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Creating Wealth Episode 8: Intro to Financial Services

Creating Wealth is an in-depth conversation between Bill Taber, an experienced financial advisor, and his millennial daughter about personal finance, investing, and financial planning.



Bill Taber is President of TABER Asset Management, a Registered Investment Advisor (RIA) and fiduciary firm located in Des Moines, Iowa since 1998. For decades, Bill has provided investment management services to clients, creating wealth, building wealth, growing income, and preserving capital for each and every client. TABER offers personalized asset management, wealth management, retirement planning, financial planning, and services such as 401(k) rollovers.


His daughter, Anastasia, works in accounting at a global law firm in Washington D.C. She enjoys discussing finances and her cats’ latest antics with her dad.


Episode 8 - Intro to Financial Services: What are the different kinds of financial professionals you can work with and how are they compensated? Bill and Anastasia discuss the duties of a financial planner, investment manager, asset manager, and wealth manager, as well as the differences between a Registered Investment Advisor (RIA) and a broker. This episode serves as a basic introduction to the financial services industry.


For questions and comments, you can email us at askcreatingwealth@taberasset.com.


Click here to listen to the episode.


Anastasia: Welcome to Creating Wealth, I’m Anastasia.


Bill: Hi, I’m Bill.


Musical Intro


Disclaimer: The views expressed today are our own, solely for informational purposes, and it is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular investment strategy. The views are subject to change and are not intended as a forecast or guarantee of future results.


Anastasia: Great, so after quite a bit of technical difficulty and maybe some cat wrangling (laughs) we are finally ready to start this episode. I think it would be helpful if people had definitions to the different kinds of financial services that they can use or hire. I think it would be good to give people an overview of the financial services industry and starting with that, let’s discuss what is the difference between financial planning, investment management, asset management, and wealth management.


Bill: Well, starting with financial planning, a financial planner will help you develop a roadmap or a plan for moving from your point A to point B. Point A is where you are today and a financial planner will help you identify personal goals and deadlines for achieving those goals. They’ll assist in prioritizing those so that you know what’s most important. And then, look at your current money situation to identify any shortfalls or gaps that must be bridged.


Anastasia: So they kind of help you with budgeting?


Bill: Budgeting can be part of financial planning. It can be a very important part of it, specifically if you have difficulty with that or if you have debt that you would like to eliminate. Point B is they help you develop a plan to get out of debt, to increase your income, cut your expenses, save for retirement, college expenses, and any other long term priorities. I believe anybody can benefit from financial planning. Some people are natural planners themselves, others might need assistance to do this.


Anastasia: Okay, what individual do you think might hire someone to do this for them?


Bill: I would say someone that has trouble getting organized, getting started, someone that maybe doesn’t naturally create to-do lists.


Anastasia: (Laughs) What, those kinds of people exist?


Bill: They just need some help focusing and identifying where they are and also where they would like to be.


Anastasia: So it’s kind of like an entry-level type service?


Bill: It is an entry-level type of service for people that either have some money for investments or want to have money for investments.


Anastasia: So working with a financial planner could help them see what their shortcomings are and help them figure out what to focus on?


Bill: Yes, absolutely.


Anastasia: Okay, so then what is an investment manager?


Bill: An investment manager helps with the process of selecting investments that will help grow your money at a targeted rate of return each year, a return that you would like to get each year, and to get that return consistent with your tolerance for taking risk or accepting the volatility of prices/markets. Because with higher rewards come higher risks, and an investment advisor can help you develop a written plan, written guidelines, or a personal policy statement to help identify and invest in securities that will help you achieve your personal goal. Within this service, I think it’s important to understand the difference between a broker and a financial advisor. They differ in two areas, first the standards that they’re held to, and secondly how they’re paid. The standards that they’re held to--a broker is obliged to ascertain that an investment that they offer to you is one that is suitable based on your financial situation and your risk tolerance. An advisor is obligated to place your best interests ahead of their own. So it’s a higher standard, it’s a legal obligation that they have to act in your best interest.


Anastasia: Functionally, do they do the same work?


Bill: Yes. The second way that they differ is brokers are paid commissions for doing buy and sell transactions, whereas advisors are paid fees for providing investment advice. And so, probably the best way that I know to highlight these differences is perhaps to use an example that I know that you’re aware of, going back to the near financial meltdown in 2008/2009, there was a book that was written by Michael Lewis called The Big Short.


Anastasia: --Great book.


Bill: Yeah, and in that he discussed in 2006-2008, the period where brokerage put together bad loans, bad home loans, and then sold them to their clients as “high quality investments.” In that scenario these brokerage companies were brokers-dealers that were allowed to deal in investments that they themselves originated and profited from, and then received another payment when their agents, or their brokers, offered those investments to the clients and received a commission for doing that. If a person had been dealing with an advisor, rather than a broker, the advisor would not have been able to offer them that investment because it would be a conflict of interest.


Anastasia: How so?


Bill: The advisor would not be paid for putting the investment together and not be paid again for advising the client to go into it. The advisor is paid to put the interest of the client ahead of their personal interest, and so in the case of the brokerage companies, they got paid for putting together the investment, and then a second time for offering it to the client..


Anastasia: Well, it seems to me like the compensation models being different is pretty key. Because if they’re paid when they put together investments and clients buy those, then that incentivizes them to do that, right? Regardless of whether or not they’re good investments?


Bill: Mhm, correct.


Anastasia: Whereas a financial advisor, if they’re paid, say a fee, some very small percentage of the returns on a person’s portfolio, that’s incentivizing them to choose good investments that create a return that helps the client financially.


Bill: Yes, the advisor is paid for the quality of their advice. If it’s good and it benefits the client, they profit. If it’s not good and it doesn’t benefit the client, then they also receive less compensation.


Anastasia: Yeah, as opposed to sort of a transactional like, “Hey just get in on this deal.”


Bill: Yeah, the broker comes along and says, “This is a great investment,” and the client agrees, purchases it, pays the broker for getting into it. Whether it works out or not, whether it’s good or bad, the broker still gets paid.


Anastasia: Right.


Bill: And if it’s bad, it gets sold and the broker gets paid again.


Anastasia: Double payment! The fiduciary aspect seems really important.


Bill: Yeah, particularly, in terms of the law and the standard, yes. Because the law states as a fiduciary it’s your legal obligation to provide advice that is really best for the client and not best for you as a financial services provider.


Anastasia: Have advisors always been under that standard?


Bill: Yes, under the Investment Securities Act of 1940, firms that are Registered Investment Advisors (RIAs) have always been under that fiduciary standard. There is a separate act that is still in place that was the Securities Act of 1933 that allows for brokers and dealers in securities to offer investments to clients. That’s still in place, that’s a lower standard, that’s the “make sure it’s suitable for someone given their financial situation and risk tolerance.” But in the last ten years particularly, there’s been a huge rise in the number of people interested in dealing with someone that does not have a conflict with providing them advice. But this kind of goes against the traditional power and influence that the brokerage companies on Wall Street have had setting the laws, the securities laws in this country. And so there have been major brokerage companies that have been heavily lobbying the government to maintain or create laws that benefit themselves. One of the changes that they got overturned in recent years were rules that would have forced brokers to stop using the term “advisor” if they benefit from selling their own investment products to their clients. And the reason that the lobbyists got this overturned is because it causes a lot of confusion in the marketplace as to who does what and how they benefit.


Anastasia: Which is why we have to have this whole episode (laughs).


Bill: Yeah, so you will still have brokerage companies out there calling their representatives or their agents “financial advisors.”


Anastasia: Even though they don’t meet the fiduciary standard.


Bill: Exactly.


Anastasia: They meet the suitability standard but that is a much lower bar for clients.


Bill: Correct. It’s a confusing topic.


Anastasia: It really is. It’s confusing, it’s almost purposely convoluted.


Bill: Well, and that’s benefitted the brokerage companies which is why they lobbied against that change. The other thing about investment management is that it refers to investments in things like common stocks, mutual funds, including open-ended, close-ended and index funds, bonds, as well as corporate bonds, treasuries and municipals, and hybrid-type investments like convertible bonds.


Anastasia: I’m nodding my head at all of these.


Bill: So those are the type of things that investment managers will help their clients with. To use the third term that you were referring to, asset management refers to many of the same investment vehicles as investment management does, in fact, they’re almost synonymous. Except that asset management can sometimes refer to investments in real estate, such as companies that manage real estate properties.


Anastasia: Okay, could be residential or commercial?


Bill: Yes, and as an investor you can choose to do your own investing or you can use a professional for a second opinion but maintain control over the process. Or you can work with a professional that will make investment decisions for you. So those are other considerations within investment management.


Anastasia: Okay. You’ve talked before about how you actively pick investments, but not everyone in your industry does that.


Bill: We research stocks and then place them in clients’ portfolios because they are appropriate for that client.


Anastasia: Yeah, not every investment manager does that or is that what every investment manager does?


Bill: Not every financial planner does this, nor does the fourth area that we wanted to refer to which is wealth management. Wealth management, like financial planners, help you develop a plan to increase your wealth based on your goals, your financial situation, and your risk tolerance. But these services are geared toward already affluent individuals that need help coordinating estate planning, trusts, business structuring, insurance options, bank credit options, and other related issues. So wealth managers may work together as a team with the client’s existing CPA and/or their estate attorney that helps them with setting up trusts and avoiding estate tax. Or wealth managers may be one of these themselves, they may be a CPA or an estate attorney and they may do that themselves. They act directly with the client or they act as a coordinator, for a team, for the client. But they also--and this is what’s a little confusing--is that they also handle your investments, but the investment arena is one that requires a lot of time to research and a certain expertise to do well at, and so most of the wealth managers will typically outsource the investment management decision making process to a third party or they will use index funds or exchange traded funds to invest your money for you.


Anastasia: Okay.


Bill: Wealth managers are typically paid through a fee, perhaps a one-time fee, or perhaps an ongoing retainer fee for continuing advice, or they’re paid by the hour.


Anastasia: Like a lawyer?


Bill: Like a lawyer, exactly.


Anastasia: It seems like wealth management tends more to be involved in the legal side of things. If they’re working with estate attorneys, in setting up estates, that sounds like still a financial service, but it’s a lot different than the work that an investment manager does.


Bill: Yes, and you can think of it in terms that they’re acting perhaps as a coordinator to bring the members of the client’s team together to make sure the decisions that are made are able to increase the client’s wealth and accomplish the client’s goals. There are any number of situations where if people invest money in a certain manner or invest it in a certain type of ownership like themselves as opposed to their joint relationship with their spouse or if they invest it as a joint relationship versus in some sort of trust, then it can have a big impact on the taxes that they pay. And that of course defeats the goal of building wealth--to get the best investment returns you can and pay the least tax possible.


Anastasia: So, you talked about how wealth managers are compensated, we touched a little on how investment managers are compensated, but do you want to go more into how the different financial services professionals are compensated?


Bill: Financial planners are compensated through several different means. One would be a fee, a one-time fee for doing a plan, for gathering all of your information and then using their software that they have and using their experience to help you identify the key goals in what you need to do or change to reach those goals. That’s typically a time-intensive process and can be done once and then maybe not needed to be done for a number of years after that, depending on how your goals change. Sometimes financial planners will charge by the hour, for specific questions that people have, and other times they will charge a retainer, a monthly amount, kind of like a subscription service if someone feels more comfortable just checking in with them periodically and getting input on, for example, how they’re handling their budget or they just got this amount of money, should I pay it towards paying down debt or putting it towards this account? I mean those types of issues.


Anastasia: Okay.


Bill: Wealth managers pretty much work on the same compensation system, a one time amount, a hourly basis, or retainer basis. Investment managers typically work for a fee for the amount of assets that they’re managing under their management. So that, say for example, you have a $100,000 account, the manager charges 1% of that each year for helping you to decide which are the best investments to go into. Again, if the account goes up, the manager will make more, because that 1% of that total amount gets higher. If it goes down, they make less.


Anastasia: So they’re incentivized to make the best--


Bill: --to give you the best advice possible to grow your account.


Anastasia: Because if they’re making you money, they’re making themselves money.


Bill: Exactly. The other element that we discussed was a broker. And brokers are paid commissions--transaction fees when something is bought and something is sold. And there is a place for that in the marketplace. If you’re an individual that pretty much likes to control your own decision making, but seek a second opinion from someone, you can show appreciation, so to speak, to that broker for bringing an idea to you that you had not been aware of and agreed with them, and thought that that was a good idea The compensation to the broker on that would be a one time commission. From that point, you might have that investment in your account or portfolio and hold onto it for many years..


Anastasia: Mhm.


Bill: And the broker will never be paid anything further.


Anastasia: Mhm.


Bill: So there is a place for all of these things. One of the important keys to this is just understanding what they do and how they are compensated.


Anastasia: I think a broker kind of sounds like a real estate agent. They just want you to buy the home or sell the home. But they’re not really focused on your overall financial picture.


Bill: That’s a perfect example.


Anastasia: I talk about this because we’re currently looking at buying a place. But you’re the one who has to figure out how big of a mortgage you can get and how it fits into your finances. But the real estate agent, he’s a good guy and he’s trying to find a place that will make us happy, but his incentive is to get us to buy a place.


Bill: Yes, and if the value of the property that you decide to buy is higher than what you maybe started with, then that typically benefits them as well.


Anastasia: Well, yeah because they’re getting a percentage of your home price.


Bill: Correct. And then in the process of working with an agent, a real estate agent like that, you can see that they can provide some very helpful assistance to you. But you just need to have your eyes wide open as to how they get compensated and when there can be a conflict of interest between themselves and you.


Anastasia: Yeah and what their incentive is.


Bill: Yes.


Anastasia: Cool, is there anything else you think we should mention?


Bill: Well, that pretty much covers it.


Anastasia: So ask if your financial services professional is a fiduciary.


Bill: And is incentivized to work in your best interest.


Anastasia: Yes, and then ask them for financial advice.


Bill: Yes, well thank you very much.


Anastasia: Thanks Dad!


Musical Outro


Anastasia: Thank you for listening to Creating Wealth! If you liked our podcast, please subscribe and consider recommending it to your friends or leaving us a review on your podcast app. We would love to discuss your questions. You can email them to us at askcreatingwealth@taberasset.com. You can also find full transcripts of every episode on taberasset.com. That’s Taber with an “e” not an “o.” Thank you for joining us on the path to financial abundance. We’ll see you next time!


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