Cold Open Quotes And Welcome

Voices [0:01]

A foolish consistency is the goblin of a little mind. A gorbled by little statesman and philosophers of the mind. If a man does not keep pace with his companions, perhaps it is because he hears a different drummer. A different drummer.

Mostly Queen Mary [0:18]

And now, coming to you from Dead Center on your dial, welcome to Risk Parity Radio, where we explore alternatives and asset allocations for the do-it-yourself investor. Broadcasting to you now from the comfort of his easy chair, here is your host, Frank Vasquez.

Mostly Uncle Frank [0:36]

Thank you, Mary, and welcome to Risk Parity Radio. If you are new here and wonder what we are talking about, you may wish to go back and listen to some of the foundational episodes for this program. And the basic foundational episodes are episodes 1, 3, 5, 7, and 9. Yes, it is still in my memory banks. We have also created an additional resource, a collection of additional foundational episodes and other popular episodes.

Voices [1:07]

We have top men working on it right now. Ooh.

Mostly Uncle Frank [1:14]

Top men. And you can find those on the episode guide page at www.riskparody radio.com. Inconceivable! All thanks to our friend Luke, our volunteer in Quebec. Sacosh. We'd be helpless without him.

Voices [1:35]

I have always depended on the kindness of strangers.

Mostly Uncle Frank [1:41]

Because other than him, it's just me and Marion here. I'll give you the moon, Mary.

Voices [1:46]

I'll take it.

Mostly Uncle Frank [1:48]

We have no sponsors, we have no guests, and we have no expansion plans.

Voices [1:52]

I don't think I'd like another job.

Mostly Uncle Frank [1:55]

Over the years, our podcast has become very audienced focused, and I must say we do have the finest podcast audience available.

Voices [2:04]

Really top drawer.

Mostly Uncle Frank [2:07]

Along with a host named after a hot dog.

Voices [2:10]

Lighten up, Francis.

Mostly Uncle Frank [2:13]

But now onward, episode 541.

Weekly Reviews Setup And Listener Email

Mostly Uncle Frank [2:17]

Today on Risk Party Radio, it's time for our weekly portfolio reviews. Of the eight sample portfolios you can find at www.riskparty radio.com on the portfolios page. We also have a rebalancing to talk about today. Won't that be exciting?

Voices [2:38]

But before we get to that, I'm intrigued about this. How you say email.

Mostly Uncle Frank [2:45]

And I talk so long on the answer to the first email that we only have time for one email. Gosh!

Voices [2:54]

Idiot.

Mostly Uncle Frank [2:56]

And so without further ado. First off.

Voices [2:59]

Second off. Last off. First, second, and last off of an email from Cameron. I'm the Skynet guy. I made the Terminator, and it's emerged recently as the kind of poster child for AI Gone Wrong. And Cameron, right?

Mostly Queen Mary [3:19]

Hi, Frank. Longtime listener, first-time correspondent here. I wanted to share a quick real-world test I ran and get your thoughts.

Voices [3:29]

You are talking about the nonsensical ravings of a lunatic mind.

Mostly Queen Mary [3:34]

There's an Atlanta-based retirement planning firm that advertises heavily on TV. If you followed all the instructional material, you just offering a free retirement plan for people with a portfolio of $500,000 or more. Always be closing. Always be closing. Basically, generating reliable income in retirement while preserving principle. On paper, it sounds clean, but in practice it felt very outdated, much more so after listening to your episode 504.

Voices [4:42]

Mm-hmm. Mm-hmm.

Mostly Queen Mary [4:46]

It assumes retirement should mimic a paycheck model, which made sense decades ago, but today ignores flexibility, total return, and modern low-cost execution.

Voices [4:58]

That is the straight stuff, O Funkmaster.

Mostly Queen Mary [5:02]

No surprises on their actual recommendations. The entire conversation revolved around income and annuities. That was clearly the anchor.

Voices [5:11]

Because only one thing counts in this life. Get them to sign on the line which is dotted.

Mostly Queen Mary [5:18]

When I pushed back and brought up what you'd typically recommend modern low-to-no fee trading, flexibility, and focusing beyond just income, the conversation shifted, but only slightly. Their next lever was taxes.

Voices [5:36]

Real wrath of God type stuff.

Mostly Queen Mary [5:39]

They made the usual pitch that when markets fall apart, income is the only thing you can rely on.

Voices [5:45]

Fire and brimstone coming down from the skies, rivers and seas boiling, 40 years of darkness, earthquakes, volcanoes, a dead rising from the grave.

Mostly Queen Mary [5:53]

That seemed to be the core fear-based argument holding everything together.

Voices [5:58]

Human sacrifice, dogs and cats living together, mass terrorism.

Mostly Queen Mary [6:03]

But it also felt like they were solving for emotional comfort, not optimal outcomes. Locking into products instead of adapting to markets.

Voices [6:20]

But walk away from the 90%. Don't go where they go. Don't do what they do. Don't talk like they talk. Develop you a whole new language. Be part of the few.

Mostly Queen Mary [6:31]

Curious how you'd break this down, especially the income above all else argument and this paycheck replacement mindset that they lean on so heavily. Thanks, Cameron from Atlanta.

Voices [6:44]

I haven't beaten anyone this bad in a long time. I haven't beaten anyone this bad in a long time.

Mostly Uncle Frank [6:55]

Well,

Why Advisors Sell What They Sell

Mostly Uncle Frank [6:56]

Cameron, you've opened up a big topic here, or a big can of worms, depending on how you look at it.

Voices [7:03]

I want you to be nice until it's time to not be nice.

Mostly Uncle Frank [7:11]

The way I break this down really reflects how I view the entire financial services industry overall and where that fits into consumer culture. Because that's really what retail financial services is. It's a creature of consumer culture designed to sell things to a particular audience. And while the product is financial services or financial planning, it actually doesn't have that much to do with finance at its core because it has more to do with presenting things to consumers, retail consumers, and what is likely to get them to buy and to keep buying. Because what most financial advisors do has little to do with finances and much more to do with their business models, which are based on their need to make money from people who they are marketing to.

Voices [8:15]

AIDA, attention, interest decision, action. Attention. Interest, are you interested? I know you are. Decision. Have you made your decision for Christ? An action. AIDA, get out there. You got the prospects coming in. You think they came in to get out of the rain? They're sitting out there waiting to give you their money. Are you gonna take it?

Mostly Uncle Frank [8:45]

And in order to really understand this, you need to know the history of consumer culture and then where financial services or financial advisory services fits into that history. Fortunately or unfortunately for you, I've actually spent a lot of time studying this. And I find it very interesting.

Voices [9:05]

You're insane, gold member!

Mostly Uncle Frank [9:08]

Both from a psychological perspective and a sociological perspective. And maybe a little bit of anthropology as well.

Voices [9:18]

It's a monkey!

Mostly Uncle Frank [9:20]

But modern

Consumer Culture And Propaganda Roots

Mostly Uncle Frank [9:21]

consumer culture and the consumer economy really dates back to the 1920s. It's really not that old, at least as a dominant culture. Consumer culture itself dates back much further than that. In fact, if you want to read a book about that, there's one called The Empire of Things by a gentleman named Frank Trentman, who traces the history of consumer culture back to the 14th century. Now you really have to want to nerd out if you're going to go read that book. It's very long, but it's very interesting and does show you how consumer culture originated as a small piece of culture and over time has come to dominate general culture, at least in Western societies. And for several centuries there was a push and pull as to whether it would become a dominant culture or not. The reason it did not become dominant until the 20th century was simply because we were not capable as a society of producing or mass producing lots of relatively cheap goods so that lots of people could buy them. And that started off becoming a reality really right before World War I, and that is when you see the first kinds of advertising which went beyond, say, the Sears Robux catalog in the late 19th century. Because frankly, it was very difficult to mass market things until you had radio to do that with, and newspapers that could be published nationwide or to a large audience at once. And once consumerism became a big enough thing, people started looking at, well, what is the best way to do this to make the most money and have the most influence doing it? And the progenitor of this is a guy named Eddie Bernays, who is a nephew of Sigmund Freud, who lived in the first half of the 20th century, got his start doing propaganda for the Department of War in World War I, and then wrote a very famous book called Propaganda in 1928, and that book described how to use those methods to market to consumers. One of his most famous vignettes from that book has to do with how do we get women to smoke. Because while women would smoke in private, it was considered unladylike and inappropriate to be seen smoking in public for women. They recast this as a Freedom March kind of thing in the 1920s, and that's where Virginia Slims came from and organized walks where women would walk down, I don't know, Seventh Avenue in New York smoking. And that was one of the original marketing campaigns, but Bernays really specialized in how to influence the masses, which led to the book Propaganda. Now that word propaganda was a neutral term until, of course, it was adopted by the Nazis, who had a minister of propaganda, Joseph Goebbels. And so the word propaganda went out of fashion as not just a form of marketing, but as a form of mass influence and mass lying about people. So they coined a new term, Eddie Bernays did. They call it public relations, and that's what they call it now. Public relations.

Voices [12:38]

Well, isn't that special?

Mostly Uncle Frank [12:41]

But it's rooted in the book, Propaganda. And so how to market to consumers, mass market, became a big business, essentially. Go back and look at the series Mad Men, that's what that was all about. And like a lot of things, it developed in the business world or the practical world first as a method of making money and selling things, and only became formalized later. And so

Behavioral Biases And The Power Of Incentives

Mostly Uncle Frank [13:07]

then you started having psychologists really investigate this stuff. And one of the most famous books there is the book Influence by Robert Cialdini, who wrote it trying to educate people as to how to say no to people marketing things, since all these techniques had been developed at the time. But it quickly became the Bible for people who were going out there to market things and what techniques might work to market things. So Cialdini wrote that book in 1984, but it really reflected practices that had been developed over the past several decades before that. Now, around that time and following that, this became even more formalized in psychology and then became the field we know as behavioral economics, and it's what Danny Kahneman won the Nobel Prize for. And that book is Thinking Fast and Slow, which breaks this down in terms of cognitive biases that most human beings hold, at least in some respects, and is what people who market things play to, to take advantage of to get people to do things, as the book Influence suggests.

Voices [14:15]

You know, whenever I see an opportunity now, I charge it like a bull. Ned the bull, that's me now.

Mostly Uncle Frank [14:21]

There's another famous reference you should all look at, which is the psychology of human misjudgment. It's a speech by Charlie Munger. I'll link to a YouTube video in the show notes, which attaches to a transcript of that. But that also lays out 24 different cognitive biases. The most important one for our discussion here today is the first one, which is incentives. That if you know the incentives, you'll know the behavior. And that is really what goes on in financial services as we get closer to that.

Voices [14:55]

Am I right or am I right or am I right? Right, right, right.

Mostly Uncle Frank [14:59]

But all of the techniques founded by people like Edward Bernays and propaganda talked about by Robert Cialdini and the influence, and are present in Thinking Fast and Slow, which is Kahneman's book describing all these cognitive biases. Those are all things that are used by the financial services industry to market their product, scheme, services, whatever they've got.

Voices [15:23]

You know, I got friends of mine who live and die by the actuarial tables, and I say, hey, it's all one big crapshoot, anywho.

Mostly Uncle Frank [15:31]

And what they've learned there is you better be employing some of those tactics if you really want to make money in the financial services industry, because you're probably not going to be successful if you don't.

Voices [15:41]

Bing!

Mostly Uncle Frank [15:42]

But now let's go backward again and talk about how marketing and sales developed in the financial services industry.

Voices [15:51]

Bing again.

Mostly Uncle Frank [15:53]

The first reference we have there is Charles Mackay's great book or series of books called Popular Delusions and the Madness of Crowds, which was published in 1841 and talked about all kinds of crowd behaviors from the tulip bubbles to witchcraft to dueling to many other things.

Voices [16:14]

Are you a good witch or a bad witch? Who me? I'm not a witch at all.

Mostly Uncle Frank [16:23]

But that also touched on these seemingly irrational behaviors. Mackay was a journalist and so was more describing things than trying to explain them. But he did describe them fairly accurately, and is what people have talked about ever since, particularly in financial areas, as to how markets or people in markets often behave. Now, prior to the consumer era in the 20th century, most of these behaviors were confined to actual financial markets. So if you read a book like Fifty Years in Wall Street, published by Henry Clues in 1907, that will tell you all about the robber barons and other people in the late 19th century in Wall Street. And you'll learn about the good, the bad, and the ugly there. The good. The bad. The ugly. And what you'll learn is the dumb money tended to chase things, and the smart money just sat on their money until there was a panic and then went out with their canes. That's how it's described in the book, walking down Wall Street to go buy the assets when they were cheap. If you read a biography of Hetty Howland Green, you'll learn how it's done. Or how it was done back in the day. The most notable book written in the early part of the 20th century about how the financial services industry behaved and how it treated its clients is the famous book Where Are the Customers Yachts, published by Fred Schwed in 1940. That book is still relevant today because all of the concepts described in that book apply to the financial services industry today. It has not changed in over 85 years. The methods have changed, the marketing sticks have changed, but the overall approach to the business, by and large, has not changed.

Voices [18:29]

If you have a milkshake, and I have a straw, there it is. That's a straw, you see. Watching. I drink your milkshake. I drink it up.

Mostly Uncle Frank [18:57]

Now

How Wall Street Sales Models Evolved

Mostly Uncle Frank [18:58]

let's talk about how the financial services industry developed in terms of different forms of marketing and what they think they are selling or what they were selling at particular times. In the era of Fred Schwed and up until late 1960s, early 1970s, the way the financial services largely dealt with the public was to sell them things. If you ever watched the Wolf of Wall Street, where they're getting on the phone, cold calling people and trying to sell them shares of stuff. That is what the entire industry was about. Essentially from the 1920s until the late 1960s.

Voices [19:35]

You mailed in my company a postcard a few weeks back requesting information on penny stocks that had huge upside potential with very little downside risk. Something just came across my desk, John. Name of the company, Aerotine International. It is a cutting-edge high-tech firm out of the Midwest awaiting imminent patent approval on huge military and civilian applications. Now, right now, John, the stock trades over the counter at 10 cents a share. Our analysts indicate it could go a heck of a lot higher than that. One thing I can promise you, even in this market, is that I never ask my clients to judge me on my winners. I ask them to judge me on my losers because I have so few. 4,000, that'd be 40,000 shares, John. Let me lock in that trade right now and get back to you with my secretary with an exact confirmation. Thank you for your vote of confidence, and welcome to the Investor Center.

Mostly Uncle Frank [20:32]

Just like that, I made two grand. And part of the reason for that was that commissions were established and were not changeable. Everybody had to charge the same commission, and it was relatively high. I think it was like $200 a trade or something like that, at least in the 1960s. And so the way stockbrokers, and that's what financial advisors called themselves then, they called themselves brokers, would make money was on the transactions. They would call up people, try to get them to engage in transactions and get the commissions from the transactions. And it was that simple.

Voices [21:07]

Winner, winner, beginning dinner.

Mostly Uncle Frank [21:12]

So it was all about hot stock tips and all of that sort of stuff. There still are people that do that sort of thing, but they mostly write newsletters these days. The newsletter industry, the financial services newsletter industry really developed from that over time. Now, the concept of a financial advisor or organizations of financial advisors really didn't come about until the 1970s. It's not that old. What financial advisors were doing in the 1970s is largely tax shelters. Because under the old tax regime prior to 1986, tax rates were extremely high. They were first 90%, then 70% at the top marginal rate. But there were lots and lots of loopholes that people could employ. And so what financial advisors were would largely do was sell tax shelters, come up with tax shelters and sell them to people with high incomes. Also during the nineteen seventies, the old model of fixed commissions fell apart and places like Charles Schwab started charging very low commissions, relatively low commissions on stock trades, which changed the brokerage industry a lot. What you saw was brokers began advertising and they were essentially advertising their stock picking prowess. And so the famous ads from E.F. Hutton came about in the late 1970s and persisted through the eighties and into the 90s. You also had Smith Barney We make money the old-fashioned way.

Voices [22:46]

We earn it good investments don't walk up, bite you on the bottom and say we're here. Finding them takes good old-fashioned hard work research. The kind they do at Smith Barney. Smith Barney is among a handful of top investment firms singled out for their work and research. Smith Barney. They make money the old fashioned way.

Mostly Uncle Frank [23:12]

They earn it and insurance companies began to get into the act. Insurance had always been around it's a much older industry that dates back to the 19th century and was really based on sales even in the early 20th century and that persisted and still persists to this day. Because if you do you could always use a little more right I mean who couldn't but in order to broaden out their bases and to seek new marketing opportunities insurance companies began moving into financial services really in the 80s and 90s. And during this period from the 70s 80s and into the 90s you really saw the development of mutual funds as well. And believe it or not back in the late 1960s it was common for a mutual fund to have a front-end load of like 8%. So these were very expensive things but everything was very expensive in terms of the cost of the transactions and doing business in the financial services area which led to a lot of business models involving just churning of assets and transactions because he could make a lot of money that way. Tell him the good part.

Voices [24:26]

The good part William is that no matter whether our clients make money or lose money, the Duke and Duke get the commissions.

Mostly Uncle Frank [24:38]

Well what do you think Valentine sounds to me like you guys a couple of bookies I told you he'd understand but that led to the world of the 1990s where the next development was the idea that you didn't want to try to pick individual stocks but you wanted to pick funds and fund managers. This is the Peter Lynch era. This is also the era when Morningstar got its start because Morningstar's purpose at the beginning was to identify hot funds and hot fund managers. And that is what people did and how they marketed their services back in the 1990s in particular that was all the rage. And a lot of the business models then revolved around picking funds and 12 B1 fees or kickbacks that a financial advisor would get by putting their clients into a particular fund. That is actually still what the Dave Ramsey model is. When he sends people off to his smart investor advisors, whoever pays to get promoted, what they do is largely put people in loaded mutual funds and that's how they make extra profits in addition to the AUM. That practice dates largely from the 1990s and that was the dominant practice back then. It still persists with the unwary and the unwise to this day are you stupid or something almost as stupid as a stupid do as butsaction fees went down and you couldn't make as much money just selling or churning accounts what replaced that is AUM assets under management. Drink drink drink drink your more and more milk drink drink drink drink drink drink your more and more milk drink drink it up which as it developed was considered to be superior to the sales model and it is in some ways but it's got its own drawbacks and own conflicts of interest.com bust that people began realizing and research showed that actually these brokers were not able to pick hot stocks or hot fund managers that well and hot fund managers tended to underperform after outperforming for a little while. And so it became more obvious that index funds and algorithmic funds like the ones put out by DFA were really the way to go. And so a lot of advisors moved to that kind of model in terms of what they were putting their clients in. But that went hand in hand also with the AUM business model. And it also made it much easier for financial advisors to kind of standardize their offerings in terms of what they would generally put clients into. And typically most financial advisors have some kind of formula or formulation that they use with virtually all of their clients. And financial advisors can even get these model portfolios if you will off the shelf or farm that out to another entity. And that is frequently what goes on with these very large agglomerated investment firms like the ones run by Peter Malu, Creative Planning and Rick Edelman. They basically provide model portfolio formulas to give to the advisors in their networks. But it's really been only about the past 10 to 15 years that we started having advisors who work on a flat fee basis or an hourly fee basis. That is a relatively new development in the grand scheme of things. But once you understand that you can understand why the landscape of financial services looks the way it does it comes out of historical development. And there was a nice presentation that Sarah Catherine Gutierrez has given a couple times. I'll link to it in the show notes again. But basically the modern financial services landscape divides up into four sections essentially first you still have people that largely work on commissions and sales and these generally come out of the insurance industry. And they are generally selling various forms of life insurance and then also various forms of variable annuities.

Voices [29:28]

As you all know first prize is a Cadillac Eldorado anybody want to see second prize second prize a set of steak knives third prize is your fire.

Mostly Uncle Frank [29:42]

And there are also some independent and fly by nine operator types who are just out there selling various things and that's over 40% of the financial services industry. Now another 40 some percent of the financial services industry is what you would call hat switchers. And these are advisors and entities that make their money in two ways they both sell products and then they also can charge AUM and oftentimes they say that I'm acting as a fiduciary part of the time and then not acting as a fiduciary some of the time too in fact if you read the disclosures from say Northwestern Mutual and their advisors they disclose just that which is allowed that's still allowed because there are no fiduciary standards that apply generally to people in the financial services industry.

Voices [30:35]

That's not how it works.

Mostly Uncle Frank [30:37]

That's not how any of this works but in in addition to the big insurance companies who typically will advertise at sports stadiums and on TV you will also find the big retail outfits the Mara Prizes, the Edward Joneses, they are all in the multi-revenue stream business. And so over 85% of financial services professionals that market to individuals are in those two areas those business models that's how they operate about another 10 to 12% is now comprised of registered investment advisors who work primarily on AUM models.

Voices [31:17]

I drink your milkshake I drink it up every day.

Mostly Uncle Frank [31:23]

I drink it up and they are typically registered with the SEC as RIAs they do have fiduciary standards at least part of the time they do disclose a lot of conflicts of interest though if you read their ADVs which are the disclosures they have to make with the SEC and if you listen to financial services podcasts or what used to be on radio this is the business model followed by a lot of these podcasts with financial advisors on them who are running them. They are typically marketing to clients who have at least one million dollars in investable assets. What they would prefer are clients in the range of two million to ten million or more if they can get it. And they are typically charging those kind of clients somewhere between $20,000 and $5000 a year for their services. And then the smallest group are the advice only or fee for service advisors who charge a yearly fee or by the hour or by the project but they don't charge by assets under management. That is the smallest group those are actually the only ones I would employ from my perspective they have the fewest conflicts of interest and are more likely to be somebody charging a fair price for what they do because honestly the work of financial advisors has gotten way easier in the past decade due to technological advances. And there's no reason most of these people shouldn't be charging only about $10,000 a year for their services. But that's why AUM advisors fight so hard to keep their business models alive and recommend their business models because they're very lucrative.

Voices [33:10]

Am I right or am I right or am I right? Right, right.

Mostly Uncle Frank [33:14]

But let's go back now and talk about how the marketing has changed. Now

Fear Marketing And Sleep-Well Promises

Mostly Uncle Frank [33:20]

since financial advisors are not claiming these days mostly to be hot stock pickers or hot fund manager pickers or somebody that's going to beat the market their marketing has changed and their marketing has gone from being financial experts to psychological experts. Now when it comes to money it's well known that what motivates consumers or most people the most are two emotions fear and greed all we need to do is get your confidence back so you can make me more money. Now back when financial advisors were mostly marketing their prowess at picking stocks or picking fund managers or beating the market or whatever the motivation was primarily greed. That's what they were really marketing to. These days that's not where most of the marketing is focused. In fact almost all of the financial services marketing is now focused on fear. Fear is the path to the dark side fear leads to anger anger leads to hate. Hate leads to suffering again they've all turned into amateur psychologists. And there's basically two ways that fear is used for marketing purposes. Some of the advisors exploit fear. I get frequent free steak dinner invitations talking about all the calamities that might happen and of course the financial media plays into this because stoking fear is how they get clicks and eyeballs. Human sacrifice dogs and cats living together mass terroria and that is frankly still how lots of financial products are sold by this annuity to save you from the whatever calamity is coming up next. Look my insurance product works like a Swiss Army knife run forced run for the financial services industry has become more sophisticated than that. And what we see now is less exploiting fear but more catering to fear is what I see mostly in financial services. And these are all of the AUM advisors who now claim oh we're the good guys we're not going to sell you these products like those horrible insurance companies we're not going to exploit your fears. Instead come in here we're going to cater to you we're going to take care of you.

Voices [35:52]

We're going to make you feel good about your finances somebody says yeah but I'm looking for safety and security fine then huddle in a corner we'll cover you with a sheet bring you three meals a day and we'll protect you feed you look after you care for you we won't let anything happen to you and you'll probably live to be 100 the guy said well yeah I'd live to be 100 but what a way to live.

Mostly Uncle Frank [36:20]

Right what a way to live safe and secure and see it's not important how long you live what's important is how you live first we'll give you this pop psychological quiz that we came up with it'll tell you about what kind of investor you are what kind of income style you have what kind of club you might want to join.

Voices [36:44]

I've got a good mind to join a club and beat you over the head with it.

Mostly Uncle Frank [36:47]

Basically those are fear meter tests. They're designed to measure what are you afraid of because then the financial advisor can cater to that fear. So what are the primary fears that people coming to financial advisors have one is running out of money. That's a big primary fear particularly somebody who's been successful at saving for a while.

Voices [37:10]

And it's gone what? What's all gone? The money in your account it didn't do too well it's gone.

Mostly Uncle Frank [37:18]

And the second is what is going to happen in the short term because the population that financial advisors are primarily marketing to and trying to get in the door are what we call level two investors. These are people who have the wherewithal to invest they're not at level one so they're not having debt problems and not overspending their income so they have money to invest they may have started investing but their understanding of investing is relatively rudimentary and it's based largely on consuming popular financial media. So they tend to be very reactive they think that financial advisors have magic investing buttons to push. They think that if you find the right shiny object like some covered call fund these days or some other popular thing that's being marketed that's another key to investing they think that shopping for opinions is important. Somebody important on TV says something they need to react to that. And so they're very reactive to what they see in financial media and what financial advisors tell them frankly whether it's the national debt, the price of oil, some war, some politician taxes guy in a suit? No, it's a tax collector hey there SpongeBob all of these things stoke reactive fears and in the meantime they don't really have a very good grasp on long-term investing in particular they probably don't know much about portfolio construction other than there are stocks and bonds and you should have some stocks and some bonds. And so because this is the primary audience that financial advisors are dealing with or trying to get in the door because they're also not very cost sensitive, they need to have business models that cater to those kinds of fears. If you do this and follow my model A, you're not going to run out of money and B, I'm going to be able to answer all of these questions you have about short-termism. And that leads directly to these buckets, ladders and flower pots strategies, which are all based on dealing with short-term fears. And then the dirty little secret that most financial advisors will not acknowledge if they even are aware of it themselves. Which is their primary way of dealing with people worried about running out of money is simply to have their clients underspend. They underspend so they can pay the AUM fees. They underspend so they don't get anywhere close to running out of money and in fact most of them have too much money. I was listening to the Whitecoat Investor podcast from last week and they had a question from somebody who had saved 33 times their expenses but was still concerned about running out of money because when they went to the grocery store the prices were up that kind of combines very short-term thinking with very long-term thinking. And what Jim Dolly and his guest who's a financial advisor came back with is some very interesting statistics which are that the biggest problem for most Americans is they're not saving enough money. But for the Americans who have saved enough money to retire or are on their way to doing that, their biggest problem is not spending enough money. And I didn't realize how bad this was I knew it was bad. What they said was that six out of seven retirees are barely touching their nest eggs. They're essentially living off income so that their portfolio values never go down. And that is a really bad hoarding problem.

Voices [41:07]

Oh no you don't you want my treasure what's mine understand all mine down mine.

Mostly Uncle Frank [41:14]

And here's what the financial advisory industry doesn't want to admit they are part of that problem. It makes more sense for them to cater to that fear of running out of money by having their clients underspend their portfolios it caters to the fear of the client it keeps the client relatively happy it keeps the client from going somewhere else and as a bonus it keeps the AUM fees going up every single year.

Paycheck Replacement Versus Liquidity

Mostly Uncle Frank [42:27]

But now getting to the marketing experience you had with the Atlanta based retirement planning firm okay that whole philosophy they call replace my paycheck challenge is basically catering to a short-term fear. The fear being if I don't have income, what am I going to live on? So I need to do something that creates something that looks like a paycheck. Now typically that is done these days either with annuities or with some combination of buckets ladders and flower pots. I think bond ladders are becoming very popular these days for this purpose. And that does very well in catering to these fears and as what you experienced and why they were babbling endlessly about income and annuities. But as we talked about in episode 504 and we've talked about elsewhere, you really don't want income or uncontrolled income spewing out of various orifices during retirement because the first word after income is taxes. What you really want is liquidity as in an ability to sell something and use that as your quote income unquote whether or not you're paying taxes on it or not and hopefully not or very little that's what I'm talking about. But if you are structuring your business model around this idea that we need to have this defined source of income coming out you are Just building in inefficiency. And you can see why it's attractive to cater to this particular short-term fear. But if you're beyond being a level two investor, you'll also see why it's very inefficient.

Voices [44:13]

Do you think anybody wants a roundhouse kicked to the face while I'm wearing these bad boys? Forget about it.

Mostly Uncle Frank [44:19]

And it sounds like you called them on it, and they really didn't have an answer for that. Instead, they moved the goalpost or shifted what they were talking about and started talking about taxes and market crashes. Because it ignores things like the fact we have no fee trading now, and that capital gains taxes are way lower than ordinary income taxes, that these income-generating things are probably spewing out. And I'm sure there was something about dogs and cats living together in the mass hysteria.

Voices [44:55]

Real wrath of God type stuff.

Mostly Uncle Frank [44:57]

Because as you say, their argument boiled down to anything can happen, markets can explode, and the only thing you have to rely on is this annuity we're going to put you into. Because it's income, and you have to have income to replace your paycheck. That is just either exploiting or catering to a fear, depending on how you look at it. And as you say, they were solving for emotional comfort, not optimal outcomes, looking into products instead of adapting to markets. Because they're not really in the financial advice business. They're in the fear management business. And that business is much more lucrative than giving objective financial advice or coming up with optimal plans for people. They go straight to the fear and straight to managing the fear or exploiting the fear rather than dealing with the financial problem and the financial goal to be reached. Because if you're doing this dispassionately without the fear, think about how you would actually approach these problems, any financial problem. You would approach it like institutions approach this, whether they're managing a pension, whether it's an insurance pool, whether they're managing an endowment. Think about how professionals who manage in that area approach these problems. They look at the objective goal of whatever this thing is. Probably got to pay out some form of income over some period of time, and there may or may not be some flexibility in that. They make projections on that, and then they come up with asset allocations that will match that goal. And they're not talking about fear. They're not talking about what's going to happen next year or the price of groceries. I mean, can you imagine somebody going into a management meeting where they're the financial advisor to a pension fund? And the first thing they say is, well, if we put you in this, it'll help you sleep better at night. Do you think the trustees of the pension can make a decision based on this will help you sleep at night? Of course they can't. But in my mind, that is the way we should be all approaching our finances. Let's take the emotions out of it first. Come up with a plan that is optimized financially for what we're trying to do. And then after that, we can cater to our fears or modify it or do something different to, I don't know, create an income paycheck if you really need one. But unless you're doing the finances first and putting that first, you are not going to come up with the best plan because the procedure is just a bad procedure. That's why I'm very much opposed to the idea that you bring these people in, give them this psychological profile test, which is probably not well grounded in any way, and then tell them based on your psychological profile, these are the products you should be in. We're going to put you in this annuity, put you in this bucketeering strategy, do this ladder and this flower pot thing.

Voices [48:18]

That's not an improvement.

Mostly Uncle Frank [48:20]

To me, what would make a whole lot more sense, although it does not work for the business models, is to take every client, look at their problem from an objective perspective, as if we can come up with a plan that this client is going to follow. Let's not talk about their emotions to start with. Let's just talk about what the problem is, the financial problem is we're trying to solve, and come up with something that solves that problem. So that can be plan A. Then you can take into account the idiosyncrasies and fears of the client and modify plan A to deal with those things. But if you did it that way, you'd come up with much more optimal plans, and your clients probably would not be understanding.

Voices [49:03]

Inconceivable.

Mostly Uncle Frank [49:06]

Because their plan was based on good finances first and fear and psychology second, and not the other way around. The problem with what I described is that there isn't much money in it. It is not designed for the typical audience that financial services are marketing to. Because most of the people that have enough money to invest and that who would be going to financial advisors are these level two type investors. They're not what we call would call level three, which are boglehead efficiency types, or level four, which is what I'm describing, is an let's come up with a plan that objectively meets these financial goals in the best way possible and try to keep our emotions out of it, at least to begin with. You would have a very small audience pool indeed if you did what I suggested. But that is in fact what the wealthiest people tend to do. People who have things like family offices, they start treating this as primarily a financial problem and not an emotional or fear-based problem to be managed. But I don't expect this form of marketing or practice to change anytime soon because it's lucrative. That's the incentive. There's a reason why the financial services industry's business models are created the way they are. They are designed to cater to the audience, the consumer audience that they are trying to serve and trying to get money from. This goes all the way back to Edward Bernay's propaganda, Robert Cialdini's influence, and every other book you can find about marketing and how to sell things to particular people. And that is what you experienced. But guess what? We can choose differently. We don't have to do that. And to the extent we hire somebody, we can hire them on our terms, not on fear-based terms.

Voices [51:02]

And we have the tools, we have the talent.

Mostly Uncle Frank [51:05]

We don't have to accept these models and these cookie-cutter plans where they take all the client's stuff, ram it through some calculator which spits out some gobbledygook based on probably some erroneous assumptions, and then comes up with a buckets, ladders, and flower pots strategy that caters to the fears of the clients and makes them happy in that way. I guess the thing that irritates me the most, though, is that because most financial advisors don't understand the history of marketing, the history of their own industry, why their business models are the way they are, most financial advisors erroneously think that whatever they're doing is the best they can do from a financial perspective. They honestly believe that these buckets, ladders, flower pots, income replacement thing that they've come up with and that they can happily market and that works very fine for their own income is objectively the best financial advice they can give. And that just goes to Upton Sinclair's observation that it's difficult for a person to understand something when his salary depends on him not understanding that thing. Because incentives drive behaviors, the behaviors of financial advisors. So build your business models and your service models around that and not on objectively good financial planning. Because you don't get paid for objectively good financial planning because your client doesn't know what it is anyway. At least most of them don't.

Voices [53:27]

Coffee's for closers only. You close or you hit the bricks.

Mostly Uncle Frank [53:33]

But I think I've gone on long enough about this for now. Not forever. Your experience was typical and not surprising. But hopefully you have an understanding of why these things are the way they are and how they evolved, and a much better understanding than the people who are selling the products and services. Because most financial advisors have no clue about why their business operates the way it does. In fact, they erroneously think it's always been this way, or I'm working from some Dead Sea Scrolls. Whatever my business model is, is written down somewhere in some biblical tone that says we should do things this way because this is the best way.

Voices [54:17]

Forget about it.

Mostly Uncle Frank [54:20]

Hopefully you found that illuminating. And thank you for your email.

Voices [54:27]

Alaska Missa. And now for something completely different.

Market Snapshot And Portfolio Returns

Mostly Uncle Frank [54:38]

And the something different thing we get to do now is our weekly portfolio review. So of the eight sample portfolios you can find at www.riskper.com on the portfolios page. Well, there was a lot of sturm and drang due to the Fed raising interest rates last week, but not much happened in terms of actual movement in assets. Just looking at the markets, the SP 500 represented by the fund VOO is now up 12.59% for the year so far. The NASDAQ, represented by QQQ, is now up 17.72% for the year so far. Small cap value is pulled back. Representative fund VIOV is now up 16.68% for the year so far. Although its sister fund AVUV is still up over 20%. Gold, represented by the fund GLDM, was slightly up last week. It's up 1.43% for the year so far. Long-term treasury bonds represented by the fund VGLT actually rose last week as well, but they're still down 3.76% for the year. REITs are up 7.27% for the year so far. They took a hit. Commodities represented by the fund PDBC are up 48.38% for the year so far, leading the way of all these assets. Preferred shares represented by the fund PFFV are up 3.26% for the year so far, and managed futures are still managing to make gains. Representative fund DBMF is now 15.89% for the year so far. Moving to these portfolios. First one's the all seasons. This is a reference portfolio. It's only 30% in stocks and the total stock market fund. 55% in intermediate and long-term treasury bonds, the remaining 15% in golden commodities. It's down 0.65% for the month of September. It's up 5.34% year to date and up 29.56% since inception in July 2020. Moving to these kind of bread and butter portfolios, first one's Gold and Butterfly. This version has 41% in stocks, divided into a total stock market fund and a small cap value fund, 20% in long-term treasury bonds, 19% in short-term treasury bonds, and the remaining 20% in gold, GLDM. It's down 1.58% for the month of September. It's up 5.75% year to date, and up 68.69% since inception in July 2020. Next one's a golden ratio. This one's 42% in stocks, divided into a large cap growth fund and a small cap value fund. 26% in long-term treasury bonds, 16% in gold, 10% in managed futures, and the remaining 6% in cash and a money market fund. It's down 0.98% for the month of September. It's up 6.54% year to date, and up 64.49% since inception in July 2020. Next one's Risk Parity Ultimate. Not going to go through all 12 of these funds, but it's down 1.06% for the month of September. It's up 6.74% year to date, and up 49.17% since inception in July 2020. Moving to these experimental portfolios that all involve levered funds. Don't try this at home.

Voices [58:04]

You have a gambling problem.

Mostly Uncle Frank [58:06]

First one's the accelerated permanent portfolio. This one is 27.5% in TMF, that's a levered bond fund. 25% in UPRO, that's a levered stock fund. 25% in PFFV, a preferred shares fund, and 22.5% in gold, GLDM. It's down 2.07% for the month of September. It's up 4.01% year to date, and up 28.39% since inception in July 2020. Next one is the Aggressive 5050. This is the most levered and least diversified of these portfolios. It is one-third in the levered stock fund UPRO, one-third in levered bond fund TMF, and the remaining third in ballast and a preferred shares fund and an intermediate treasury bond fund. It's down 2.32% for the month of September. It's up 3.59% year to date, and up 1.82% since inception in July 2020. Next one's a levered golden ratio. This one's a year younger than the first six. It is 35% in NTSX, that's a composite fund of the S P 500 and Treasury bonds, levered up 1.5 to 1. 15% in AVDV, it's an international small cap value fund. 20% in gold, GLDM, 10% in KMLM, it's a managed futures fund. 10% in TMF, it's a levered bond fund. And remaining 10% in a levered Dow fund and a levered utilities fund. It's down 1.76% for the month of September. It's up 6.98% year to date, and up 28.24% since inception in July 2021. And the last but certainly not least and newest portfolio is the OPTRA portfolio. This is a return-stacked kind of portfolio. It's 16% in UPRO, it's a leverage stock fund. 24% in AVGV, that is a worldwide value tilted fund. 24% in GOVZ, that's a Treasury Strips fund, the remaining 36% divided into gold and managed futures. It's down 1.14% for the month of September. It's up 12.1% year to date, and up 44.64% since inception in July 2024. Now we

OPTRA Rebalance And What It Tests

Mostly Uncle Frank [1:00:19]

did rebalance this one last week.

Voices [1:00:22]

Great success.

Mostly Uncle Frank [1:00:24]

This one is on kind of an experimental rebalancing plan that is designed to not rebalance it very often. So we only rebalance this when the Fed changes directions on its interest rate, which last occurred in September of 2024. So we haven't rebalanced it for two years. This involved selling a lot of stocks and buying a lot of bonds. So just to go through exactly what we did, which is also reflected on the website. We sold $595 worth of UPRO, that levered stock fund. We sold $500 worth of AVGV, that's a value-tilted fund. We bought $1,296 worth of GOVZ, that is the Treasury Strips Fund, getting it back to 24%. We sold $303 worth of gold, GLDM, and bought $102 worth of DBMF, the Managed Futures Fund. And so that returns us to our original allocations.

Voices [1:01:26]

Wow, is it very nice?

Mostly Uncle Frank [1:01:29]

Now given the relative performance of stocks and bonds in the last two years, that has worked out to the advantage of this portfolio, not rebalancing it very often. But that doesn't necessarily mean it's a good idea. It is a good experiment, though.

Voices [1:01:42]

It's all in the name of science. Weird science.

Mostly Uncle Frank [1:01:48]

Anyway, that concludes our weekly portfolio reviews and our rebalancing. And

Contact Info Reviews And Sign-Off

Mostly Uncle Frank [1:01:54]

it's been a long episode. So now our signal is beginning to fade. If you have comments or questions for me, please send them to Frank at RiskPartyRare.com. Then email us frank at riskparty rare.com, or you can go to the website www.riskpartyradio.com. Put your message into the contact form and I'll get it that way. If you haven't had a chance to do it, please go to your favorite podcast provider and like subscribe and me some stars, a follow, a review. That would be great. Okay. Thank you once again for tuning in. This is Frank Vasquez with Risk Party Radio. Signing off.

The Timid Approach To Risk

Voices [1:02:31]

Now you can also be too reckless, but you can also be too cautious. This is called the timid approach to life. This used to drive me right up the wall. I used to say, what if this happens? And on top of that, if this was to happen, look at the fix I'd be in. I better not try. Then I'll tell you what changed my whole life when I finally discovered it's all risky. The minute you were born, it got risky. If you think trying is risky, wait till they hand you the bill for not trying. If you think investing is risky, wait till you get the tab for not investing. See, it's all risky. Getting married is risky. Having children is risky. Going into business is risky. Investing your money is risky. It's all risky. I'll tell you how risky life is. You're not gonna get out alive. That's risky. The Englishman says, Well, if that's the way it's gonna work out, let's give it a go. Right, that's what it's for. Give it a go. Better to live 30 years full of adventure than a hundred years safe in the corner. And see, it's not important how long you live. What's important is how you live.

Mostly Queen Mary [1:03:49]

The Risk Parody Radio Show is hosted by Frank Vasquez. The content provided is for entertainment and informational purposes only and does not constitute financial, investment, tax, or legal advice. Please consult with your own advisors before taking any actions based on any information you have heard here, making sure to take into account your own personal circumstances.