AMA 49 – Investor Watchdog with Jack Waymire

jack waymire

Join Jason Hartman and Investor Watchdog, Jack Waymire, for a discussion concerning the ethics of the financial services industry. According to Jack, the frequent lack of integrity undermines the achievement of investors’ financial goals. For more details, listen at: www.JasonHartman.com. Companies do not do what is best for you. They are very good at hiding information that they do not want their investors to know. Investor Watchdog investigates these companies and products, acting as a go-between for investors and advisors, answering frequently asked questions, such as, “How do I know I’m getting the right financial advice?” Jack shares examples of deceptive practices by various companies and how the executives that run the companies, i.e. Goldman Sachs, are insulated from accountability simply by paying fines rather than serving jail time for unethical and illegal practices. Jason and Jack touch on the subject of the Madoff Ponzi Scheme, where Jack talks about some of the evidence that was found, as a glaring example of unethical sales pitches and conman tactics. Jack also informs listeners of what deceptive sales practices to watch out for when dealing with financial advisors.

Jack entered the financial services industry as a financial consultant in 1976 for Warburg, Paribas Becker. He provided financial advice to companies, public entities, Taft-Hartley funds, endowments, and foundations with assets exceeding $7 billion. After spending two years with an investment firm, Jack co-founded Lexington Capital Management in 1983, a money management firm that wholesaled its services through wirehouses and regional broker-dealers. In 1989, Jack also founded a broker-dealer and built a national retail distribution system to market its products and services. Between 1996 and 2003, Lexington was sold to two larger financial service and technology companies. In his last position, Jack was President of Sungard Advisor Technologies. During these 20 years, Jack worked with thousands of investors and financial advisors and was responsible for providing services to individual investors with billions of dollars of assets.

In 2004, Jack left the financial services industry to market a book he authored: Who’s Watching Your Money? The 17 Paladin Principles for Selecting a Financial Advisor. Published in December, 2003, by John Wiley & Sons, his book was widely regarded as the first to provide an objective process investors could use to select higher quality advisors and to avoid the risks and consequences of bad advice from lower quality advisors. In 2004, Jack co-founded PaladinRegistry.com, a website that took selected content from his book and made it available to investors over the Internet. Later in 2004, a Registry of pre-screened, five star rated financial planners and financial advisors was added to the website. Paladin became the first online firm that vetted financial professionals for investors and provided comprehensive documentation for their credentials, ethics, business practices, and services. In 2008, Jack was instrumental in the development this blog site (InvestorWatchdog.com) that reports on investment risks that result from ethical conflicts in the financial services industry. Jack has appeared on CNNfn and over 100 national, regional, and local radio shows to talk about the subject matter of his book, the risk and consequences of bad advice, and Paladin’s free online solutions. He is also widely quoted in the print media including Forbes, BusinessWeek, Worth, and Kiplinger and is a columnist for Worth Magazine. Jack can be reached at [email protected]

Narrator: Welcome to the American Monetary Association’s podcast where we explore how monetary policy impacts the real lives of real people, and the action steps necessary to preserve wealth and enhance one’s lifestyle.

Jason Hartman: Welcome to the podcast for the American Monetary Association. This is your host, Jason Hartman, and this is a service of my private Foundation, the Jason Hartman Foundation. Today we have a great interview for you. So I think you’ll enjoy it. And comment on our website or our blogpost. We have a lot of resources there for you. And you can find that at AmericanMonetaryAssociation.org or the website for the foundation which is JasonHartmanFoundation.org. Thanks so much for listening and please visit our website and enjoy our extensive blog and other resources there.

Start of Interview with Jack Waymire

Jason Hartman: My pleasure to welcome Jack Waymire. He is the founder of Investor Watchdog, InvestorWatchdog.com as a website. And this is an interesting service. He’s done a lot of research on financial advisors and we’re going to talk about how to avoid some pitfalls, scams, and what you should look out for, what questions you should be asking, and what qualifications you should consider to be legitimate and illegitimate. Jack, welcome, how are you?

Jack Waymire: I’m doing great, thank you.

Jason Hartman: Good. Hey, where are you coming to us from today?

Jack Waymire: Northern California. We are located right outside Sacramento.

Jason Hartman: Fantastic. Well, my aunt and uncle own a lot of properties. They’ve become very rich in real estate in Sacramento. So good place for them – not lately, but overall they sure have.

Jack Waymire: Yeah, it’s making a small comeback like the rest of the country.

Jason Hartman: Good. Well, tell us about Investor Watchdog and maybe, first of all, what prompted you to start this, just all of the frauds and scams on Wall Street?

Jack Waymire: Two things, both of them tied to stock market crashes. And between 2000 and 2003 when people lost trillions of dollars, I saw a lot of people get really badly damaged by bad investment advice during the crash in 2000, so I wrote a book in 2000-2002 that was published in 2003 titled Who’s Watching Your Money? And that book was literally tied to how do I avoid bad advice? How do I avoid bad investment products? How do I select quality advisors? And we went along for a number of years basically providing services to investors and how to pick advisors and how to avoid bad guys.

And along came the stock market crash in 2007 and 2008, and what we did was we launched a second website called Investor Watchdog and it launched as a blog site, primarily tied to investment scams and deceptive sales practices, basically things that advisors did to take advantage of the clients. And now what we’re doing in the middle of April is re-launching that Investor Watchdog website because it’s really resonated with investors. We’re re-launching it as a go-to website loaded up with free tools investors can use to select new advisors and for the first time we give them the ability to monitor their current advisors. And so it’s all tied to advisors, much like the rest of our history, but now we’ve got a site that’s really got a lot of comprehensive tools on it.

Jason Hartman: When I look at Wall Street oriented investments, there are so many layers to them. There are so many layers as you peel back the onion as it were. You’re dealing only with that first layer, the advisor themselves, right? So, it has nothing to do with the board of directors, the CEO, the mutual fund manager or anybody else back there behind the advisor who could be skimming the profits off the top, paying themselves big pensions and exit bonuses and things like that, right? It’s strictly the point of contact or the storefront with the public, right?

Jack Waymire: Great question. I think what really, really confuses people is when you look at the companies on Wall Street to produce the products, then you’ve got the companies on Wall Street to distribute the products, and somebody like a Merrill Lynch does both. They create products, they distribute products. But you have other companies that are more specialized. They do one or the other. And then when you think about the distribution system, now you get into the advisors that are actually the sales reps for that company.

We really focused on the professionals because the professionals are licensed with organizations. They may be employees, they may be independent contractors, but we really focus in on the individual because these companies are so murky and complicated and they’re very, very good at hiding information. They don’t want investors to have that it’s frankly just a lot easier to deal with the professionals at those firms.

Having said that, we’re moving more down the path of firms as we go forward because once we got all the functionality built out on Investor Watchdog, the next step is to start looking at firms. However, we’re going to limit ourselves to small independent registered advisory firms as opposed to the big broker dealers or the Wall Street firms.

Jason Hartman: One of the things, when you say Merrill Lynch, they create products and they sell or distribute products. They’ve come under a lot of fire for that – not enough in my opinion. But they’re doing investment banking, so they’re puffing up stocks and then they’ve got their own customers they’re selling them to and they weren’t disclosing it – they probably are now but no one reads it anyway. So it’s irrelevant, it’s disclosed in mountains of disclaimers and 50-90 paged documents nobody ever reads anyway.

Jack Waymire: Don’t forget the 4-point type either buried in a lengthy document. There’s a type size. But when you look at somebody like a Goldman Sachs, they historically have been one of the most prestigious firms on Wall Street. A lot of people just literally viewed themselves as lucky to work for Goldman Sachs.

Jason Hartman: Well, why wouldn’t they? They get a $600,000 a year bonus.

Jack Waymire: Yeah, they make large sums of money. But when you say Goldman Sachs, package up $1 billion of basically toxic mortgages, turn around and sell those toxic mortgages to their clients as safe investments, their clients then proceed to lose $700 million of the $1 billion in less than 2 years. Obviously they’ve been fined for this and everything else. Goldman Sachs says they paid a fine of about $250 million. But to package up toxic assets and sell them as safe, and that’s one of the more prestigious firms on Wall Street, if that isn’t a huge red flag to investors I don’t know what would be.

Jason Hartman: Yeah, and I couldn’t agree with you more. And we won’t hammer on this too much, but just since you mentioned it, Goldman Sachs, one of their execs left and wrote a scathing letter upon leaving of why I’m leaving Goldman Sachs. I don’t know if you saw that in the New York Times. It’s been floating around the media because that just came out last week. But these companies, really what they do, and I’ve seen it in other industries as well, they just literally budget into their business plan the paying of fines. And it’s a better deal for them, unfortunately, to just pay the fine than it is to do the right thing a lot of times.

Jack Waymire: We’ve been preaching exactly the same thing. Citigroup just paid a huge fine for doing the same thing Goldman Sachs did. And these are the biggest names on Wall Street. And if they have to cheat to win, you really got to wonder what’s going on. But the bottom line is the fines have not been a deterrent, the fines have been functioning more like a cost to doing business for these companies that are willing to scam their own clientele but there’s a big issue sitting in the background. We keep referring to companies. It’s not companies. It’s the executives that run the companies. Somebody at Goldman Sachs, somebody at Citigroup, somebody at Bank of America, somebody made these decisions to scam their own clientele. By virtue of the fact that the company can pay a fine without admitting guilt means none of those executives go to jail.

And so what’s the bottom line here? You’ve got a very greedy, corrupt group of executives running very prestigious Wall Street based companies. And the bottom line is they’re insulated from any responsibility of the outcome. So when they decide to go build a $1 billion dollar CDO made up of toxic assets, somebody made that decision. Nobody at Goldman Sachs has gone to jail. And so paying fines is a way, in my opinion, to insulate those executives from accountability when they make decisions to rip off investors.

Jason Hartman: Well, it’s interesting how you explain that because the other thing that this has the effect of doing, the net effect here, is they basically can go out and act illegally and at the very least unethically but illegally in most places, and they get the shareholders to pay their bail. I guess that happens in all the cases really – look at Bernie Madoff. He used the money that he made illegally to make his life more comfortable, to do his defense. And he didn’t really have a trial which is to me in and of itself very suspicious. I almost there was collusion there because a lot of that stuff would have been made public that never was, but that’s another whole issue.

Jack Waymire: Let me give you an example of Madoff. We would have caught Madoff. Our due diligence process that we use for screening and reviewing advisors, I guarantee you we would have caught Madoff in 5 minutes. All you had to do was go into the FINRA records on Madoff and you would have seen one complaint after another from investors, every one of them settled very quickly for cash. Now, why a FINRA or an SCC wouldn’t have come in and said this is fairly suspicious behavior. Obviously he had a lot of great contacts and a good relationship with some of the regulatory agencies. But the bottom line was that evidence was there but people with billions of dollars obviously never looked at the FINRA records before they committed their money to a Bernie Madoff.

So I think you could say Madoff obviously was a criminal, but you can also make the case that investors in a lot of cases are their own worst enemies because they won’t take a little extra time to go out and really analyze who’s going to be handling their money and whether or not they’re ethical, whether or not they’re competent, whether or not they can trust them.

Jason Hartman: Fair enough. Yeah, very good point – do your homework, folks. What should investors look for when they select a financial advisor? We’ve already touched on some of the mistakes but I’m sure there are many more of them. I like what you said before we started about these fake designations or these meaningless designations. Tell us about all of that. Start with what should they look for when they select someone?

Jack Waymire: Okay. The easiest thing for them to do, starting the 17th of April, is go to Investor Watchdog.com and set up a user account. What Investor Watchdog does is it gives an access to a number of different tools that they can use to identify and evaluate the quality of financial advisors. One example is a deceptive sales practice. A lot of advisors go out and put a lot of initials after their name. Some of those initials are extremely valuable. An example would be CFP, CPA, SEMA, CFA. Those are very valuable credentials. They’ve done a lot of work to earn the credentials, testing, classwork, ongoing education requirements, etcetera. That’s one end of the spectrum.

The other end of the spectrum is they went out and spent $195 to buy a bogus certification. This certification they put after their name and then they go out and tell investors, look, I’m an expert in my field. Look at all these initials after my name. And the investor has no idea that they paid $195 for each certification and did absolutely no work. And a lot of investors that might fall into the category of easily impressed go “Wow, this guy must be an expert. Look at all those initials.” when in fact it’s purely a deceptive sales practice.

Jason Hartman: Let me make one comment on that just for a moment if you would, just to back up and look at the broader concept here is that this presupposes that the smarter advisor is even the better advisor in the first place. And here’s what I mean by that. It may sound like a crazy comment. But if you look at some of the biggest financial scams that have been perpetrated, at one time I was kind of bashing Harvard because it seems like every crook comes out of Harvard. Nothing against Harvard University or anything, I’m sure it’s a great school, but all of these guys are highly educated – that doesn’t make them ethical, it doesn’t make them follow the law just because they’re smart.

Jack Waymire: And let’s go down that path. If you were smart and also extremely greedy, if you wanted the Park Avenue apartment and the summer house out in the Hamptons and the private jet to head down to the Caribbean, if that’s the lifestyle you aspire to, the question then is can you achieve those goals by doing what’s best for investors or can you kind of go in and manipulate the system and do what’s best for you? And I would submit in a lot of cases it’s the latter.

The other thing that’s true is the reason you might spot a Harvard in all of this is Harvard on Wall Street. It’s a little bit incestuous to the extent that the Harvard MBAs hire the Harvard MBAs. And the guys from Yale hire the guys from Yale. And so they’ve got a little bit of a network going, especially through the business schools. And the bottom line is you may see a company that is dominated by executives that come from particular schools because they’re all hiring each other. But that also creates a culture that can be a little bit poisonous because I’m bringing you into a culture that I basically dominate and then my expectation is you’re going to adhere to the rules of the culture, right?

Jason Hartman: Right. It becomes a peer pressure sort of fraternity environment.

Jack Waymire: Absolutely, all built around enormous sums of money when you’re talking about executives that come on 8-9 figure bonuses and the only way they achieve those bonuses is a lot of short term profitability. That’s why a lot of them have made mistakes out of just pure greed but where’s the downside risk? If I take a big risk and I win, I make a lot of money. If I get caught, my company pays a fine, nothing happens to me. I go on to the next business opportunity. And I’m not even sure on Wall Street if it doesn’t make you less employable if you do get caught unless you go to prison.

Prison changes the rules because now you got a discloser item. It’s a crazy environment and I think whenever you’ve got tens of trillions of dollars floating around, there’s a lot of people who got into the financial services industry to make a lot of money as opposed to help investors achieve their financial goals and then the risk for the investor is, when they hire an advisor, if they get one of those advisors who came into the industry to make a lot of money, they have a potential problem on their hands if they get an advisor who really does subscribe to the ethical standard of putting the investor interest first.

And so going back to your question about what to look for at an advisory, one of the absolute keys is that your advisor is an acknowledged fiduciary. In order to be an acknowledged fiduciary, the advisor has to be a registered investment advisor or an investment advisor representative. Those are the two registrations that allow an advisor to provide ongoing advice and services for fees. So that’s a nother characteristic that you’re compensating your advisor with a fee versus a commission. But the real key is you want a fiduciary handling your money, not a sales rep. And that means you look for the RIA or the IAR after their name that these guys are registered. What that means is they’re held to the highest ethical standards in the industry.

So, if you’re a stockbroker, your ethical standard is called suitability. You’re supposed to make suitable recommendations to your clients. Suitability, if you think about it, is a fairly vague standard because it’s going to vary from client to client. An older client may be more risk averse. A younger client may have a higher risk tolerance and I’m supposed to make suitable recommendations. When you go in and you look at the RIA/IAR giving advice, by law they have to put the investor’s interest ahead of their own. That’s why you’ll see organizations like Merrill Lynch fighting basically the regulators and others and some of the industry organizations.

They’re fighting the whole idea that stockbrokers are going to be main fiduciaries. And the reason they’re fighting it is they don’t want their stockbrokers held to a higher ethical standard. They like the lower one called suitability, and again it’s vague and subject to interpretation.

So I want a fiduciary handling my money, I want somebody who is compensated with fees, I want somebody who’s got a clean compliance record which I can check going to FINRA.org and BrokerCheck. I can learn more about their compliance record. I want somebody that’s in the wealth management business so he’s not trying to sell me mutual funds and annuities and life insurance.

If I viewed a financial advisor the same way I did other professionals, CPAs, lawyers, doctors, dentists, architects, basically these are specialized professionals that have knowledge that I’m willing to pay for because it helps me achieve my goals. And that’s the same way you should think about a financial advisor. I want a professional that has a lot of knowledge, integrity, somebody I can trust, that is basically there to help me achieve my financial goals. I do not want a salesman handling my money. And that’s the single biggest thing because salesmen are there to basically move product, collect commissions.

And what I want is somebody that’s a real advisor, that’s held to that fiduciary standard. I pay them a fee just like I pay my CPA or my attorney. And actually a financial advisor is a better deal than a CPA or attorney because when I pay a fee to the CPA or attorney I would call that a cough center. When I pay a fee to a financial advisor, I expect performance in return. I could almost view my advisor as a profit center. But I want to basically compensate them similarly. They’re paid fees for their knowledge, for their advice, for their services. But I do not let sales reps handle my money. And so if I limit myself to the RIA/IAR registered investment advisor representative, now I’m dealing with a real advisor who was compensated with fees, who’s held to that higher fiduciary standard, then my odds of achieving my goals just went way up.

Jason Hartman: Talk about how they’re paid so everybody understands that. A lot of them brag about fee-only financial advisor. That means, what, that they’re getting a percentage of the portfolio value? They usually take that out quarterly.

Jack Waymire: There are three types of fees. When I say I’m fee only, basically I’m telling you I don’t accept any type of commissions. Keep in mind there are two types of commissions. One type of commission is when I sell an investment product like a mutual fund. Another commission is when I sell an insurance product like life insurance annuities, long term care, etcetera. So when I say I’m fee only, I’m not accepting any commissions.

The most popular fee for investment advice is called an asset based fee. So if you put $500,000 with me and my asset space fee is 1%, then you’re going to pay me $5000 a year for my knowledge, my advice, and my services. That’s an asset based fee percent of assets. A lot of planning professionals that really promote the fee only, they may charge an hourly fee, $300 an hour, $200 an hour, or they may charge a fixed fee. I’ll do your financial plan for $2500. So, when they say fee only, they could be fixed fee, hourly fee, or asset based fee.

Jason Hartman: Yeah, and I find that one of the other sort of smaller rip-offs out there, because a lot of times I think it is kind of a rip-off, they just try to sell you these plans. I’ve literally met with advisors over the years that it seems like all they’re trying to do is charge me $2500 just to do a plan. And it seems like half the time they don’t even really care that much about my business or that’s their way to sort of hook you so that you’ll be in with them already. They just want to sell you that plan half the time. But go ahead.

Jack Waymire: Just think about it. 99% of those plans are a boiler plate. They’re sitting inside software programs.

Jason Hartman: They just use NaviPlan Pro, the software, whatever they use, and spit those plans out with pretty graphs and charts.

Jack Waymire: And you can have small plans, big plans, complicated plans, simple plans, a lot of range in the plans but a very high percentage of the content of the plan is sitting inside computer software, then all the advisor has to do is identify the variable. How many children do you have? How old are they? Are they going to college? Stuff like that, identify the variables and put them into my program and it spits out a plan.

But the one to watch out for is the plan that’s designed to sell product because it used to be some years ago 70% of all financial planners were insurance agents. Insurance agents, it was a pretty onerous title to have on your business card insurance agent. Selling insurance was not a high prestige job. What they found was if I quit calling myself an insurance agent and I start calling myself a financial planner, I’m going to have a lot less sales resistance. So one reason to be a planner was less sales resistance. People weren’t as resistant to the planner as they were to the insurance agent.

The second one is when I produce this plan, what if I produced a plan that recommended that investor put a lot of money into annuities and life insurance? So now I could go out and buy software that was designed to basically sell all those insurance products for me. What a sweet deal. And I gotta tell you, it worked like gangbusters. A lot of investors fell for kind of a scam if you ask me. I call myself a planner even though I’m an insurance agent, and there’s absolutely no law that prevents that, just for the record. So that’s perfectly legal. If I want to call myself a planner, no regulation out there says I cannot do that.

And then, secondly, for me to use software that is basically designed to sell insurance products or other products like front end load mutual funds, products that are designed to generate substantial commissions for me, and now it’s almost a case where, hey, I’m not selling you these products. Look at the plan. It’s the recommendations of the plan. And this plan represents what you told me. You gave me the input, I ran the plan, there’s what the plan looks like. And so the fact that you need a $5 million dollar life insurance policy, it’s the plan saying that, not me. So they let the plan do the selling for them.

So, all of this should be major red flags for investors. When I pick a planner and he’s asking me a few questions and comes back with an ADPH plan and it’s loaded with insurance recommendations in particular because insurance products pay much higher commissions than most other types of products. When it’s loaded with insurance recommendation, be careful.

Jason Hartman: Yeah, I think a lot of those insurance products are just abject scams. It’s so popular nowadays for these planners to be selling these life insurance policies as an investment. And I’ll tell you. I remember one of those guys came into my office. And I’ve known this guy for a long time. We used to serve in a charity together on the board. And he comes into my office one day and he says ‘Hey, I want to pitch this stuff to your investors’ and he was a little more tactful than that but basically that’s what he meant. And he’s talking to me and I’m kind of resisting it. I’m like, no, I’m not really interested promoted insurance products and stuff like that.

He pulls out a copy of a check and he puts the photo copy of the check on my desk and it’s over

$250,000 and it represented one of his commissions on a life insurance policy he sold. A big policy albeit, but give me a break. That’s just incredible.

Jack Waymire: The largest check I’ve ever seen was $750,000 for one sale of a $7 million dollar survivorship policy to a lady in Aspen, Colorado. So, again, if you get back to all of the greed that drives Wall Street, I just wrote a blog titled “The Botanist”. I wrote a blog on our website I think just yesterday. And “The Botanist”, this was a guy that I interviewed some years ago, and I could remember very distinctly he had a degree in botany. Like, what does that have to do with financial services?

Jason Hartman: Right.

Jack Waymire: He then got out of college and he goes to work for a company that sold fertilizer to nurseries. Now, there’s a lot of different words you could use for fertilizer. That’s basically what he did. At some point, he got tired of selling fertilizer and he heard you could make a lot of money in the financial services business. So he got a sponsor from some little local BD and he went out and took the Series 6 license and in one week he went from selling fertilizer to selling mutual funds. And because he had passed the Series 6 exam, he went out and told investors he was a financial expert because he was a licensed professional. And obviously I wouldn’t have this license if I wasn’t an expert.

Anybody who bought anything from this guy was probably a serious risk. He had no clue what he was doing. He was selling the product, the flavor of the month. He was doing what his boss told him to sell. He was selling the products that made him the most money. But just think about an industry now that when you think about ethics, let’s go over on the side of competence. There is absolutely no minimum education requirement to be an advisor, not even a high school diploma. So when you think about the CTAs or what they went through to earn that designation, the lawyers in law school, the doctors with internships and residencies. . .

Jason Hartman: They have some real education.

Jack Waymire: They have some real education. Now you’ve got an industry that wants to handle your pension fund and your rollover IRA and the bottom line is there is no education requirement, not even high school. There’s not one day of experience requirement. There are no training requirements. The minimum age is 18 and convicted criminals can obtain securities licenses as long as their crime was not securities related.

Jason Hartman: Unbelievable, I had no idea.

Jack Waymire: An ax murderer could get a securities license. What kind of an industry are you looking at when you look at the absolute lack of minimum requirements? Minimum requirements would protect investors from the botanists, the botany majors.

Jason Hartman: I want to just mention a tangential issue to that to some extent. The reason the minimum requirements in that education is so important, and obviously, as you just told our listeners, it’s totally lacking in the financial services industry, but the reason that’s important is because it makes the advisor have something to lose. It puts them at stake.

A lawyer, they got their bachelor’s degree, they spent another 2 or 3 years in law school, or if a doctor got their bachelor’s, spent another 5-8 years in medical school and residency and internships and all that, they’ve got a lot at stake. If they lose that and they’ve got to start over and get other specialized education or training in a whole other field, they’re going to be careful to treasure that big sacrifice that they made, whereas these people, like you said, you could be just out of prison, you could be an ax murderer, and you could become an advisor. That is amazing to me.

Jack Waymire: And to support what you’re saying, the turnover rate for new advisors in the industry is somewhere in the 50 to 70 percent range because these guys are paid straight commission just like a used car salesman. They have to pay their own expenses most of the time. They get very limited support from the company, therefore it’s sink or swim, you either sell enough products and you make enough commission that you can afford to stay in the business or you don’t. So when you think about the turnover rate and the lack of minimum requirements, what this does is it creates a huge risk for investors when they select financial advisors.

And so now you’re back to why did we create Investor Watchdog? It’s a go-to website. Everything on the website is free to the investor. Nobody’s trying to sell them anything. And these are tools that they can then use to check out an advisor. They’re thinking about hiring, there’s tools that they can use to monitor their current advisors, because that’s a big issue too. If I’ve got a bad advisor right now. . .Let me describe probably the most core strategy and I call it “friend, trust, expert, sell”.

The first thing I want to do as an advisor is I want to get you to like me. And I call it rapport building, relationship development, I got names for it but I want you to like me. The reason I want you to like me is I know you inherently trust people that you like. So if I can get you to like me, it’s much easier to get you to trust me. Now, once you trust me, bottom line, it’s gonna be easy for me to convince you that I’m an expert in my field. And now you trust me, so you’ll believe me when I say I’m an expert with all those initials after my name.

And then once you buy into the fact that I’m an expert, slam dunk for me to sell you whatever I want to. And the reason is, just like you trust people you like, you do not question the advice of experts. You don’t question your doctor, you don’t question the lawyer, you don’t question the experts because they all know more than you do. So, I may be the botanist with 2 weeks of experience, but if you like me, then you trust me, and I use trust to convince I’m an expert. It’s a slam dunk for me to sell you whatever I want to because now you believe I’m an expert and you’re not gonna question the advice that I give you. And that is exactly the way most advisors are trained. Like, trust, establish yourself as an expert, sell whatever makes you the most money.

That’s what the investor’s up against. It’s a very, very slick process. If you look at the Stanford guy down in Houston to scam people out of $7 billion dollars, you look at the Bernie Madoff guys, these are very slick marketing programs. One of the biggest laments of the 11,000 people that invested with Madoff was “I thought we were friends”, right? You hear that over and over and over.

Jason Hartman: People should remember something. I was talking to a guy that he went into a fund that invested in a property. So this is a real estate deal but it’s pooled money which I always advise against and say pools are for fools. And he likes the guy still even though he knows he got scammed. The promoter of this, he just likes him. And I said to him “Look, this is the stock and trade. This is the major survival tool of a con artist, is rapport – they’re good at it. When you’re legit and you run a legitimate business, you don’t have to use the likability factor as much. Of course you should be reasonably likeable always.

Jack Waymire: The way we represent it is do you want the doctor with the best bedside manner or do you want the doctor with the greatest degree of competence? And I would say, personally, I don’t care what his bedside manner is, I want great advice and I want a good surgeon, and I want the best doctor I can find. So personality kind of takes a back seat to competence. But here’s the problem. Very few investors know how to measure the competence of advisors.

So, what they fall back on is the advisor’s personality. If he’s likeable, he must be trustworthy. If he’s trustworthy, then I believe it when he tells me he’s an expert. And once I believe he’s an expert, look out. He’s now in a power position. And if he’s ethical, he may use that position to recommend really good quality and give me great advice, recommend good quality products, etcetera.

If he’s unethical or he’s just out to make as much money as he can from my assets, then I’ve got a huge risk sitting there, very big risk. And let me give you one other tidbit. I don’t know that risk exists. Why? Because Wall Street spends over $300 million a year on lobbyists fighting regulations that would benefit investors. And the purest example of that is the amount of money Wall Street firms have spent fighting any form of full disclosure by financial advisors.

So, the fact that I’m a botany major with 2 weeks of experience, there’s no rule that says I have to disclose that. So if the investor isn’t smart enough to find that out on their own, that investor has got a big problem on their hands. So, Wall Street has created the risk by hiring these guys, then Wall Street hides the risk by fighting any form of transparency or full disclosure. So it’s up to the investor to uncover the risk.

So that goes back to the these watchdog tools I’ve referred to. These three tools basically are designed to uncover this information before the investor hires the advisor. Not only does it ask the right questions. The advisor has to respond in writing. So now the investor has a written record of that advisor’s responses. So, the fact that he was a botany major, the fact that he has 2 weeks experience, the fact that he only holds a Series 6 license, or the fact that he’s got all these complaints from investors on his compliance record, all of that has to be disclosed in our system. And anybody that refuses to respond, there are two choices for the investor. Walk away because whatever he’s hiding, chances are it’s not good news or they can use us to do some due diligence for them on a one on one basis.

Jason Hartman: What about just performance as an aspect of it? We talked about character trust and competence trust as [00:35:42] and his books. But what about just performance itself? Because some of these advisors that have pitched me for my business, of course they all say you’ve got to have at least $500,000 to invest with me because they only want the bigger fish, right? I’ll ask them about their track record and they’ll give me some sort of glib response about it orally. But when I say I want to see it in writing, they just don’t produce anything. They just disappear. I never hear from them again.

Jack Waymire: That makes it a great question.

Jason Hartman: Of course it does.

Jack Waymire: If they won’t deliver and they disappear, you just avoided potentially a big risk, right? Here’s the bottom line. An example of a money manager might be a mutual fun. Money managers have track records because they provide the same service to a lot of clients. Very few advisors have track records because they tell you their services vary by client. Everybody’s different, therefore they don’t have 1 track record. That is half truth and half not-truth because obviously they could pick their clients and put them into categories and develop a track record for each category.

The bigger risk is the advisor with the bogus track record because they’ll come in and show an investor hot mutual funds and then claim the performance as their own and what they really did was they picked the funds after the performance occurred so they only pick big winners. But then they go out and sell the investor on the idea that I picked those winners before the performance occurred and of course the investor has no way of knowing when they picked the funds. So I look like, wow, I’m great at picking these hot performing funds when in fact I picked them after the fact.

If you’d look at legitimate track records, they have two core characteristics. One is their incompliance with what’s called GIPS, global investment performance standards. So, if somebody shows you a track record, you ask them if it’s GIPS compliant, and if they have a strange look on their face like they have no idea what you’re talking about, it’s not a legitimate track record. The second characteristic is it’s been audited by an independent third party. And ideally that independent third party is one of the big 5 accounting firms, somebody that you would recognize.

Keep in mind the track record generated by Bernie Madoff was generated by two accountants out on Long Island. One of them was 75 and retired. One of them was in his 20s. And so they went in and said our track record was audited by this XYZ CPA firm. Nobody ever bothered to check out is that a legitimate CPA firm. And obviously he owned the BD so he could generate fake brokerage statements and that type of thing, but his track record was all manufactured, all fake, but he did have that little extra element to make it look more real, that he had it audited by the CPA firm except the CPA firm was 2 people and one of them didn’t even work there.

Jason Hartman: And I just want to say, and I hate to be such a skeptic but remember Enron was audited by Arthur Andersen, a huge longstanding accounting firm, so even then you don’t know, right?

Jack Waymire: Now you’re saying things like S&P would issue these quality ratings on a lot of these products and so forth and they were being paid millions of dollars to issue triple A credit ratings on toxic assets.

Jason Hartman: Moody’s came under fire for that.

Jack Waymire: They all had their hand in the cookie jar. And the bottom line is when you get down to who can I trust with my money, bottom line is if you can find an advisor that is an RIA, an acknowledged fiduciary, works for fees, has great education, good certification, CFP, CFA, CPA, that’s as good as it’s gonna get.

Jason Hartman: Jack, the other thing is that really bugs me about that is they’ll never let you talk to their actual clients. I want to hear from the clients. “Oh, that’s confidential. That would be a violation for us to give you that information.” which is probably true but my point is they’re just hiding behind that. You can never actually get a reference on these people.

Jack Waymire: Let me tell you that’s a two-edge sword because I may tell you it’s confidential. On the one hand if I gave you a copy of a client’s portfolio to show you how well I was doing and then I went in and blocked out their name and address so you have no idea who they were, some advisors might do that. It could be a good thing or a bad thing.

Jason Hartman: It could be fake anyway.

Jack Waymire: It could be fake. The other big issue, though, is when I was ask for references, I’m not so sure references are a great way to judge the quality of an advisor.

Jason Hartman: Because they might be fake references?

Jack Waymire: Bottom line is I’m never gonna give you a bad one. So I may have pre-screened my references. I may have coached my references. My references may not even be a real client. It could be my brother in law with a different last name. I may have a reciprocal relationship where you and I are both advisors and I agree to be your reference and you agree to be my reference, and then we’re both telling investors this is the greatest advisor I’ve ever known. I’ve had several and this guy is wonderful and delivers great results and some advisors have used references as a proxy for track records that aren’t really legitimate, etcetera. So, I think references should come with a disclaimer that, unless you really know how to evaluate a reference, you better be careful because no advisor will ever give you a bad reference.

Jason Hartman: Yeah, I agree. A couple more things just before you go. First of all, what’s the business model of InvestorWatchdog.com? I mean, how do you make your money? That’s a fair question I think given all of the conflicts of interest on Wall Street.

Jack Waymire: Bottom line, we have advertisers on the website. So we’re like a lot of other websites. We provide a lot of content to investors. We provide the content for free. And investment firms and professionals can advertise their services on our website and that is fully disclosed to the investor. Anybody that’s listed in our directory, etcetera, is a paid advertiser. So we support ourselves with paid advertising. But everything we do for the investor is free and nothing is painted by the advertising. It’s all arm’s length.

Jason Hartman: And what is Wall Street’s deepest, darkest secret? Or have we been talking about that for the past half hour?

Jack Waymire: We’ve been talking around it. But to a large extent, 80% of all financial advisors are not financial advisors. They’re sales reps. But Wall Street, just like we said when we were talking around it, when we said insurance agents could call themselves planners, when that sales rep calls himself a financial advisor, legally he’s not a financial advisor. Technically, he’s a sales rep because he has a Series 6 or a Series 7 license that limits him to selling investment products for commission. That’s all his license permits him to do. But that’s not what he tells investors.

He’s like the insurance agent claiming to be a planner to help sell product. The sales rep knows a lot of investors do not want sales reps handling their money. And it’s all done verbally so there’s no written record. But I’ll go out and tell that investor I’m a financial investor. That’s what I do. I give you advice. I help you achieve your financial goals. Reality is they only have a Series 6 or 7 license. They’re not that RIA/IAR we talked about earlier. And their only method of compensation is a commission. By law they cannot charge fees. So that’s one way you can tell if they’re a sales rep or a real advisor. How are they being compensated for their advice and services?

And then we also mentioned the fact that Wall Street spends hundreds of millions of dollars on lobbyists to fight regulations that would require full disclosure. And that’s why it becomes a deepest darkest secret. Just imagine if an advisor had to walk into your office and lay down a one page piece of paper and it lists education, experience, compliance record, certifications, methods of compensation, types of services they offer, licensing. What if they had to lay that one piece of paper on your desk? You would then have a level playing field because you would then know exactly who you were talking to.

But the bottom line is Wall Street fights that tooth and nail. They want to keep the reality a big dark secret and transfer all of the risk to the investor. So, if you don’t know the right questions to ask and if you’re not smart enough to get those responses in writing, then it’s your problem. That’s how the dark secret is maintained, lobbyists. Bottom line is Wall Street has bought a lot of politicians.

Jason Hartman: They own the US Senate. Wall Street owns the Senate.

Jack Waymire: They own the senators that sit on the committees that oversee the FCC and the financial services industry, banking. Basically, they own those politicians. So, when we say they spend all this money on lobbyists who then funnel the money to the right politicians who then make sure the regulations favor, it’s the same thing big tobacco did for years, the big pharmaceuticals are still doing. They basically buy the politicians. The politicians are more focused on staying in power than they are doing what’s right for voters, investors, etcetera. So, Wall Street has been able to protect its big, dark secret by making sure there are no regulations that would shine a spotlight on exactly what they’re doing.

Jason Hartman: Boy, it’s really a jungle out there, I tell you. Well, this has been very enlightening, Jack. Thanks so much for sharing it, InvestorWatchdog.com. And keep up the good work out there. You’re basically fighting an incredibly difficult uphill battle. I commend you for doing it but we’ve really only touched on, today, that first layer of corruption and graft which is the advisor themselves.

Now, maybe they can protect you by being good, ethical, competent, and knowledgeable, etcetera, from the other multiple layers behind it, the investment banks, the rainmakers, the fund managers, the CEOs, the board of directors, all that stuff maybe. But even then, you’ve still got all these other layers behind the advisor. Any other comment on that before you go? I didn’t want to leave all that and not give you the chance to address it.

Jack Waymire: It’s all interactive. The analysts, the portfolio managers, the companies, the executives, I think the real core here is you got the politicians basically being bought off so they protect the executives. An executive like a Bernie Madoff, bottom line a criminal, then you’ve got the executives that are running Goldman Sachs and you’ve got executives at Citigroup and a lot of the other big Wall Street firms, they’re basically in a position to commit crimes and have absolutely no accountability for those crimes.

And how do you fix this? You don’t because those interests are so embedded and so powerful in New York City and Washington, D.C., the bottom line is you and I, investors, nobody is powerful enough to take them on and win. All you can do is learn to protect yourself. And you protect yourself by making sure you’re dealing with the right people.

Jason Hartman: Very good. Well, good stuff, Jack. Thank you so much again and keep in touch.

Let’s have you back if any big news comes up or you have any new developments on the site or in terms of your services. We’d love to hear from you again.

Jack Waymire: You bet, thank you.

Narrator: The American Monetary Association is a nonprofit venture funded by The Jason Hartman Foundation which is dedicated to educating people about the practical effects of monetary policy and government actions on inflation, deflation and personal freedom. Our goal is to help people prosper in the midst of uncertain economic times. This show is produced by The Jason Hartman Foundation, all rights reserved. For publication rights and media interviews, please visit www.HartmanMedia.com or email [email protected] Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate professional if you require individualized advice. Opinions of guests are their own and the host is acting on behalf of The Jason Hartman Foundation exclusively.

The American Monetary Association Team

Transcribed by Ralph

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