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Transcript

Zach:

Welcome to the Retirement Today podcast. My name is Zach Holcomb. And with me here as always, we have Michael Reese, he’s a certified financial planner, founder, and president of Centennial Advisors and a retirement planning expert. If you’re listening along with us on your favorite podcast app, happy to have you here with us, but if you’re watching this on our YouTube channel, remember to like comment and subscribe, to stay notified about all of our latest content and newest videos. Mike, on today’s program, big news last night, as we’re recording this, Bernie Madoff just passed away. So now you have a lot of thoughts to share on this.

Michael:

Oh yeah. Yeah. Bernie is gone and you know, I was commenting before we started recording. I was talking about how you normally, when somebody passes away, I, you know, you feel, you feel pretty bad. I mean, I do feel bad for the family, of course. But at the same time, it just brought back memories about, you know, how he ruined the lives of so many people and, you know, he took their money, he lied to them about what he was doing. He basically robbed them blind. And, you know, I just have such disdain for someone who does that type of thing that when I heard about that news, I have to admit the first thought in my mind was not, you know, my heart going out to the family. It was actually more along the lines of, you know, almost, and I’m, I’m a little, sorry to say this, but I almost felt like, you know, kind of good riddance.

Michael:

I mean, somebody like, like to me, just a real slime ball. Um and, but, but I thought, you know, this would be a great opportunity. And by the way, I know, I know as you’re all listening or if you’re watching, you’re thinking just, you know, don’t hold back, Mike, just go ahead, tell us how you feel. But you know, it made me think about how this might be a good opportunity to really describe if you are an investor, right. How do you make sure that you don’t get caught up in the same kind of thing?

Zach:

Absolutely.

Michael:

Right. Because it’s, it’s crazy. It seems like every couple of years I see some headlines about where a financial advisor is doing something similar. And all I’m thinking about is how in the world is this happening and we know how it happens. Uso I thought we could have a great discussion today on, you know, how do you protect yourself? How do you make sure you’re, you know, you’re not getting involved in something like that. And, you know, and, and what do you want to watch out for? Right. And what’s legitimate. What’s not legitimate.

Zach:

Sure. So if I’m somebody who’s seeking the services of a financial advisor initially out of the gate, what am I looking for?

Michael:

So here’s step one, there are two types to I’ll call it two general types, Zach of advisors you might be talking to. So one type of advisor would be an advisor that you’d find at a large firm. And when I say large firm, you know, we’re talking, you know, Merrill Lynch, Edward Jones, Morgan Stanley, Ameriprise, or like a big bank, Wells Fargo. I mean, companies that, you know, like they’ve got on every street corner, it seems like they’ve got an office.

Zach:

Right. They got the big building brand recognition.

Michael:

Right. That’s exactly it. And, and so let’s talk first. What did, what did people do with Bernie? Well, what they did was they broke their checks to his firm. So his firm was what’s called the custodian of the money. And at the same time they would report all the returns. But when you deal with a, with a,utrue, you know, a traditional big firm like that, you’re kind of giving them the money, but they have a department, they have their own custodian. And those custodians are sending you statements separate from the departments that run reports and all that kind of thing. So the key here is you want to separate the custodian. Who’s holding your money with the people that are running the reports.

Zach:

Right. It makes complete sense.

Michael:

And when you deal with a big firm that got huge compliance departments, to make sure that there are walls in place so that, you know, you you’re, you’re protected in that way.

Zach:

Sure.

Michael:

Really the question though, that’s not people don’t normally have a problem or a question with that. Normally what happens is when they come to a firm like ours, because we’re independent, we are an independent firm and people are like, well, Bernie was independent, you’re independent. You know, how do we make sure our money is protected? So the second set of advisor, if you’re talking to an independent advisor, what you want to look for is the question you really want to ask is who are you using for a custodian?

Michael:

And that answer had darn well better be someone that’s not the name of the company. Right? So for example, what kind of answers might you want to hear? Well, if you said, who is your custodian? And someone said, Fidelity, TD Ameritrade, Schwab trust company of America or something like that.

Zach:

I’d like to hear that.

Michael:

That’s the answer you want to hear. Right. You want to hear. And ideally, and most people, the big three are Schwab, TD Ameritrade and Fidelity, although Schwab, bought TD. So now it’s, I guess the big two. But there are other legitimate custodians. Trust company of America I know is used by a lot of independent advisors out there. Then there are like we main star and, and mainstay and, and millennium trust. And, but there are trust companies out there as well, that service custodians, but the key is it needs to be someone not the name of the company.

Michael:

Right. You want to separate that because like, in our case, let’s say you have accounts with us at TD. Well, you’re going to go on to TD’s website and you see your money all the time. You see what your account balances are. And when we send you a statement that says, or not a statement, we would more like a performance report or something like that. But when we send you communication, you can always look at the number we sent you, you go to TD and you look at the number there like, okay, do those numbers match up? Right. Then there are other custodians that are completely legitimate. Insurance companies is a good example. So let’s say that you want to hold an insurance contract of some type, maybe an annuity of some type of fixed annuity, indexed annuity, variable, whatever insurance companies act as custodians again, though, not the name of our company. It’s the insurance company that’s the custodian. That is a big, big key. Make sure that the custodians, the places that your money is going to, not the name of the firm. That’s the key.

Zach:

Okay. So legitimate custodian. That’s a big thing to be looking out for, but that can’t be the only thing that I need to be monitoring.

Michael:

Here’s another one. Here’s another way that people get in trouble all the time. It’s the, I call it the too good to be true syndrome. Yet oftentimes from an investor perspective, you don’t realize it’s too good to be true. So I’ll give you a couple examples of this. I remember several years ago I was actually approached by a company and they were promising to deliver 12% returns, 1% a month. Now, at the time the 10 year treasury bond was paying like five or 6%. So we’re talking, you know, a premium interest rate over what’s, you know, 10 year treasury bonds considered the risk free rate. And so they were saying, we are promising returns net to the client. After you pay the advisor, after you pay them net to the client 1%, a month, 12% a year, which is the equivalent of maybe at the time six, maybe 7% above what the risk-free rate was.

Zach:

Right.

Michael:

Well, treasury bonds are paying 1% now. So now you’re trying to tell me that you can get 6% above the risk-free rate with little to no risk.

Zach:

I’m starting to see a trend here.

Michael:

You know? No. Now is there a risk there? Yeah. There’s a lot of risks there, but they don’t present it that way. So is that a Ponzi scheme? Like Bernie Madoff? No, it’s not that one, that type of thing is not a Ponzi scheme, but it’s an example of, Hey, anytime you hear big returns with little to no risk, that’s where you got to really watch out, there’s always risk somewhere.

Zach:

From my perspective, it seems very unethical to present an investment in that shape or form.

Michael:

Yeah. Yeah. I’ll, I’ll agree with that and say, it’s unfortunate that some people aren’t as ethical as they should be. And another thing that comes to my, like right now, there’s like one of our clients is in this place. You can look it up online and I’ll give you the name of it because it’s all public information. One of the biggest automotive groups in the country was built in one of these programs where they said, Hey, we will pay you. I think there were saying eight or 9% ongoing income, plus a percentage when we go public. Called GPB automotive. I think the 11th largest automotive group in the country. And I came across, I never put a person into it, but I came across people that have money in it. And in fact, I can think of right now, a couple of our clients who are in it, but what, what happened?

Michael:

It ended up being basically it’s a big Ponzi scheme. What is a Ponzi scheme? They were taking all people who added money, new investor money and using it to pay off the promises to older investors. Right. And in fact, I think it was February, just a couple months ago where the CEO of the company, plus a couple of the, of the execs, they actually are criminally charged now with exactly the same thing that Bernie Madoff’s doing. Same thing. Right. So again, it just goes back to, Hey, high returns, low risk there, as my father would say, there ain’t no such thing right. Now certainly when it comes to managing money, there are way you can, you can use algorithms, right. To try to reduce your risk. Right. You can do that. But, Oh, that was the other thing about these programs Zach that I forgot to mention almost all of them are illiquid, meaning that meaning that, you know, they’re not held in a TD Ameritrade account or a Fidelity account or something like that. A lot is programs. You got to give them the money, just like Bernie. Right. You had to just like Bernie was no X or, or some little custodian that nobody uses. Or a lot of times these programs are inside of when I say illiquid, they tell you, Oh, you can pull the money out every now and then. But it’s really at our discretion. When you read the fine print. So just, if it sounds too good to be true, as they say it probably is.

Zach:

Gotcha. All right. So we’ve talked about looking for a legitimate custodian, too good to be true investments. And you know what to look out for Ponzi schemes, anything else that comes to mind?

Michael:

Yeah. I kinda think this this here’s a message that I think will make some sense. There are some alternatives. There are alternative programs that where liquidity is restricted, where they legitimately, you know, they might pay six to 10% a year and we have a fund that does that. And it’s filled with legitimate programs, right. It’s a diversified approach, legitimate programs, but here’s the deal. It’s also only available to people who are what’s called accredited.

Zach:

Right.

Michael:

So what is an accredited investor? An accredited investor is someone who has over a million dollars in their investment accounts, or they’re making like two, 300,000 a year income, right? Oftentimes these illegitimate programs, the ones you really want to watch out for they’re available to everybody. So what’s happening is a lot of these, well, these people that might not be as ethical as they should be you know, they’re selling their programs or pushing their programs to people that are they’re non-accredited a lot of times they’re non they’re.

Michael:

You know, they, they might be investors who are less sophisticated, but what’s crazy is a lot of times 0they even capture sophisticated investors as well. So you get both. But if you’re, but generally speaking some of these programs that sound too good to be true. Hey, if you’re not accredited, I can almost guarantee they’re too good to be true. Right. those types of programs, there are programs that are similar to that, that are available to accredited investors. But a big, big red flag is, Hey, here’s a program that you’re gonna earn, like in today’s world. If someone says to you, Hey, you can earn seven, eight, 9% with almost no risk. Right. And anyone can do it. That’s not just red flag, but probably screaming. Right?

Zach:

Yeah. The alarm bells should be wailing.

Michael:

Yeah. You should be like, yeah. Right. Do they call it the four alarm fire, five alarm fire or something? Yeah. Look out. That’s probably not, that’s probably not something you want to be part of.

Zach:

These are a lot of good things to look out for. And I mean, there’s some of the things that I didn’t even think about as well.

Michael:

Yeah. So just as we kind of wrap this up, you know, Bernie’s gone. I think he’s very dark mark in the history of the financial world. I just, I mean, I just can’t, you know, my, my blood boils when I think about him but what do we learn? You make sure you’ve got a custodian in there. Right. Make sure there’s a custodian. Someone’s someone has your money. That’s not right. Not the name of the firm. It’s number one. Two, if it sounds too good to be true, it probably is. Right. And three, especially if it’s available to anyone, you know, if it’s only available to accredited investors, the odds of it being legitimate are much higher. But if it’s available to everyone, boy now you’ve got really, really screaming red flags,

Zach:

Doing your due diligence is key.

Michael:

Yeah. And it’s, it’s kind of hard to like, and that’s the hard part, you know, because so many of these programs, Zach, even if they’re ill, if they’re not legitimate, man, they put together some beautiful packages for people and they look slick, they look really good. So like, you can do all the due diligence you want. I was having dinner or I was having dinner with someone last night who he lives and breathes these alternative investments. And he even told me, he’s like Mike, as he goes, I’ve been doing this for 30 plus years and I can guarantee you that I still get caught sometimes in something that’s not legitimate, he goes, so I said, so what do you do? I asked him, he said, it’s all about diversification, just diversify. If you’re going to use those types of investments, you want to have a large mix of those things.

Michael:

So if one of them goes bad on you, it’s a very minor percentage of your overall portfolio. And that’s true probably in a lot of areas of investing right. So that’s, that’s the thing you can do all the due diligence you want and you should, and it still may not help you. It’s the problem. It’s frustrating. So the one message I would deliver is if you’re going to go into the alternative space, do it in a diversified way, one of the reasons we run our divert, our income portfolio, our alternative income portfolio, the way we do it’s very diversified is for that very reason. Right. We don’t expect that there’s anything in that portfolio that would be illegitimate. But if there is, it’s only going to be a small portion. So that protects the client or protects the investor versus just trying to put all your eggs in, in one of those baskets.

Zach:

Sure. Well, I’m glad we had this discussion today because I think these are things that people forget about sometimes unless it’s in the news or in the media, it kind of goes to the back of our mind.

Michael:

So there we go. That’s our message this week, right? So as I wrap up and man, I hope I’m not offending people when I say this, but Bernie, I’m sorry, man, but good riddance to you. Just really not a good person, just not a good person. And, and it’s, I feel for your family, but I don’t feel for you. And at the same time, you know, I hope this message was helpful to people. I hope as you’re watching, you’re listening, I hope this was at least helpful that you can be better educated, right. When it comes time to evaluate some of these things. And if you have, if you’re being presented something that looks a little questionable, you know, you can always give us a shout. We’re always happy to visit with you and, you know, maybe share a fiduciary’s perspective right, on something like that. So all right. I think we can wrap this up, right Zach. You got anything to finish with.

Zach:

I agree. Like you said, education is key and if you like the content that we share on our channel, remember to like, comment, and subscribe. So you can stay up to date about all of the latest things that we post.

Michael:

Yeah. That’s right. Like subscribe and share with your friends, right?

Zach:

Yup. You got it. We’ll see you next time.