Learn Bonds Interviews The Reformed Broker…I ask an “Idiotic” Question and More.

the reformed brokerI recently interviewed Josh Brown AKA The Reformed Broker. His tell all book “Backstage Wall Street” about the brokerage industry (and how not to get ripped off by it) has received lots of positive press.

Josh has moved from being a commissioned salesperson to a Registered Investment Adviser (RIA). As we discuss in our article “Should You Trust Your Financial Advisor” RIAs are held to a much higher standard than a broker.

Here is a slightly out of order version of my Interview with The Reformed Broker:

Learn Bonds: Do men or women make better financial advisors?

Josh Brown (The Reformed Broker): That’s an idiotic question.

Learn Bonds: Why is that an idiotic question?

Josh Brown: If I asked you, do Roman Catholics or Jews make better financial advisors, what would you say?

LB: Who should be managing their investments on their own versus using a financial advisor?

Josh Brown: If you have under $100K, you should be managing it yourself. Over $250K, you should be using a financial advisor. Between $100K and $250K, it depends if you have a time and interest to do it yourself.

(During the interview, Josh made clear that when he was talking about “financial advisors” he meant those with a fiduciary duty, such as an RIA and not a commission based stockbroker.)

LB: Do financial advisors fall into broad categories?

Josh Brown: Yes. You’ve got  CPAs and former Vanguard and Fidelity people. They see the stock market as an investment tool to allocate a portion of a portfolio. Their focus is on tax and financial planning, and they don’t try to beat the market. Then, you have your hedge fund type financial advisors that make the investment decisions themselves, and try to beat the market. I am somewhere in the middle.

LB: You’re connected to BrightScope, which has a free online tool to research Financial Advisors. What type of information can you find on their site that would be a warning sign not to choose an advisor?

Josh Brown: If the financial advisor moves from one firm to another a lot. If the financial advisor was ever terminated for cause. If the financial advisor does not have a lot of experience.  These would all be warning signs that you may want to avoid that advisor.

LB: When should you leave a financial advisor?

Josh Brown: When they don’t deliver on the goals that you set together. Your goal may not be to beat the market but to have a certain amount saved up for retirement. For example, you may have a goal of returning 5% a year to get to that number. If the market moves up 35% in a year, and you return 15%, you still did 3 times your goal. That is not a reason to leave your financial advisor.

I see so many f***ing times that when the market starts roaring like it did in 1999 and 2006, that people decide that they don’t need and an advisor.  These were great examples of the types of situations where you need a mature professional managing your money

LB: How much should a financial advisor charge?

Josh Brown: Around 1% and not more than 2% (of Assets Under Management, per year).

LB: My financial advisor put some of my money in a mutual fund. I had a negative reaction to paying my advisor a fee to manage my money on top of the mutual fund fees? Do you think that advisors should use other managers?

Josh Brown: We (The RIA where Josh is a representative and Barry Ritholtz is the Chief Investment officer)  use a great outside manager that invests in Asian convertible arbitrage. We pay him 89 basis points (.89%). He’s been killing it.  You don’t want me making currency trades. We are dealing with people’s money. We have to be serious.

I believe that Josh was saying that a financial advisor cannot be an expert on all aspects of the financial markets. Wouldn’t you rather have a better overall portfolio return than pay less fees?

LB: Can a commission based broker do a good job managing a client’s finances?

Josh Brown: I am not saying that there are no good brokers or brokers that make money for their clients, but the model is broken. A commission broker is so inherently conflicted that they will rarely be able to provide a satisfactory service to the client.

LB: What is the future for the major wirehouse brokerage firms (eg UBS, Morgan Stanley Smith Barney)?

Josh Brown: Halfway houses, where they enable their brokers to transition to a fee only model while  remaining at the firm. Clients are demanding it.

Leave a Reply

Your email address will not be published. Required fields are marked *