It's Time to Rewrite the Rules of Financial Success for Your Kids
How “equal” beats “better”
Ric Edelman: It's Friday, March 31st. Happy end of month. Happy end of quarter. And I got an email from Dr. Robert Ramirez. He's with the Keller Graduate School of Management, and he wrote the following, "Mr. Edelman, I teach about business, entrepreneurship and multiple streams of income in my courses as a professor. I encourage my students to listen to podcasts to continue their education. And your podcast is at the top of my list. I also raised six millennials and your podcast today really hit home. Thank you for succinctly laying out the issues that the millennials now face". Thank you so much for that, Dr. Ramirez. I really appreciate your endorsement and you're spreading the word of my podcast.
If you missed what he's referring to, I did a podcast complaining about the fact that millennials are doing terrible with their personal finances. In fact, they actually now have more debt today than they did prior to the pandemic. And it wasn't the millennials I was blaming. It's their parents. Meaning probably you, because I'm willing to bet you have a millennial in your household. If you missed that show, the link is in the show notes. Go listen to that now and then come back to this one. Okay. Welcome back. So can we blame millennials who don't want to work hard? Is it really their fault when they're raised this way to expect everything to be handed to them, to never have to suffer the experience of failure, sacrifice, delayed gratification? We have millennials demanding that the government waive their student loan debt.
They're discovering that it's harder to pay off their debt than they thought it would be. And they now regret spending so much on an expensive college degree and choosing a career that pays so little. And so they say none of this is their fault. We shouldn't make them pay back the loan that they took out.
We're seeing examples of this kind of attitude all over the world. Paris is burning right now because their version of Social Security is talking about raising their age of retirement from age 62 to age 64. Their retirement system is collapsing. Nobody cares in Paris. They just want to be able to retire at 62, even though their system can't afford that anymore now that everybody's living into their 80s and 90s and hundreds. In South Korea five years ago, the government limited overtime to 12 hours a week. Well, now the government is proposing to restore the overtime limit to what it used to be: 29 hours a week.
But the Millennials and Gen Xers all over the country are protesting. They even say that working 69 hours a week will kill you. Really? When people worked on farms, they routinely worked 70 to 90 hours a week. But now working that long causes something that they now give it a name. Gwarosa - death by overwork. It's not just younger workers who are unhappy about all this. It's not just them that don't want to have to work so much. Their parents are unhappy for them. In fact, parents are just unhappy overall.
And a new poll, only 12% described themselves as very happy. This is the lowest happiness score since this poll began back in 1972. One reason people are so unhappy is that they're worried that their kids won't have a better life than they did. 80% of parents say that. Probably, therefore, you.
Now think about this for a moment. First, let's assume that you're right, that your kids won't have a better life than you. I'm not sure I agree with that premise, but let's go with it anyway, for the sake of this conversation. If you think that your kids won't have a better life than you did, what makes you think that that's a problem? You could be a victim of old school thinking. I know my grandparents emigrated to this country in 1916. They fled the Russian Revolution. They wanted a better life for their kids. Well, their kids became my parents. And my parents certainly had a better life than my grandparents did. My grandparents had a really rough time coming to America with not a dime in their pocket. They couldn't speak the language. They had to get by as best they could.
This story is told over and over by immigrants to the US over the generations. My parents, though, they were given a safe and warm home by my grandparents, their parents and always my parents had food on the table. My dad though, he worked his entire life, starting when he was a kid. He used to tell me stories of how he'd get up at 4 AM to go work at a newsstand downtown. Standing outside before dawn in the freezing cold streets of Center City, Philadelphia.
My dad was never able to go to college. Instead, he went into the Navy. Defending our nation in World War II to protect, you guessed it, my future, his future children. My dad sure had a better life than his dad. And my dad was determined that my life would be better than his. Just like his dad had done for him. And so my dad made sure I went to college. And yes, that made my life better than his. My dad accomplished his goal. And so following this tradition, if I had kids, shouldn't I want their life to be better than mine?
No. You see, if you're like me, you're the beneficiary of generations of elders who came to this country and scrimped and saved through hard work and adversity. You don't need your kid's life to be better than yours the way that they needed their kid's life to be better than theirs. Frankly, if your kid's life is as good as yours, that's good enough. It doesn't have to be better.
Think about it this way. For generations, we've all been climbing a mountain. A mountain of success. Generations ago, they didn't even know there was a mountain. They were fully focused on sheer survival. Later, generations discovered the mountain and they started to try to reach it. One generation finally got to the foothills and the next generation made it up the hill a little bit. Every generation after that was able to climb that mountain a little bit higher than the previous generation. Every new generation accomplishing more and more, building on the foundations that their elders had built for them. And then it was our turn when we came along, us boomers and millennials. And guess what? A lot of us have now made it to the top of that mountain.
Oh, sure, it's not Nirvana. The view's not nearly as good as we'd hoped. The weather often stinks up there. But, hey, no matter what you say, there's no denying it, when we're at the top of the mountain, it feels good. But if we keep climbing, we're just going to fall off the other side. So if I'm at the top of the mountain, I shouldn't be unhappy that my kids won't climb higher than me. I should just focus on my kids being able to be up here with me.
And so my suggestion is that we reframe the question. We need to stop asking if our kids will be better off. Instead, let's ask if they're able to maintain the position on the mountaintop we've established. Now, if you're not at the top of the mountain, do keep climbing. And if your kids are not at the top of the mountain, make sure you're helping them have the opportunity to get there, too. If you and your kids are both there, though, then what are you doing to help others get there as well? Yes. It's time we reframed the question. If you don't think your kids are going to have a better life than you, that doesn't mean you necessarily need to be unhappy.
Maybe your life is so good, your kids having your life is good enough. In fact, let me give you some statistics to help you with this. In 1960, the average house in America was 1500 square feet. Today, the average is 2500 feet. It's almost twice as big. Cars and airplanes are safer than ever. Medical technology has never been more advanced and access to it better than ever. Do we have a lot of work to do? Do we have a lot of inclusion yet to provide? Of course. But more people are graduating high school and college than ever. Life expectancy is nearly double what it was 100 years ago. Are we sure that we have to equate happiness with better than before? Maybe it's time to equate happiness with what it is right now. For some of us, we should be focusing on making sure others have as good a life as us, not a better life. It's a lower bar, admittedly, but that lower bar is easier for us all to achieve and achieving happiness - that really ought to be the goal.
Hey, tonight I'm going to be speaking at a dinner hosted by Bitwise in Washington, D.C. It's an invitation only event. If you're a financial advisor and you'd like to be invited to one of Bitwise's future events, the link is in the show notes.
Exclusive interview: Karen Barr, President and CEO of the Investment Adviser Association
Ric Edelman: You know, it's really interesting. And by the way, thanks for hanging around here on this week's edition of The Truth About Your Future. And yes, that's my phone making noises. I got a new Apple Watch and I haven't been able to figure out how to turn off the audio. So anyway, I'm really happy you're with us for this segment because there's an element to the world of personal finance that I think most investors don't really pay a lot of attention to. It's the business of advice. It's not the advice itself. Most investors these days have a financial advisor, and rightly so. The world of personal finance has gotten so complicated and confusing and time consuming that we delegate the chore to a financial advisor who is so skilled. But what we often don't realize is that the world of financial advice is itself now an entire industry. And to give you an insight examination of that world and the work that's being done behind the scenes to improve the quality of the advice you are getting and the ability of advisors to serve you even better, I'm really excited to bring on to the program Karen Barr. Karen is the President and CEO of the Investment Adviser Association. Karen, great to have you with us.
Karen Barr: Thank you for having me.
Ric Edelman: Karen and I have known each other for quite some time. The IAA is one of the most influential organizations in the nation's capital. Talk about it. Let everybody understand a little bit about what the IAA does.
Karen Barr: Well, thank you Ric. The Investment Adviser Association is a trade association that represents fiduciary investment advisor firms. That is firms that specialize in managing other people's money, which is supremely important for our investors and their futures, their financial futures. Our members range from the global asset managers that many of you have heard of to the small and medium business sized businesses that make up the core of our industry. They manage money for individuals, for families, for businesses, endowments, charitable institutions, pension plans, retirement accounts, all of those different kinds of clients. And folks don't understand how broad an industry that we have. So people have heard of kind of the big names managing big funds, the top 10, you know, Fidelity, Vanguard, Schwab, JPMorgan Asset Management, all of those large companies. But most investment advisors are small businesses - 20 to 50 person shops, managing money for local individuals in their community.
Ric Edelman: And that's really fascinating element about this is that the industry is massive because we're talking about America's wealth, but at the same time it's a bunch of mom-and-pop shops. Most advisors are sole practitioners. They have a couple of staff; they serve a couple of hundred people as clients. And just like you go to the local accountant or the local butcher or the local dry cleaner, you go to the local financial advisor and yet you add them all up, there's a couple of hundred thousand, about 300,000 of these people in this business. They end up managing trillions of dollars of assets, Most of the nation's wealth.
Karen Barr: That's right. There are like 300,000 investment advisor representatives like the individuals. There are 15,000 firms that are considered larger firms, another 17,000 firms that are considered, you know, even smaller firms. And so these 30,000 businesses manage $128 trillion in assets. It's a crazy number, right? It's a crazy number.
Ric Edelman: It is hard. It is hard to fathom. And it's fascinating that there's a need for a trade association like yours, like the Investment Adviser Association. So talk about what it is that the IAA does. Why do you need to exist? What's the whole point of this?
Karen Barr: Well, there's, as we like to say in association world, there's an association for everything, right? There's a group of businesses that decide to get together and have representation in aggregate in Washington, in front of the media, in front of the public, to really help the public and policy makers understand what our members do, why they're important for investors, for the economy, for the capital markets. It's important to join together for our voices to be heard and not in a fragmented way. So investment advisors are together advocating for our industry and our clients on Capitol Hill, at the Department of Labor, at the SEC, other regulators, just like there's, you know, the Dairy Association with their got milk commercials. There's an association for everything. And so it's really important for investment advisors to have their voices heard and no one else is doing it for them. We are we are here for them in Washington to make sure that their voices are heard in front of policymakers and in the media, and that people really understand how important they are for the interests of investors.
Ric Edelman: And by the way, if you'd like to learn more about the Investment Adviser Association, their website is InvestmentAdviser.org. And we've got that link in our show notes for you today so you can easily access them. And one of the important distinctions, Karen, that you've made is that your organization is not merely representing the investment advisors, but helping the investment advisors represent their clients. Because as Washington is creating new laws and regulations that have an impact on investors and an impact on the opportunities for investors to grow their wealth, as well as the importance of protecting investors from fraud and scam and things like that, the regulators and the legislators don't always truly understand the hearts and souls and the thinking of the client of the end investor. The advisor knows. Well, it's kind of like saying if in the health care field we want to help patients, you're better off talking to the doctors than the patients because the doctors understand the patients' needs often better than the patients do. The patient just says, Look, I want to get better. The investor says, I want to get wealthy, but it's the advisor to that investor who understands what is needed to help you achieve that goal. And so having the advisors voice in Capitol Hill can really help Congress and the administration create the rules and the laws to further that goal.
Karen Barr: That right. It's very helpful for folks in Washington to understand what is important to investors. Right. And your point about the doctors is a good one. Patients do understand what they need. Investors do understand what they need. But what's complicated is the regulatory framework in which it operates, right? The health care system complex, right? The framework for investment advisor and retirement plan regulation, very complex. And the end client doesn't know how that that policy framework really has an impact on their wealth. Looking toward their financial future, investor protection and how they can be assisted by their investment advisor, professional investment advisory professionals.
Ric Edelman: And you said a couple of things really, really important there. Number one, that it is helping us understand the rules and regs and working through this, this complicated environment, but also the fact that we're trying to help improve our financial future. And that is often code for retirement because I think that's what most people are thinking of when they focus on their financial future. How am I going to be able to live comfortably in my retirement when I no longer have a paycheck to support myself? So I'm assuming that at the Investment Adviser Association you spend a lot of your focus on the retirement issue.
Karen Barr: We do. We spend a lot of time working on Capitol Hill and working with the Department of Labor on making sure that the policy environment for providing advice to retirement plans and plan participants ensures that plan participants have the opportunity to save for their retirement, to grow their wealth, to have choice of their investment vehicles and can work with their investment advisors to do what's right for them.
Ric Edelman: I recently was looking at some data and this matched my experience at Edelman Financial when I was running what was the largest (and still is the largest) investment advisory firm in the country, about two thirds of all the money we managed was retirement assets, IRAs and 401K assets. And I think that's reflective of most Americans. We have most of our money in retirement savings. And so it's impossible to focus on investment advice if you aren't talking about retirement advice because the two are so inextricably linked. So talk with us about what your organization has been doing to get Congress and the administration focused on retirement savings issues.
Karen Barr: So just by way of most recent example, we have worked on Capitol Hill to help support passage of Secure Act 2.0. It's a short name for a huge bill.
Ric Edelman: This was a major piece of legislation that you helped get through Congress.
Karen Barr: A major piece of legislation that we supported that has a lot of wide range of impact on the plan participant and their investment advisors and the advice that they're given. It's a really complicated world out there and. Investment advisors are helping their clients and plan participants understand what Secure Act 2.0 did to change the investing environment for them. It increased the age at which you have to take a required minimum distribution. And the rules around RMDs are complicated. But it was a good thing that the ages increased because that helps people keep their money working for them longer and not have to take it out before they need to. It decreased the penalty for failing to take an RMD. RMDs are no longer required to come from Roth accounts in employer retirement plans. It increased the catch-up provisions. All of these are complicated and investment advisors are helping their clients parse through what this really did. Defined contribution plans can add an emergency savings account. That's a big deal. There's automatic enrollment provisions in 401K and 403B plans, which are mostly teacher plans. That is a big deal. It permits service providers to offer sponsor auto portability, which helps transfer low balance accounts to new plans. Employers are going to be able to match employee student loan payments. That gives employees an incentive to save while they're paying off their loans. So all of that is a really big deal and our members and the investment advisor community are analyzing all of those important changes and helping their clients understand how it affects them.
Ric Edelman: And it's a twofold aspect of this, and it's so vitally important. The first is that we know we have a retirement savings crisis in America. We know that. We know that we don't have as individuals and as households, we aren't saving enough money to meet our needs in retirement. And part of the reason we aren't is because the system, the rules that are in place, make it difficult to save. They penalize you for saving or they create obstacles and interferences in your efforts to save. Secure 2.0 is reducing and removing many of those barriers, as you pointed out. That makes it easier to save, makes it cheaper to save. That creates greater flexibility in saving. And so the first thing we had to do was to get Congress to recognize the importance of making the rules better and easier for everybody to deal with. And second, the other half of your work at the Investment Adviser Association is to make sure that the advisors are aware of all of these new changes so that they can alter the strategies and the advice they give their clients so that their clients in the end are taking advantage of all of the new provisions of the law.
Karen Barr: Absolutely. What we do is what I like to call the life cycle of policy making. We work with policymakers in advance. We help them understand what needs to happen to make positive change on behalf of investors. We then work with proposals that happen on Capitol Hill and at the regulators. Then when a final rule or law comes out, we analyze it and help our members understand it and provide education and resources so that our members can understand those changes and then implement them for their clients and take them into account.
Ric Edelman: And in that sense, all of your members are, I would say we would refer to them all as frenemies. They're competitors clearly in the marketplace, but they all have common issues and concerns and objectives that they share among each other. And it makes sense to work under your umbrella at the IAA, the Investment Adviser Association, rather than everybody trying to figure it out one by one. Let's just do it as a group.
Karen Barr: Absolutely.
Ric Edelman: So the fact that you referred to it as the Secure Act 2.0, that suggests that there was a Secure Act 1.0, that this was the second piece of legislation which therefore suggests that Congress didn't get it all done in the original law. And that forced everybody to go back to Congress and say, hey, good job, good start with the Secure Act. There's more we need to do. Congress was in agreement and created the Secure 2.0 Act.
Karen Barr: And I would note that it's bipartisan, which is a big deal these days on Capitol Hill. That tells you the importance of this issue to policymakers, the importance to investors and the shared interest in in making these changes happen.
Ric Edelman: Absolutely right. I mean, we all want to create wealth. We all want everybody to create wealth, because if we have millions of Americans entering retirement in poverty with insufficient savings, that means they're going to turn to the government for financial support. And that means the rich are going to be taxed more when the rich don't like that. So even if they might not need the help of Congress to create wealth because they're already wealthy, they do recognize the importance of helping everybody else create wealth for their own self-motivated interest. And so everybody, you're right, recognizes the importance of eliminating this retirement savings gap and eliminating the shortfall that we have. And there aren't very many subjects in Washington, as you noted, Karen, that enjoy broad bipartisan support and creating wealth for America. That's one of the few subjects.
Karen Barr: And it lifts all boats, right? This kind of legislation lifts all boats.
Ric Edelman: Absolutely right. So the fact that we had the Secure Act and now we have the Secure Act 2.0, does that mean there's going to be a Secure 3.0?
Karen Barr: We would like there to be actually a Secure 3.0.
Ric Edelman: Is there already a list of items you'd like to see?
Karen Barr: Yeah, there absolutely there are. There were some things that didn't make it into this Secure Act 2.0, where I think this is, as always, you have to play the long game in Congress. It took years to get Secure Act 1.0. It took years to get Secure 2.0. I think we need to be realistic that Secure 3.0 is probably not going to be this year, right? You have to keep working in a long-term way. One of the examples I would give is that folks really wanted to get into 2.0. As I alluded to earlier, there are a number of kinds of retirement plans. There are 401K plans that everybody knows about. That's the most common worker retirement plan. But there are also specific kinds of plans for teachers and charities and firefighters, right? There are different specific kinds of plans. And we'd like to get them on a level playing field with the with the 401K plans. So, for example, 401K plans have the option of investing in collective investment trusts, which are a cost-efficient kind of vehicle like mutual funds but run under a different set of regulations and in some ways can be a very cost-effective way to invest. 401K plans can invest in them, but not 403B's, which are the teacher type plans. We would like to see that happen, for example. In a Secure 3.0, get everyone on an equal footing.
Ric Edelman: That makes perfect sense. I mean, it's understandable when you look at the evolution of this that the old 403B came about decades before 401K's were in use. And they were designed, as you said, predominantly for teachers and also in hospitals. But those rules have been frozen for decades. Along came the 401K, totally separate and distinct for companies and businesses. And the schoolteachers kind of got left behind. Right?
Karen Barr: Right. I mean, we think it would be a good idea. It's so hard to get things done at a big level. But if people take a step back and look at the system holistically, right, why aren't we treating all these kinds of plans the same and all these kinds of employees equitably? Right. And I think that's something that Congress really needs to do. To take a big step back and look at holistically, where are we going here with this?
Ric Edelman: It really shouldn't matter who you're working for to determine how you're allowed to save for retirement. And that's kind of the system we ended up with because there was never a grand plan in mind from the beginning. And we have this hodgepodge of rules and it's kind of complicated and it's messy and it frankly doesn't make a lot of sense. And I think everybody gets that. And it's just a matter of getting to business and making it all fixed.
Karen Barr: We need to get workers more access to plans. I mean, Congress needs to look at that. There are 57 million workers who don't have access to retirement plans.
Ric Edelman: Let's elaborate on that a little bit, Karen, because that is a very fundamental issue. We spend all of our time talking about 401K plans and 403B's. If you work for the federal government, you have the TSP, the Thrift Savings Plan. But this is all assuming that you're working for an employer that in fact offers one of the above. But as you just pointed out, what did you say, 57 million?
Karen Barr: 57 million workers do not have access to retirement plans.
Ric Edelman: That's mind boggling that because I have to assume that the reason for that is that most Americans are working for small employers.
Karen Barr: That's exactly right.
Ric Edelman: And that small business run by, you know, a mom-and-pop shop doesn't have the financial wherewithal. They don't have the sophistication. They frankly just don't have the time because they're busy running their business to go about providing a retirement plan. They don't know how to do it. They don't have the advisors to help them do it. They're afraid of the cost of doing it. And the end result is 57 million people don't have an ability to save for retirement via their workplace. And if you can't save in the workplace, you end up not saving at all.
Karen Barr: Right. And your opportunities are more limited outside of workplace retirement plans than they are in workplace retirement plans.
Ric Edelman: Yeah, I mean, people would argue there's an IRA, but let's face it, you can't contribute nearly as much money to an IRA as you can to a 401K. Exactly.
Karen Barr: The contribution limits are totally different.
Ric Edelman: It makes no sense. Retirement is retirement, but that's what the rules currently suggest. And so we are putting a lot of people at a huge disadvantage merely because of who they're working for. And let's elaborate on that a little bit. It's not just the fact that some people are being denied the ability to save for retirement because their employer doesn't offer a plan. This is creating a racial gap at the same time, isn't it?
Karen Barr: Absolutely. And it's because small businesses employed disproportionately a number of minority groups. And so that exacerbates the gap in access to retirement opportunities, right? And actually Price just did a study on this. If you look at the data on access to plans, the gap is wide. But if you look at once you give equal access, if people have access, the gap is narrowed. The take up in using the plans is a much narrower gap than the gap in access to plans.
Ric Edelman: So that's fascinating. In other words, when people are saying, gee, you know, whites are far more likely to be saving for retirement, therefore people will argue they care more, they pay attention more or what have you. The fundamental fact is if you're white, you're more likely to be working for someone who offers you a plan. And if you're a minority, you're less likely. Because when you put minorities and whites in the same employer, they're similar in their participation rates in retirement savings.
Karen Barr: That's exactly right. That's exactly right. It's an access issue, not a desire to participate issue. And so we know that. And it's an access issue. If we provide additional ability for small businesses to provide retirement plans, that would make a huge difference. And, in fact, the federal government is not mandating retirement, that small businesses start retirement plans. But a lot of states are actually picking up the slack here and they're starting to roll out requirements of their own. They're requiring auto enrollment in a Roth IRA funded through automatic payroll deductions. So, for example, 11 states have passed legislation doing exactly that. Seven of them are already live. There are another, I don't know, 5 or 6 states in process. Through the ones that are already live, workers have already saved $637 million through these programs. Wow. So it's starting to make a difference. And many other states are considering doing just this. So there is some hope in terms of increasing access through these state level programs, But obviously more should be done.
Ric Edelman: So in other words, Karen, what you're saying is that in addition to spending an awful lot of time on Capitol Hill in Washington, you're now finding yourself having to spend an awful lot of time in the state capitals all around the country.
Karen Barr: This is an important issue and our members need to pay attention to what's happening and investors need to pay attention to what's happening at the state level.
Ric Edelman: I don't think most people would intuitively recognize that focusing on retirement savings legislation can reduce the racial gap in wealth creation in this country.
Karen Barr: It is a really important issue. And access equals opportunity. Access equals opportunity. So if we increase the access here, we can close the racial and ethnic disparities in plan participation.
Ric Edelman: There's another issue that is a huge conversation these days in the retirement and investing field. It's ESG. Talk about what ESG is and why it's so controversial.
Karen Barr: Well, ESG means a lot of things to a lot of people. What it stands for is environmental, social and governance. Some people call it sustainable investing. There are a lot of different names for it. Fundamentally, what it means is taking into account a wide range of issues in making decisions on how to invest. And those decisions can relate to climate risk. They can relate to governance best practices. They can relate to how a company treats its employees. There is a wide range of issues that ESG can refer to. It's a big. It's become a controversial issue, if you will, a lot to how investment in fossil fuels is playing out in the broader conversation out there. Some folks are interpreting statements by investment managers about ESG as being against fossil fuels or for, you know, for certain things. And really what investment advisors are doing is taking a broad range of factors into account in making important investment decisions for their clients and analyzing all the different kinds of risks that are being considered by companies that they're investing in. And that's their job. They're financial professionals, they're analysts. Their job is to look at the broad range of risks. Inherent in what any company is doing and make sure that that company is a good investment for their clients in the long run. And also taking into account what their clients want out of their investments.
Ric Edelman: Well, let's start there. Yeah, let's start with that point because I think that's really what it comes down to. In the old days, I'm, you know, I'm an old guy with a lot of gray hair. A lot of gray. Not much hair. And I remember back when I started in this business back 40 years ago that when it came to investing, there was only one goal that the client had: make me money. That's why we invest. I want to grow my wealth. There wasn't a whole lot of conversation about how you accomplish that. I didn't really care what stocks you recommended. I wanted the stocks to go up in value. So given the choice between two stocks, give me the one that will rise faster. That was all there was to it. When I say that's all there was, I mean that was pretty hard to pull off, but that was the focus. Today, there's a new level of attention in addition to growing wealth, which of course we all still want to do. Many people are now taking the attitude that I care very much about how I'm making that money. I want my investments to reflect my values. So people would say, I don't like tobacco or guns or alcohol or gambling, what are sometimes referred to as the sin stocks. And so I don't want to invest in those companies, not because I don't think that MGM isn't going to make a lot of money in the Vegas casinos, it's just that I don't like the idea of casino gambling and therefore I don't want to profit off of something I don't personally endorse.
And this raised the issue of values investing, and that's what the ESG movement has grown to reflect. Right now, it's raising the controversy of, wait a minute, if you're going to focus on non-economic factors, you're going to interfere with your goal of achieving maximum economic results. And therefore, which master do we serve? Do I focus on making the most money? Which, by the way, one federal law requires? The ERISA law demands that as a fiduciary, my goal is to maximize your returns and minimize your risks and your losses. And that's a crude way of summarizing ERISA. But if I'm now going to focus on the environment or governance, such as fairness to workers and customers, or if I'm going to focus on social issues such as inclusion, all of a sudden I'm not paying as much attention about the company's profits. In fact, some of those policies may interfere with profits. Your example of fossil fuels is a really good one. If I am not going to harm the planet by drilling for oil, then I'm going to interfere in ExxonMobil's ability to make money. So which master am I serving? And this is where the controversy comes about. And many states have gotten very vocal about this. They have fired some fund companies because they have been vocal in their climate change concerns. And to your point, the fund companies are saying, wait a minute, we're trying to do what's best for our investors. And being best might mean saving the planet's climate.
Karen Barr: Investment advisors' interests are aligned with their clients. Let's just start with that, right? They have a fiduciary duty to act in the best interest of their clients and the way they get paid is actually aligning their interests with their clients. So if clients' assets go up, the way investment advisors get paid is that investment advisors asset fees go up. So it's an asset-based fee. So if the client does well, the investment advisor does well. There's every incentive for an investment advisor to try to maximize the client's returns. What the conversation about here is how best to go about doing that in the long term. And when you're looking at the long term, you're saying, okay, when I'm looking at a company, I'm looking at are they vulnerable to climate change factors? Are they vulnerable to flooding? Are they vulnerable to, you know, are they vulnerable to changes in practices regarding clean energy? You know, are we in a situation where these governance practices are going to lead to disaster at this company? Those are all factors that investment advisors look at in deciding whether this company is going to be profitable over the long-term. And a lot of the conversation is really losing sight of the fact that these factors and considerations are really integrated into the whole analysis, the whole fundamental analysis of a company's prospects.
Ric Edelman: And so what is it that the Investment Adviser Association is recommending to its membership to investment advisors? How should they handle this controversial issue of ESG investing?
Karen Barr: Well, we don't make investment recommendations. Let me be clear. We're a policy group. But our policy position is exactly that. Congress, regulators, policy makers. You should leave the investment decision making to the investment professionals. You know, policy makers should not be putting their finger on the scale in favor of one investment or another. Policy should be strategy, neutral strategy. Neutral, sustainable investing, ESG, the factors that advisors consider in making decisions for their clients should be left to the investment professional in conversation with the client about what the client wants and needs. That is what should happen here. Strategy neutral. So our message on Capitol Hill to the Department of Labor, to the states: policy should be strategy neutral. Your investment advisor and your client, it's up to them how best to invest it.
Ric Edelman: That makes perfect sense. We don't want this done at the regulatory level, the legislative level. This is a decision made by the client in consultation with their advisor. If you believe very strongly in investing in a manner consistent with your values, hire an advisor who behaves that way. And if you don't care about those issues, then hire an advisor who doesn't care about those issues. Let the marketplace handle it.
Karen Barr: There are 30,000 investment advisors out there. There are thousands of funds out there. There is investor choice.
Ric Edelman: And that's all there is to it.
Karen Barr: So, you know, we strongly believe in letting investors choose.
Ric Edelman: So tell me, Karen, what's Congress's attitude about this? Is there consensus about ESG on Capitol Hill?
Karen Barr: Well, Ric there's very little consensus about this issue on Capitol Hill, as with many issues. The House, which is now Republican led, is likely to hold a lot of hearings, really drilling down into concerns that they have with respect to ESG investing. The Senate side, led by Democrats the past two years, has held hearings expressing concern that more should be done with respect to sustainable investing and ESG. So definitely the two branches of Congress are not on the same page with respect to this issue. But we expect to see more hearings on this. There's very little chance of bipartisan agreement on this issue.
Ric Edelman: So you're not expecting any legislation to come out of Congress?
Karen Barr: There will be legislation undoubtedly introduced and proposed, but I do not expect legislation to pass both houses in this Congress.
Ric Edelman: And even if it did, I presume that President Biden would veto anything he didn't like.
Karen Barr: That is correct. And there's no majority on this issue that would be able to override a veto.
Ric Edelman: And so I guess the real message for our audience here is to be aware of the ESG investing theme, decide how you feel about it and talk about it with your investment advisor. And speaking of investment advisor, one last subject I want to talk with you about, Karen, is the way that your organization spells the word advisor. I mean, we're managing what did you say, $128 trillion. And we can't even agree on how to spell the word. The Investment Adviser Association spells the word adviser - e.r. The SEC's rules use adviser. Many of the laws use the spelling of –e.r. with adviser. But if you were to ask the average ordinary everyday American, they are going to spell it advisor – o.r. Is there a difference?
Karen Barr: Yes, actually.
Ric Edelman: Oh, no.
Karen Barr: There's a historical difference, I would say. Historically, the Investment Advisers Act has been spelled 'adviser'. Investment advisers who are fiduciaries have spelled it adviser for 85 years. Being a fiduciary means that you're acting in a position of trust and confidence with your client throughout the entire relationship. And this is a concept that has been around for eons, right? Investment advisers typically have historically spelled it with an E. Over the years, there have been other types of financial professionals who have started to offer investment advice, and they've started to spell it with an O and call themselves financial advisors. Things are changing. But historically, those were broker dealers, people who buy and sell and hold securities on a transaction-by-transaction basis for a commission historically. And so historically, those who spelled it with an O were coming from the broker dealer world. They were not fiduciaries. Those are spelled with an E. We're coming from the investment adviser world who are fiduciaries. Those worlds are getting a little blurry and there's a lot of investor confusion out there. I would say that confusion is a bit exacerbated by regulation that is now requiring investment advisors and brokerage to describe themselves in very similar ways. But it is important for investors to ask their financial professional, are you an investment advisor? Are you a fiduciary or are you registered representative or broker dealer? Or do you wear both hats and tell me when you're wearing each hat. So those are very important questions that investors should ask.
Ric Edelman: And so let's not judge books by their covers. Don't pay a whole lot of attention to the adviser versus advisor because lots are using both. Instead, focus on the key word that Karen has mentioned, which is fiduciary. That's the key question. Are you acting as a fiduciary and are you acting as a fiduciary 100% of the time?
Karen Barr: That's exactly right, because fiduciaries are obligated to act in your best interest, in a client's best interest throughout the entire relationship and not episodically transaction by transaction.
Ric Edelman: So pretty fundamental when you see adviser versus advisor. That's Karen Barr, she's the president and CEO of the Investment Adviser Association and you can reach them at the at InvestmentAdviser.org and the link is in our show notes so that you don't have to worry about properly or mistakenly misspelling adviser. Karen, thank you so much for joining us on the show today.
Karen Barr: Thank you Ric. It's a pleasure to be here.
Self-Care with Jean Edelman: How To Get Better Results by Slowing Down
Jean Edelman: Great to be with you this week. This week I want to talk about less is more. I feel like there is a great myth in life that connects our worth - our personal internal worth - to our productivity. We, in our busy life, tend to ignore our hunger, how tired we are. We work through sickness. We push our bladders to the brink because there's always something more to do. There's always something that needs to get done.
Cherishing ourselves and having consistent self-care is vital to our routine. It will help to have healthy boundaries. Learn to say no and embracing we are good enough. Better, faster, stronger is not always the best way. And remember that our mind and our body needs to rest, relax and time to restore and to process our life. It is at the slower, quieter moments that we produce our insights and our ideas. It's during our mindless task that we can be our most productive. The quiet and the rest helps us tap into our unconscious mind, which is where our creativity is.
And so our action item for the week is think about situations where we have pushed our way through. What were the results versus a time when we allowed and flowed more with the situation?
So my word of the week is LESS.
The L is to Learn. We're here to learn about ourselves. We will be given obstacles, obstacles to work through in our life because this is lifelong learning. And when we finally understand that - the less is more and that we are enough, we have all we need. It will be a great, great moment.
The E is for Effective, producing a result. We do not have to push through everything to create a result. We can take the time it takes to get great results.
And the S is to Share our light and our laughter. We cannot have these moments when we're focused on busy, busy, busy life. We can do this when we flow and allow the moments to be.
The other S is to Shine, to dazzle and gleam. When we are in balance and we make time for others when we can be in the moment with those that we love. These are the memories and the moments that we hold in our hearts.
Have a wonderful week and please practice less and see what great results you have.