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.