold, guns, and groceries. It’s the ultimate survival trip. Wouldn’t you agree?
Richard: Yeah, I’d like to sleep at night.
Patrick: The thing that’s kind of funny is that some people have been – either they’ve bought it and it hasn’t done well for years and years, so a lot of people sold it right before this last big run-up. Do you think it’s got very much further to go and we’re not even promoting it necessarily. We’re just saying – do you think it will do pretty well?
Richard: Yeah, I think over the next five years you’re going to still see some run-up and another thing you should be looking at is the fact that the bonds are definitely a bad place to be right now and you want to short them. We’ll talk about all that at the seminar.
Patrick: That’s great. Well, come to the seminar April 27th or May 4th. Make sure you call to register at 972-325-1700 for Richard’s event. And then also, if you want to call Richard direct, 972-758-4484.
You’ll want to be with us next week 5:30 – 6:30 as we talk about how to create the Financial Fortress for you and your investments. We’ll talk to you next week.
Richard: Thanks again.

Financial Fortress Radio 4-11-10 Secrets of the Smart Investor

Patrick: Welcome to Financial Fortress. This is your host Patrick Dougher. Richard, we have a great show in front of us. I know that some of the things that you want to talk about to share how the smart investors really, not just make money, but they actually will retain their wealth and carry it through the other generations.
I know you came up with some stuff this week in one of the articles you were reading on a man from Duke, a Professor from Duke. So, tell me about that.
Richard: Sure. Let me tell you a little bit about Professor Dan Ariely. He’s a psychology and behavioral economics professor with 30 years’ experience; recently wrote a book called Predictably Irrational talking about how investors are far less rational than all standard economic theory assumes.
In other words, economic theory assumes that the market is efficient and we all know it isn’t. That’s why we have such rapid volatile rises and declines in this market without warning. And not just self investors are irrational, everybody assumes that.
We all know of a lot of people that have put money on the market themselves, tried to manage it themselves after being frustrated with their brokers, and lost a lot of money and didn’t want to admit it.
In fact, over 90% of the self-investors lose money consistently in the market and don’t even meet the stock market index returns.
Patrick: I understand.
Richard: The surprising thing though is that the fund managers, the guys that run the big funds – not just the hedge funds – but the big mutual funds and pension funds, as well as the stock brokers, routinely make irrational decisions.
Patrick: I wouldn’t think that that would be the case in New York or any investment because these are sophisticated investors, aren’t they?
Richard: Absolutely. And they have some of the best degrees from some of the best schools in the country. But, what he found from his research is that most people that handle large funds have so much money at stake that they actually become a cause of these financial meltdowns that we’re seeing more and more frequently in the markets. And why? Dishonesty? No. Incompetence? No. Conflict of interest? Yes.
Patrick: Now, how is it a conflict of interest?
Richard: Well, if you knew you could make tens of millions of dollars more a year simply by viewing a financial product, let’s say a subprime mortgage portfolio or something more complex like credit default swaps as something good when, in fact, maybe too complex to really be understood or it may not even be good at all. Odds are, you will be persuaded to go ahead and make that recommendation.
Patrick: So, everything is based on greed.
Richard: Unfortunately, it’s human nature. And he did a little research on greed. It’s kind of funny how it works. He started out with experiments with community refrigerators that students had access to and he would put a case of Coke in there and just see how long it took for it to disappear even though it was marked “do not take this Coke.”
Patrick: But it was a community refrigerator?
Richard: Sure, everybody had access to it. It was a common break room. You’ve probably seeing those kind of refrigerators.
Patrick: At the college.
Richard: Right.
Patrick: Okay. So, how long do they last?
Richard: Well, typically, a day whether it was 6 of them in there or 24. It didn’t matter. They pretty much disappear in a day. So, the next experiment, he took an equal number of dollar bills and laid them out on plates in the refrigerator. What do you think happened?
Patrick: I would think those would be picked up pretty quick, personally. I just think college kids; that’s lunch money sitting in the fridge.
Richard: Sure. So, the answer was none of the cash disappeared.
Patrick: Okay, that’s a disconnect.
Richard: Isn’t that something? So, the real reason for that is he thinks that we are taught not to steal and we recognize cash is something of value. But, when it comes to complicated financial documents and prospectuses that are 100 pages long that nobody really wants to read anyway, guess what? I don’t really want to read that thing. Somebody I trust told me it’s good. So, I’ve got a lot of money riding on this being good. I don’t really want to find out if it’s not good, so I think I’m going to recommend it.
Patrick: Okay. So, what you’re saying is they get a lot of emotional investment in that particular vehicle, a lot of emotional investment into that investment and they don’t want to give up. They just dive in because they’re scared not to take it.
Richard: They just don’t want to believe it could possibly be bad.
Patrick: So, they’re persuaded that it’s good no matter what.
Richard: They will take the advice of someone they trust, just like you take the advice of someone you trust. When you trust your broker who has large commissions at stake to make a recommendation on where to put your money; which stock, which bond, which mutual fund, which variable annuity, how can you be sure they’re making that recommendation with your interest only at heart?
Patrick: Well, one of the things I’m curious about just didn’t make sure that the audience understands the difference in the terminology, broker versus the other category I know is the Registered Investment Advisor. There’s a huge difference in the definition. Can you go over that again?
Richard: Certainly. So, a broker is a salesperson. They’re compensated for selling brokerage products with commissions from the brokerage house. Their primary duty is to generate the maximum commissions for the brokerage house and themselves, and their only duty to their client is to pick up product that is suitable. Well, “suitable” is kind of a vague term; very vague.
The wealthy people back in the 30s decided they didn’t want to have anything to do with brokers. So, Congress came up with a new category of advisor for them called the Registered Investment Advisor.
And the difference is a Registered Investment Advisor has a fiduciary duty to the client first and foremost. So, he has to take the client’s interest at heart first and foremost, and that’s the big difference.
And the scary part is 95% of the Registered Investment Advisors also carry a Series 6 and Series 7 license. They’re also a broker. And what that means is they operate every day under a conflict of interest in all these large firms out there, and medium-sized firms, and even small firms.
So, if your advisor is carrying a 6 and a 7 license, the only reason they carry those licenses is to collect a commission which means they have a conflict of interest. I highly recommend you read Professor Dan Ariely’s book about conflicts of interest.
Patrick: Very good. One of the things that I know a lot of people may want to do is join the conversation and to call in to speak to Richard. It’s 972-299-5759 if you’re in the local area. If you’re outside the area, you want to use the 800 number. It’s 866-660-KSKY on your phone.
And just join the conversation. Call us. Talk to Richard about well, is your broker, if you have one, doing you right? That’s a real key. A lot of people do not see that there is a huge difference in credibility to a great degree when you’ve got a conflict of interest there.
Richard: And not just credibility, but accountability. Don’t you want to be able to have an advisor that you can hold accountable? That’s the big difference. And if you want to find out more, we’re holding a seminar April 27th at Brookhaven Country Club at 6:30 at night. It will include a dinner if you’re interested in dinner. Hopefully, you’re just interested in investment information.
But, if you can’t make it there before you get to dinner, come on by. We’ll feed you, 972-325-1700. The seminar will be April 27th on a Tuesday and the following Tuesday on May 4th also, 972-325-1700 North Dallas, Brookhaven Country Club.
Patrick: Now, the people that really should be coming to that seminar, are there some qualifications?
Richard: Well, basically, our minimum client has 250 in investable assets. So, if you have less than 250, you might come just for the dinner, but you probably will hear some things that may or may not pertain to you.
Clearly, if you have over 250, you will hear things that will pertain to you whether you’re an aggressive investor, or very conservative investor, or just someone that doesn’t want to take any risk whatsoever.
Patrick: I will tell you, folks, that I’ve been to this seminar and I was really stunned at the quality of material that Richard was offering. I was really impressed with the fact that he’s bringing to the table solutions to many of the strategies or conflicts that people have in building and transferring their own wealth and their own investments to their next generation.
I know that we want to make sure that you have the opportunity to call in. It’s 972-299-5759 or 866-660-KSKY. Call in and join us at Financial Fortress Radio.
Richard, I know that we also want to make sure that we get to some of the key strategies. And I know, before the break, we want to cover a couple of strategies that smart investors use.
Richard: Well, obviously, the investors are always looking for high return, low fee investment solutions and we cover those at the seminar; all the full range of investment solutions that are there.
We also see a lot of investors looking for high returns without stock market risk. But, a lot of the things that are being sold out there today actually have other types of risks that aren’t being talked about and we’re going to talk about that in our next segment just in a few minutes.
They’re also looking for safe and hidden income opportunities and we will get to that. Many people are interested in passing things on to the next generation, or just to their spouses, correctly and minimizing their estate taxes. I think we’re going to see a huge amount of swing and the amount exemptions that are going to be allowed in estate taxes by the current Congress since they are looking for ways to generate taxes.
Patrick: One of the things that we want to do is encourage you to call in. It’s 972-299-5759 to join the conversation. If you’d like to get registered for Richard’s seminar, it’s 972-325-1700. We’ll be right back.
[commercial]
Patrick: Welcome back to Financial Fortress. I am really excited about the stuff in the news this week, Richard. We’ve got some of the things that go with that Professor from Duke.
Richard: Yes. We have a lot of news all the time that talk about conflicts of interest. After all, it was conflicts of interest that caused the financial meltdown back in the 80s with the savings and loans crisis. It was the same conflict of interest that caused the meltdown with the subprime mortgage crisis.
And we’ve got more conflicts of interest occurring in the market today as we speak. Just this week, there was an article in the paper about a Dallas/Fort Worth area firm that’s been barred from selling life settlements. You may have heard of these things.
So, you’re probably asking yourself why, and the answer was these products are very thinly regulated and, as a result, they don’t have to follow the same rules and regulations that other types of investments follow. They’re not really considered a true investment by the SEC. So, they don’t have to disclose the full range of risks that there are out there.
Patrick: Well, one of the things that some of the audience might be asking is, “What’s a life settlement? What are you talking about?”
Richard: So, life settlement is basically the purchase of an existing life insurance policy. You go in with a pool of investors to buy one of these things and you have an expected life expectancy on this person because they take a medical exam. You buy this thing hoping that this person – they call it maturing – matures and the policy matures within the range of time that you expect it to.
Patrick: Okay. Let’s decode that because I know that general populous – if I was out there listening and I’ve never heard of a life settlement before – maturing if the person dies?
Richard: That’s pretty much it, yeah.
Patrick: Okay. So, you’ve got these folks that may have what? Are they smaller policies or are they really large policies?
Richard: They tend to be policies of $500,000 to $1 million or more.
Patrick: Okay. So, somebody that’s maybe 75 or 80 years old has a policy that’s $500,000 or $1 million or more and a group of investors purchased this at some discount.
Richard: Right, exactly.
Patrick: Okay, because the person is expected to live no more than how many years?
Richard: Typically, three to five years are the most common policies that are purchased, but they go out to seven years. So, the range of investments for this thing, period, is five to seven years.
Patrick: Okay. So, the expectation is that this person will live five to seven years or less, maybe three years, they buy it at a discount. When it matures, when the person passes away,, then the policy becomes…
Richard: Paid.
Patrick: It is paid, so whoever purchased that policy now gets $1 million?
Richard: They get the profit.
Patrick: This pool gets the $1 million and they split it back out to the investors.
Richard: Right.
Patrick: It would seem that there would be a lot of risks or illiquidity in something like that. Is that what you’re seeing?
Richard: Well, certainly, it’s illiquid. In life settlements, you really can’t determine when someone’s going to pass, can you?
Patrick: No.
Richard: You can guess. You can take an educated guess. That’s what these examiners do when they look at medical files.
Patrick: Well, the fact is this that, to the best of our knowledge, there’s only been a couple of people that didn’t die. I hate to say that, but it’s there. So, what are the risks?
Richard: Right. So, the risks that typically aren’t talked about much; the biggest one is that unknown amount of time until the policy is paid. And as a result of that, if the insured lives past the life expectancy, the rate of return that you expect can drop dramatically and the investor could have to ante up more money for a premium call.
And if they don’t want to ante up money for a premium call because they’ve been in this thing seven years and it hasn’t paid, they have to give up the amount of money a 100% that they’ve already initially invested in that policy. In other words, on each policy, you could lose both your principal and your returns potentially.
Patrick: Okay. So, they could lose it at all.
Richard: Exactly.
Patrick: But that’s never talked about. I’ve never heard anybody say you’d lose anything because they figured everybody’s going to die. And even if it’s out five to seven years; everybody just figures this person is going to die eventually.
Richard: It’s glossed over. It’s just glossed over. It’s in the fine print somewhere. But, it’s glossed over by the guys that sells these things because the rates of commissions on these products are even higher than mutual funds which the SEC limits at 8.5% per fund. Did you know you could pay 8.5% commission on a mutual fund?
Patrick: Well, in the old days, I mean back when – I have to admit – I was in that industry, that was about right.
Richard: Yeah, and the average is still around 5.8%.
Patrick: Okay, right. And even if you were to buy what they call – what is it? B-Share where you’re not paying an upfront fee, it’s kind of built into the internal things where you don’t pay anything, but if you pull it out early, you’ll get a penalty.
Richard: Right. It’s a five year to seven year investment typically on a B fund and you’re paying it over five to seven years. Now, if you take it out early, it has a surrender charge and you end up paying the rest of it then; just like an annuity has a surrendered charge.
Patrick: Well, I know a lot of people might have heard a lot about these things. They sound amazing. They may have even invested in it. I know you have some people that you’ve seen that have invested in it and there was not a lot of diversification.
But, you might want to join the conversation. It’s 972-299-5759 or if you’re outside the area, it’s 866-660-KSKY. That’s 5759 in the end there, 866-660-5759. Call in. Join the conversation. Ask Richard about what is your broker doing.
And if they really are putting your interest ahead of their own which, really, we’ve already kind of talked about that, the conflict of interest is there if they’re selling you a security that has a commission. Is that correct?
Richard: Or in this case, it’s not even considered a security and the rates of commissions are even higher than they are on mutual funds; much higher. So, in life settlements, you really can’t determine the risk, nor can you determine the liquidity. So finally, guess what they focus on when they try and sell you these things? The potential rate of return.
And anytime you focus only on the rate of return on an investment, what do you tend to be driven by? The irrational emotion of greed. And if you need the money for an emergency, can you get your principal back quickly? And if so, what is the surrender charge? The answer to both is uncertain. Let me tell you a story.
I heard recently from an investor. She retired from a major Fortune 500 company here early. She took her pension rollout fund of almost $500,000. She took that money to an advisor that put over 95% of her money into these life settlements.
And she came to my seminar about six months later and she was in distress. I said, “What’s the problem?” She says, “My husband has a rare heart condition, needs an operation and the insurance company won’t pay anything towards the procedure because they consider it experimental.”
She keeps calling the guy that sold her these things. He’s on another radio station for two hours in the morning on another day, and he won’t return her calls. She keeps asking, “How can I sell these things? How can I get rid of them? I need $100,000 to save my husband’s life and I’ve tied up almost a half of a million in these things. What can I do?” And there’s no good answer for her.
Patrick: Because if she goes to resell it, what will happen?
Richard: Well, there’s really no market to resell it. It’s not like a stock exchange; you can’t list it on the NASDAQ, you can’t list it on the New York Stock Exchange. There’s nowhere else you can go with this thing except to call the company that created it and they have about a 30% cost of sales and administration in these products. So, let’s face it. They’re probably not going to offer more than what? 70 cents on the dollar for it.
Patrick: If that.
Richard: So, if you’re thinking about a 30% potential surrendered charge, does that sound like the kind of place you want to put your money? Is that really an investment?
Patrick: Well, I’m curious because I sit there and think IRA –you think it would be a longer-term investment and yet, how many times when people retire, now they’re having to draw off of that, so that becomes their liquid pool and that’s where they see all their money is.
So, if they need it, you’re stuck. One of the things that I want you to do is I want you to call in at 972-299-5759 to join the conversation. You can also, if you’d like to hear Richard speak on all of this successful and smart money investing, I want you to join us at the seminar. It’s 972-325-1700 to get registered for this upcoming seminar. You will not want to miss it. Thank you so much. We’ll be right back.
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Patrick: Welcome to Financial Fortress. This is your host Patrick Dougher. Richard Jordan, you have some more information about the difference between brokers and Registered Investment Advisors.
We want to talk more about this. I call it lemming approach to investing and kind of follow the herd off the cliff. So, we talk about the smart investor. It’s the person that understands that there’s a lot of ways to buy things, but the least conflict of interest is somebody where pay for the advice, you get the advice. Wouldn’t you agree?
Richard: Absolutely.
Patrick: So, why don’t you to go over real quick the difference between a broker, Registered Investment Advisor. And if you have questions for Richard, you want to call in at 972-299-5759 to join the conversation. Go ahead, Richard.
Richard: So again, Pat, a broker is a salesperson. They are more highly educated than the guy down at the Cadillac or Lexus store, but his duty is the same. It’s to derive commission. It’s their primary duty. If they want to keep their jobs, that’s what they have to do.
So, the kinds of investments that they’re going to put clients in first are the kinds of things that allow them to keep their job and make a good living. It makes sense, doesn’t it, Pat?
Patrick: Well, you’d think, knowing that that industry is driven by that, but when we started this show, we were talking about how so many investors – and when I say investors, I’m talking straight across the board all the way up to fund managers.
Richard: That’s right.
Patrick: They make their decisions because of an emotional buy-in without taking into consideration the rest of the story. Is that what you were saying?
Richard: Well, the conflict of interest causes people that are normally very smart and very educated – I see it all the time. It’s not just the fund managers that are this way. We do a lot of business in the Plano area, although we’ve got offices throughout the Dallas and Fort Worth area. We see a lot of the engineers that work in that area, in the telecom area and up in the Plano area for EDS trying to self-manage making obviously irrational decisions. And these are smart guys, probably smarter than me.
But as I tell them all the time when they first bring me their account information, do you remember the story of the tortoise and the hare? Well, you’re the hare. You’re the guy that’s trying to spend two hours a week to figure out how to do it while you’re working your full-time job or while you’re working on full-time retirement and I’m the guy that studies 30 hours a week and you may be smart than me, but I keep moving.
Patrick: Right.
Richard: And because I keep moving, you may get ahead of me for an hour on a given day, but you won’t stay ahead of me. By the end of the day, I’m going to be back ahead of you.
Patrick: Very good. I know that a lot of brokers though – well, they’re supposed to do research.
Richard: Well, they don’t. They basically are told to spend 97% of their time in a selling mode and only 3% of the time do they have an information gathering mode and that mode is the branch meeting. The branch meeting is where they’re told what stuff to sell.
In other words, a broker/dealer is not just a broker that carries that does buying and selling for you. They’re a dealer that carries inventory. And when they’ve got too much inventory and they want to get rid of it because they’re scared the value of it is about to drop in the market, they start paying extra commissions and spiffs to the brokers to get rid of it, creating an additional conflict of interest.
Patrick: Well, how do you identify the, one, the Registered Investment Advisors, but even beyond that, how can you find the right people to help you? I know the wealthy and the smart money, they have some, let’s say, litmus test, they have some queues that they follow. What’s some of the wisdom they have?
Richard: Well, their queue is that they’re only interested in dealing with someone that is a registered advisor who has a fiduciary duty. Nobody else do they want to do business with. That’s the way the smart money does it because if they can’t hold them accountable, if they have a conflict of interest, obviously you can’t trust them because they can’t even trust themselves.
That’s what this good Professor found out is that even the smartest people in this business make mistakes because of the potential amount of money that’s at stake.
Patrick: Now, when you say fiduciary, what are some of the examples – I know a lot of the more affluent will understand that immediately. They get it. But, there are a lot of listeners that are going, “What do you mean by fiduciary?”
Richard: So, a fiduciary is the same as the person you trust most in the word like your spouse. But if your spouse passes away, who would execute your will? Who’s the executor? If you and your spouse both pass and you have a trust, who is the first successor trustee, the one you trust the most after that?
That person is someone that you trust to take a fiduciary interest to follow your intentions to the letter what your goals are, the amount of risks that you’re willing to take. They’re going to follow that closely and they’re going to get you the maximum rate of return for the amount of risk you’re willing to take, not for the amount of risk that the broker thinks you should take. Maybe the broker thinks it’s more suitable for somebody at your age to take more risk and he puts you in something that you don’t really want to be in.
Patrick: Now, you’re going to be covering all of these in your workshop and more.
Richard: Absolutely.
Patrick: When and where is that again?
Richard: We’ll be at Brookhaven Country Club as our next one, April 27th. That’s a Tuesday. Or May 4th that’s the following Tuesday at 6:30 p.m. All you have to do is call 972-325-1700 and leave us your name, address, and phone number and we’ll be glad to send you a confirmation.
Patrick: What was the number again?
Richard: 972-325-1700. And by the way, of course, it’s not open to other advisors or agents that are out there.
Patrick: Okay, so 972-325-1700. Come, hear you talk about how really the smart investors, the more astute money in the marketplace are using their wisdom, their keys, their secrets to get great returns with the right amount of risk.
And one of the things that I know is that these guys don’t hang around in investment. They move their money around, don’t they?
Richard: Well, we use a lot of different algorithms, that’s formulas, mathematical formulas, to make decisions for people because the numbers don’t lie. I’m a person that happens to love numbers. I’m a numbers guy. And I can tell you that the numbers don’t get emotional.
So, if you can find a formula that works in a different type of a market cycle and obviously the market moves through multiple cycles as we go from bear to bull, the bear to bull.
Patrick: That’s up to down, up to down.
Richard: Exactly. Then, you’re in a much better shape than somebody that tries to do buy and hold.
Patrick: Now, that’s kind of going against the grain, but I want to make sure that people understand we’ve been taught forever, it seems like, for the last almost 100 years that buy and hold would have made a 10% or so rate of return over the last 100 years. What do you mean that buy and hold doesn’t work?
Richard: Well, buy and hold only works for certain periods of time and that’s why the brokers only like to quote time periods that it works in. So, if they quote you the last 20 years and tell you you could have been making 11% a year in it. What they don’t want to tell you is that you’d have lost in there with a 2% or 3% a year over the last ten years.
Patrick: That’s the key and I know that there are expenses internally and stuff like that that even erode more, and then there’s certain amount of inflation. So, there’s lots of things that are hitting your money.
I know that a lot of people may want to ask a question, so I encourage you to call 972-299-5759. Richard, I know people may want to call you after the show like next week and connect with you. Can they get your direct number?
Richard: Sure. You can reach me if I’m at my desk, and not in a conference with a client, you can reach me at 972-758-4484. And your best bet is to call earlier late in the day because I’m always trying to maximize returns for my clients when the market is open.
Patrick: Very good. So, that’s 972-758-4484, your desk right to you. And if you want to register for the event that’s coming up, it’s 972-325-1700, right?
Richard: Correct.
Patrick: 972-325-1700 and connect with Richard and come to this event where you can learn really what the smart money – one of the things I’m really surprised with is that you didn’t sell anything in that event. You weren’t selling. This is not about – there’s no pitch fest here. This is just information.
Richard: Not pitching any particular product or approach. Every client has a customized portfolio that is based on their attitude towards the market, the amount of risk they want to take, the amount of returns that they need to make.
We consider their budget and their cost of living raises. We build that all into 30 year plan so that we can be sure that their money is going to last longer than their retirement.
Patrick: That’s really a key. Call in. Join us here at the Financial Fortress Radio at 972-299-5759. And call Richard at his desk next week. It’s 972-758-4484.
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Patrick: Welcome back to Financial Fortress Radio; Patrick Dougher, Ricahrd Jordan. Richard, we’re talking about the conflicts of interest that many brokers have with their own clients and why, so many times, their investments don’t work out, that buy and hold doesn’t work, that because there are time periods when it’s 0% or less than that. And one of the things that I look at; my question is, really, why is it that the vast majority of mutual funds fail?
Richard: Well, again, the research done by the Professor indicates that there’s a conflict of interest even at the mutual fund manager’s level. And as a result of that, Lipper, an analytical firm that studies the stock market and the performance of funds, determined that 82.6% of the mutual funds did not beat the S&P 500 Index in the last 20 years.
Now, these are guys who are getting paid tens to hundreds of millions of dollars to do so and yet, only about 17% of them can do it.
Patrick: Well, I would figure that those guys with that much, essentially, revenue, that they would have the best information, the most researched, the most current, up to the second research about every single investment.
Richard: They do.
Patrick: That they would be able to make, you would think, the best decisions and yet, you’re saying that only 17% of the analysts out there, or the mutual funds out there, are beating just the norm of – just bought the S&P 500.
Richard: Exactly. And what’s worse is most people in the United States are scared of buying anything but a domestic stock fund. So, they stay away from the international funds. There was an article in The Dallas News just prior to the last bear market starting that said only 6% of the domestic stock funds beat the S&P 500 Index. So, that’s a 94% failure rate.
Patrick: You know what’s really said is that, again, you think these guys have the best information.
Richard: It’s not a question of information. It’s a question of enough time to process the information and a question of a conflict of interest. So, let’s talk a little bit now about what kind of returns the investors actually receive.
Patrick: Go ahead.
Richard: So, Morning Star did an analysis just before the last bear market occurred and they asked investors to send in the data on the funds they had owned for the last 20 years. And they asked them by sending out over 20,000 applications and they got over 2,000 of these surveys back, which makes it a scientific survey with a validity +/- 3%, about the same you see in the best polls in these Presidential races.
And what they found out is the top 50% of the mutual funds in that time period that ended in ‘06 generated an advertised rate of return of 9.65%, which is good. You could double your money in eight years with a 9% rate of return. Many investors would be ecstatic with that.
But, they also went through and read the prospectus. Oh my God, the prospectus. And what did they find out when they read the prospectus? They found all the costs because that’s where they buried. The SEC allows them to advertise the gross rate of return, but the bottom line – what the investor actually earns – is buried in the prospectus with the expenses.
And what they found was the rate of return on the top 50% of those mutual funds ending in ‘06 for the previous ten year period, which was a really good ten- ear period, after expenses, 1.45% a year.
Patrick: Well, what would contribute to that much; almost 80% of the gains?
Richard: Isn’t that sad?
Patrick: What would contribute to the expense that you’re talking about there?
Richard: Okay. So, the average fund commission right now is 5.8%. That’s what Morning Star discovered.
Patrick: Okay. So, they’re paying a broker 5.8%.
Richard: Right.
Patrick: Then what?
Richard: Well, their expense ratios to run the funds; that can range up to 2%. Then there’s 12 B-1 fees.
Patrick: Now, those are what just ongoing internal fees that they’re –no, those are things they’re paying brokers, aren’t they? Would they call them trails?
Richard: No, that’s actually a little more complicated than that. What it is is it’s a fee that gets paid out of the fund that allows the fund to do marketing and advertising so they can make the fund larger by doing more marketing and advertising.
Patrick: So, what you’re telling me is that you’ve got 5.8%, plus a potential 2%, plus a potential almost 1%?
Richard: Mm-hmm.
Patrick: Okay. And then, what else would go into that factor?
Richard: Well, there’s turnover cost. Obviously, there’s the cost of actually buying and selling the stocks that they buy and sell every year. And then, the other hidden cost that’s in their prospectus is capital gains taxes. Who pays the taxes on the funds when something that’s sold that’s held longer than a year?
Patrick: Well, is it within the year or just whenever something sold with a gain?
Richard: Well, if it’s held more than a year, it’s called a capital gain. If it’s held less than a year, it’s ordinary income. And obviously, the investors pay all that.
Patrick: Well, I know that a lot of brokerage firms, a lot of mutual funds that have a big turnover, they all turn over their inventory almost on a quarterly basis. Now, the sad part is that what do they sell first? Is it the losers or what?
Richard: Well, it’s kind of funny. What happens is that the redemptions that occur when we get a bear market and investors get scared and they start selling their funds off as fast as they can is they don’t follow Finance 101 and sell the deadwood first. They sell the winners first. Why?
So, they can advertise a higher rate of return than the competing funds that are in the same category as them, allowing them to keep less money going out the backdoor. Why does the fund manager want less money going out the backdoor? Because his primary method of compensation is the size of the fund – not the performance of the fund –the size of the fund.
Patrick: So, if I understand you correctly, they buy maybe 1,000 stocks or they may buy 300 stocks and they’ve got so much money in each of them in their pool of say $10 million, or $200 million, or whatever. Let’s say $200 million and they’ve got 300 stocks in there. And you were saying that, let’s say there’s 12, or 15, or 18 of them that shoot up a pretty good amount, 30%-40%.
Richard: Right. Those are the ones that get sold first when the bear market occurs.
Patrick: And they keep their [54:20 inaudible]?
Richard: Right. And what that means is when you get a bear market and you hang onto your mutual funds and you’re watching the value, the net asset value, of that mutual fund fall on your statements every month and then next February rolls around and you get a 1099 because they sold some winners.
And that’s called the cash distribution to you, to the fund rather, and those cash redemptions, when they have to pay people back in cash because they want to sell of their mutual funds, they do it by selling the winners first and you pay the taxes on their bad behavior which is really a direct result of what? Conflict of interest.
Patrick: Boy, I tell you, that seems like a good way to hurt a lot of people.
Richard: So, how do you get around that? Well, a lot of people say by no-load funds. But, here’s what happens with no-load funds. If you compare the top 25% of the performers in no-load funds to the top 25% of loaded funds, you would expect a difference in performance to be that average commission of 5.8%, would you not?
Patrick: Well, I would, yeah. I would expect that.
Richard: It would be too logical. The actual difference is about 0.5%. Where’s the other 5.3%?
Patrick: Marketing I would imagine.
Richard: No, it’s not marketing. If I pay you 100% based on sales volume, that’s called a commission. If I pay you 90% based on sales volume, but only 10% based on a customer satisfaction survey, that’s called an operating expense and it gets buried in the prospectus.
Patrick: Okay. So, their operating expense is then for managing and running the stuff, the show or the mutual fund, that’s just being not – it’s not visible to the public, is what you’re saying.
Richard: Even though it really is a commission, isn’t it?
Patrick: That is amazing. Well, one of the things that I encourage you to do is hear Richard speak. Come to his seminar. You said it’s April…
Richard: April 27th on a Tuesday or May 4th the following Tuesday at Brookhaven Country Club in North Dallas.
Patrick: And how will they connect with you?
Richard: 972-325-1700 to register for the seminar.
Patrick: Okay, it’s 972-325-1700. And they also can call you this next week at 972-758-4484, correct?
Richard: That goes direct to my desk. I don’t pick it up a lot during the day because, again, I’m trying to maximize returns for my clients while the market is open up until about 3:00 PM. So, the best time to catch me at that number is after 3:00.
Patrick: Okay, and you’ll call everybody back that has a question or concern about their broker and really the difference between what a broker is and what you do. Is that correct?
Richard: Absolutely. And if they want an independent objective analysis of what they’re currently holding, we’ll do that free of charge.
Patrick: Very good. So it’s 972-758-4484, or come to this seminar April 27th or May 4th. Register at 972-325-1700.