Rick Ferri: The Core 4

Foreign.

Welcome to the new Retirement Podcast. Today we're going to be talking with Rick Ferri, who is a financial advisor, author, founder of Core4, an index fund fan, and Boggleheads podcast host and retired Marine who lives in Georgetown, Texas. Some of other guests, including Jonathan Clements and Ellen Roth suggested we have him on and we're going to be discussing his beliefs about investing based on a 30 year career and also cover efficient low fee investing, maybe touch on market volatility and the future of advice. So, Rick, welcome to our show. It's great to have you join us.

Thank you for having me, Steve.

I appreciate your time. So before we get started, I always like to hear in people's own words kind of how they got to where they are today. And and also a little bit about what they're trying to get accomplished with their time on this planet.

That's a good question. Yeah, we're all in a race to get something done before we move on.

That's right.

We're not really sure what it is half the time, but we're really moving fast to do it. Yeah. So I was, as you said, I was in the military for a number of years until I was about 30 years old. And then I went into the reserves, stayed in the military reserves for a while, but went into the financial services industry about 30 years ago. And I was a typical broker and hired as a broker. And at that time, of course, you thought that brokers were very knowledgeable people about investing and that the companies they work for were very knowledgeable and they picked good investments for their clients, which helped their clients and in turn helped the company, which in turn helped the broker. And about a few years into that came to the startling realization that none of that is true. Number one, most of the people who go into the brokerage industry, well, a lot of the people, at least back then, had no education in business or finance. In fact, it was very rare. They were basically hired to sell whatever the company wanted to unload, always getting paid to sell. And nobody kept track of how the clients were doing, although the only thing they kept track of was how much money you were bringing in in commissions and fees. That's all they cared about. And they determined whether you got the corner office or whether you got any office based on how much money you made for the company. Regardless of how much money you made or lost for any client, that was not even in the equation. So when I realized this, I decided I was going to leave that industry and I went into the RIA business Investment Advisor business And I started charging a small fee to manage portfolios of index funds because I realized also after 10 years in the brokerage industry, had an epiphany after reading John Bogle's book Bogle on Mutual funds back in about 22, 23 years ago. That is very difficult to outperform the market. I wasn't doing that as a broker. The company wasn't doing it, not even close. None of the companies were. So if I wanted to do what was in the best interest of my clients, then I should just buy index funds for them, which I couldn't do in the brokerage world. It wasn't allowed back then. They didn't have ETFs. Basically there was a couple and I used what I could, but it wasn't available. So I left the brokerage industry in 1999 and I started an RIA and started using low cost index funds and started charging clients a fair advisor fee for putting portfolios together for them. And over a period of the next almost 20 years, the company grew to about $1.5 billion in assets and almost 20 employees. And due to circumstances that I ended up having to liquidate my position in that, and those circumstances had to do with a business partner who decided that he wanted to own the whole company and not me. So we could get into that if you wanted to, but it's not a great story to talk about, quite frankly.

In your time in the Marines, any huge lessons from that? I mean, 20 years is pretty long. Pretty long career in that space.

Well, okay, so I used to be a pilot. I flew off aircraft carriers. And so I went to Pensacola and then went to advanced jet training. And then after that I flew a four Skyhawks and then a six Intruders. And you know, when you're flying jets, there's no ambiguity in what you're doing. I mean, you can't be. You have to be right. When you're coming aboard an aircraft carrier, you have to be very precise. You can't be almost lined up or almost on glide path. So I was trained to be very technical and very precise about everything I did. And it kept me alive in the Marines. And when I got to Wall street, that training made me realize that Wall street wasn't that way at all. There was very little integrity, there was very little preciseness. There was a lot of things going on that would have never stood up in the military. And there were people who were running companies in the financial services world who would have been in jail, quite frankly, or Leavenworth if They were in the military. So, you know, it was a very different world to step out of the military, which had high integrity, preciseness, everybody looking after each other and going into Wall street, which is almost exactly the opposite in every single case. And that didn't suit me well, but it didn't mean that I was going to leave the industry. I just needed to try to change it. And that's what I'm trying to do ever since.

Right. Well, I applaud that. I remember like during the 2008 downturn, one of the things people were talking about, it's, it's, you know, we had a lot of folks pushing mortgage loans to people that couldn't afford it. And you know, they talked about people, People are good at recognizing, you know, the wrong thing unless their mode of making money depends on it. And then very often it's, it's a slippery slope to be, okay, I'll accept different standards because my livelihood depends on it.

Yeah. And unfortunately, people will believe you if they think that you have, if there's no reason not to believe you. So when you go around and you sell something that really has no merit to be sold and people shouldn't be buying it and it doesn't do them any good, it just is the company you're repping good to sell it because they get a big commission or fee from maybe somebody else. People are still going to listen to you, Steve, because you're Steve, and they have no reason not to believe you. And so they'll buy these things from you because you said so. And that's why Wall street, when they go out and hire brokers, back when I was getting hired, I mean, I was a fighter pilot, right. They hired me because it was cool. Oh, I could go out and tell people that and people would go, oh, wow. And maybe give me their money. And then there were all kinds of other people that were from different walks of life. They were hired to become brokers because they had personal credibility. And in a way, we were used in many ways. And when you realize that you're being used and you've got to get out of that environment, you can't change it, so you need to get out of it. So a lot of the stuff that's out there, 90% of it is useless. It's just designed for the purpose of benefiting the people who are selling it. It's not used, it's not for the benefit of the people who are buying it.

Well, good for you for having the self awareness to recognize that and take Action on it. It's just. It is. I think it's hard for a lot of folks. They get in, you know, start making money a certain way, and they see that's how the system works and they buy into it. I agree with you that I think my view on the financial services space is that, you know, in general, it's too complicated. It's. It's misaligned. We actually talked to Bob Merton, the Nobel Prize winner, about this, that, you know, everything is geared around saving money, piling up the consumer's money. And then most of financial services is made money. They're making their money on either how much money you have, right as aum, or, and that's more recent, or when you started, it was on transactions, right. How fast can we turn this money around? And we make money when someone buys or sells something. And so let's have, let's do more of that. And it's not aligned with 100%, aligned with, you know, what the consumer wants, which is, hey, keep my costs low. Let's do this as efficiently as we can. Let's manage risk as best we can. But the good news is it does seem to be changing. Right. So I think Vanguard is, and I was listening to your John Bogle podcast, which was amazing to hear him at 89, pretty spry, kind of clearly communicate his history and why he's done things. But it feels like the right things are winning in the end with Vanguard accumulating a billion dollars a day. And, you know, it's all around low fees and index investing and everything else. So some good things are happening. And you've been part of that. That's good.

Well, and trying again. I feel like I'm the guy with the Bic lighter following the torturer. There's a lot of us, as you mentioned, a couple Jonathan Clements and Alan Roth, and there's a good deal of people out there that are trying to continue to get this message out. And there's always going to be pushback from the part of the industry that wants to continue to survive and make a lot of money by selling other stuff. And it could be from the insurance industry, could be from the mutual fund companies, in the ETF industry, the advisor industry, in many ways, I think is moving toward selling stuff people don't need just for the sake of charging a 1% AUM fee. And so if you're really doing what's in the best interest of the client, you're going to act as a fiduciary, even when it comes to your own fees. And that's a real important point. I think there's a lot of advisors out there who will raise the red flag anytime they see a one or two basis point fee that maybe shouldn't be there in a mutual fund company. And by basis point, I mean 0.01%. It's a raise a red flag and they'll start screaming about fees. But when you ask them, how can you justify charging 1% to somebody who's got $2 million and charging them $20,000 a year just to manage a simple portfolio? And they come up with all kinds of justification. It's like you're not justified in doing that. So the advisor community is guilty of not self reflecting on their own fees and doing what's in the best interest of the client. So, you know. But they're quick to jump on everybody else though.

Yeah. I mean, the tension exists out there. One of the things that I saw from you on Twitter was, let me see if I can find it here. In October 5, 2018, you said Tim Buckley, CEO of Vanguard, presented to 250 Vanguard investors last night. I was there. One of his big initiatives is to democratize financial advice by driving advisor fees to index fund levels. Fasten your seatbelt, folks. Change is coming.

That's right. It took Vanguard to force mutual funds to start lowering their fees and start acting a little bit more in the client's best interest. And now Vanguard is attacking the advisor industry saying, look, how many times do you need to do a financial plan for a client? You don't need to do one every year, you don't need to meet with the client every quarter to go over their performance of four index funds. I mean, why do you need to do all of this? It's just wasting the client's money. So they're coming after the advisor community and trying to highlight that there are some issues with what Vanguard is doing as well. That kind of borderline, maybe not in the best interest of clients, but you know, they're doing more good than bad, if you will.

Sure. Well, I know they also have that study that says, what's the advisor alpha that many advisors wheel out? It's like, hey, an advisor brings 3% of value. I think 1 1/2% is from coaching and then the rest is from tax efficiency planning, blah, blah. But yeah, that's a lot of nonsense. Yeah. Well, it's interesting that they have both, you know, they're bringing up, you know, they're, you know, their own kind of low cost advisory solution. Right. Personal Advisory service and. But they're also pumping up the advisors, by the way, for what it's worth. I don't want to be. I think, yeah, there are all kinds of folks in financial services. There are very bad folks that are just selling stuff that doesn't matter and is in the wrong interest of consumers. And then there are a lot of advisors that do add value, you know, around coaching, getting people to act. So I mean, my takeaway so far from being in the space is that a lot of this is around behavior and helping people actually move, get off the needle. And that's where having a human coach or advisor can be super valuable. Now, what they should be charging and what's an appropriate price and how should you be like, you pay your cpa, you pay your lawyer, you pay your tax guy hourly to give you specific help around certain things and then they stop charging you versus the advisor model is, hey, I want to build a trusted relationship, which is important, but then I want to keep taking a rake on your hard earned money forever, which is great. I mean, I get why they love the business model, but it does feel like that's going to change, that's going to come under more pressure.

So as a fiduciary, shouldn't you be analyzing that? I mean, isn't it your duty to look at your own fees and self reflect and say, hey, if I'm charging this $500,000 client $5,000 a year and I'm charging that $2 million client $20,000 a year, am I doing four times the amount of work for that $2 million client than I am for that $500,000 client? And the answer is no, you're not. You might be doing a little bit more work because maybe there's a couple more accounts involved, but you're not doing four times the amount of work. So why are you getting paid four times the amount of money? As a fiduciary, you should be looking at that. And let's look at the other side of that. By the way, in defense of the advisors, let's say you have somebody who has a $200,000 account and you're charging them 1% and so they're paying you $2,000 a year. But this particular client is calling you every week. They need to have that behavioral coaching needs to be constant. You're spending a lot of time with them. There's a lot of things going on in their lives that need to have changes in their financial plan. You should be getting paid more than $2,000 a year. But you're not, you're undercutting yourself by only charging 1% AUM for those clients. There should be a minimum fee. So there should be a minimum fee of maybe 4 or $5,000 if you're going to provide this kind of coaching. And there should also be a maximum fee, maybe $10,000. And there can be some variation in between. That's fair pricing. That's bringing both AUM and flat fee pricing together and meeting in the middle. But you find people who are doing 1% AUM do not want to hear that. They just don't. And I think that they need to reflect back on the fact that they are fiduciaries. And as part of their role, they need to be looking at all fees, including their own.

Yeah, I think this go. I mean, you have the same problem with real estate, right? You can sell a house for, you know, the fees have been what, 5%, 6% on the house transaction forever. And you could sell a house in, you know, upstate New York for 300,000 bucks. Or you can come here in Northern California, sells house for 3 million bucks. You know, the fees don't change that much, but it will. I think the, you know, but let.

Me just say that the real estate agents are not fiduciaries. I'm talking about a legal fiduciary. As a registered investment advisor, you are a legal fiduciary and you must follow fiduciary rules legally. Now, brokers don't have to do that because they sell products and they make commissions. So they're not subject to fiduciary rules. Same thing with a real estate broker. They're not subject to fiduciary rules. Investment advisors are. That means they're supposed to be looking at all cost to the client, including their own. So it is different. It is a different level.

Yep. Well, I think the core problem is that you're asking the person responsible as the advisor. Right. To negotiate against themselves. Now, fine, they should do it. Right. But how are they going to find appropriate price? So it may be that you have to have a third party. It's either going to come from a third party that looks at it, that's separate or competition, which is emerging now. So we've had the robo portfolio managers, the personal capitals and betterments of the world and so forth that are optimizing around the portfolio. And now I think you're going to start to see more services that are around, hey, let's bring more efficiency to planning and advice and that will enable more Lower costs. And so hopefully that'll emerge. I mean, you're starting to see it. I mean, there are firms out there.

And then you've got people like me, big mouth like me, who are making an issue of it and continue to make an issue of it, and will continue to make an issue of it. Just like John Bogle been making an issue about mutual fund fees for 45 years. And that the mutual fund companies have a duty to their investors and they have to separate the management of the company, the mutual fund company from the management of the funds. They shouldn't be the same people who are on the board of directors. He's been saying this for years. Because conflict of interest. You have the same thing here with the advisor industry. Get the advisor making the decisions for themselves and what fee is appropriate. And maybe that's not right.

Yeah, I think that that's the core issue. You can't ask people to negotiate against themselves. You have to have some other way to benchmark this stuff and have people be educated or the consumer themselves has to be educated and know that there's other alternatives and see what's realistic. And I think they're starting to see that. That is starting to happen, right?

No, it is happening, but it took Vanguard 12 years before the Vanguard S&P 500 fund, the first index fund created in 1975, actually got $1 billion under management. It took 12 years to get there, and it was a very rocky road along the way. So this concept of there's other ways to charge advisor fees and that maybe AUM is not the best thing. Sure. It's going to take another 45 years, maybe a whole generation, but it's going to happen. And I think that the smart advisors are going to begin to work this into their own models or they're going to end up retiring at 65 or 60 years old and selling their book of business and they'll do okay. But the next generation, the young people in their 20s and 30s had better be thinking about these issues because they're going to be the ones affected. And the valuations of their companies are going to be affected 20, 30 years down the road.

Yep. Well, for what it's worth, that's how we're thinking about it. We rolled out our own separate RIA to provide packaged, you know, collaborative planning around the digital plans that people can create on our site. And it's priced flat, you know, fixed fee for things like, you know, plan checkups. And then we envision just charging flat subscription fees that are people agree to and that are not tied to assets or anything else. So kind of like an hourly model. I think that's what's going. You're starting to see more firms start to do that kind of stuff.

Yeah, it's a separation between day to day asset management. You could do day to day asset management under a low AUM fee. I don't have any problem with that. That's the way Vanguard does it, even with their mutual funds. But the fee for doing day to day asset management, portfolio management has to be down 20, 25 basis points roughly. That would be fair. And then anything other than that, that you do for the client above and beyond the, the portfolio management and whatever the SEC requires that you do for the client to know your client and have the right allocation and so forth. Anything above that, any kind of insurance planning, tax planning, estate planning, what 529 plan should I put my grandchild's money into? All of that advice part should be built separately from the AUM for managing an investment portfolio. So totally two different fees.

Totally agree. Historically what's happened is people advisors give away the plan and a bunch of service up front as kind of the lost leader build trust. But the real point is to get access to the assets and manage the assets and then keep that going for, you know.

Isn't that deceptive though? I mean, you know, we get all over the brokerage industry for saying, oh, you do the financial planning, you do this other stuff, but all you want is the commission. I mean, we're very quick to shoot at the brokerage industry and say, look at them, look at what they're doing. That's just not fair to the clients. And yet a lot of advisors are doing the same thing with this, you know, loss leader called the financial plan. Just to get the assets in, you have to look at what, how an advisor is paid that determines what they are. Even if a financial plan is done, if an advisor is paid based only on AUM fees, they're a money manager. I don't care what they call themselves. They're not doing financial planning for financial planning fees. They're just doing money management. It's no different than a broker doing a financial plan for the purpose of selling an insurance product. It's the same thing. So it needs to be separated. And I think that that's what I'm trying to get that message out.

Sure. Yeah. Well, we'll see, you know, we'll see how it evolves. I will say it does also go, I think partly to human nature for a lot of folks. They want to have somebody there to coach them along and, you know, be that trusted person that they can count on. I think it's really, and I think that has a lot of value. It's really just, you know, how are they paid and being everyone being on the same page that this makes sense. And, you know, is it fair?

Is it fair?

Yeah, is it fair?

That's the bottom line. Are you doing, as the advisor, are you doing the work that the client is paying for or are you doing too much work and the client isn't paying for it? It goes both ways. It has to be fair from both sides.

Ultimately, I think it's going to come back to the consumer. They have to be aware, ask questions. They started to do this with fee, with funds, right? They're saying, okay, I don't want to pay a 1% load on some mutual fund when I can get a index ETF that does the exact same thing for, you know, 17 or 12 basis points or whatever it is. So they'll probably hopefully start to look around and say, okay, you know, like they do in the rest of their lives, you know, what are my costs? Does that make sense? We'll see.

Yeah. Well, you've got companies like Betterment out there that are getting people on board with low fee asset management, which we didn't have 20 years ago, we didn't have it 30 years ago. So the younger people, the millennials and so forth are being exposed to index fund portfolios, low fee asset management fees at a much, much younger age than my generation. I'm 60 years old, a baby boomer. So my generation had nothing like that. So I think that that also those products and services that are out there exposing young people to low asset management fees and low alternatives to financial planning. Again, the next generation, 30 years from now, that's when this, you're going to see a massive sea change and it's going to take that long like it did with index funds, right?

Well, hopefully, you know, things certain, you know, feels like things are accelerating. We'll see, we'll see if you know, once it gets going, I mean, Vanguard, such a machine. Now they're getting a billion dollars a day and they're dwarfing the rest of the industry. Hey, just real quick before we move on, I listened to that podcast, your first Ball Guts podcast with John Bogle. Mr. Bogle. And what do you think his biggest contributions are to the financial services space?

Well, he's got so many contributions, accountability. He is making the financial industry accountable and they never Wanted to be accountable. Ever since they've been in existence, they have not been accountable. So I think that he is forcing accountability and accountability for the fees they are charging, accountability for the performance that they're not getting. So he's highlighted and he's focused people's attention on the lack of accountability in the financial services industry and did it by setting up a company that basically has accountability, a mutual benefit company called Vanguard that's managed for the benefit of its shareholders. The shareholders are the Vanguard investors, and I am one, by the way. Full disclosure. So he's always done it not by just talking about it. He has done it by doing it with Vanguard. And it's been super successful and it's been a grassroots growth. It's not like they had a lot of money to advertise. The whole industry was hoping that Vanguard would go under in the 1970s. They didn't. They came out, they survived. And it. And because of that, and now that they're getting a billion dollars a day, it's validated his message. So.

Right. Yeah, it's been amazing. You know, from the podcast, I mean, obviously we're aware of index funds and low fees and kind of what Vanguard does, but to hear it in his own words about, you know, how they got started. They had a license, the S and P index first. I think they're paying 25,000 bucks a year to get the right to use it, to build the fund around it. And I think the biggest. One of the huge things for me is that he did choose to take the company and make it a mutual benefit company for everybody. And so because the funds own Vanguard and the investors own the funds, their interests are aligned around driving down the costs of investing. So everyone's completely aligned. And that's what's worked. He, by choosing to do that, probably gave up several billion dollars. I don't know. He's a huge amount of like personal wealth. Right.

He's talked about that. He has talked about how much money he would be worth maybe if he kept Vanguard as a private company. Now, remember, Vanguard was actually part of Wellington Asset Management. So the ownership of Vanguard, I'm not sure how, you know, operationally or legally if he would have been the owner or not. Might have been Wellington who actually owned the company. But, you know, you're absolutely right. But then again, if it was a for profit company, would it be the Vanguard that we know today? I would say no, it wouldn't be. It would look a lot more like Fidelity.

Yeah, right. Well, it's been A big, huge, you know, several decade ab test between what's the right business model? All right, last thing here, he just wrote an op ed piece saying that, hey, index funds may be getting too big. You know, Bogle sounds the alarm that the share of corporate ownership by index funds will continue to grow over the next decade and warns that it's only a matter of time until index mutual funds cross the 50% mark. And if that were to happen, the big three, Vanguard, State street and BlackRock, might own 30% or more of the US stock market and effective voting control. I do not believe that such concentrations would serve the national interest. Any thoughts?

Well, yeah, so, I mean, he's really looking long term. So he's thinking, he's saying that if Vanguard, BlackRock and.

State street, the other.

One, State street, yeah, owned 30% of the equity, that they would collude together and vote together and therefore control the world in a way. A little bit of a stretch for me. Not going to happen in my lifetime. Not going to happen in your lifetime. Wouldn't worry about it. And I just think that if it ever actually got to the point where you had some real academic evidence that maybe this was occurring or could occur, I think that we have laws that already step in to take care of that. So he only made those comments because of some research that was done. I Forgot who the PhD, the professor was who did the research study, but it was in the article that you were reading where he was. They were just raising the red flag. Okay. I mean, maybe, and maybe there would be some negativity to that of some sort. But look at the positives that indexing have created for investors. And so if this small negative happens to maybe occur, we don't even know if it will occur or can occur. But if it does occur and we have to fix it in some way, the laws I think are in place that could do that. But also you don't want to do anything to indexing and the general nature of it because it's been such an incredibly large monumental benefit to investors to have index funds.

Okay, last question here on financial advice. Since we've been talking about this. Do you think that there's any transformative model along the lines of what Vanguard's done that causes huge change? I mean, you're rallying, you've got people like yourself and other folks kind of cheerleading like, hey, let's be real fiduciaries here. Let's bring change that way and you've got competition. Do you see anything else that emerges that's like, hey, here's a different way of doing this that fundamentally changes the whole industry.

Well, you've got the government, you've got the courts. And if there is a fiduciary rule, if it ever happens, there will be case law, and that will drive innovation in the industry, drive more people to different models will come out. So I think a fiduciary rule of some sort is, is in a way of the first step of the government getting involved in this. And part of being a fiduciary, as I say, it's looking at all the fees. And I think that will circle around eventually to make changes to advisor fees.

Yep. Okay. Well, we'll see what happens. We'll be watching. So I want to talk to you in a second about what you're doing now with Core four. But first I want to ask you just, just a few questions from our users. The kinds of questions, these aren't specific to people, but like the kinds of things they're asking about. So, for instance, and I know we can't deliver financial advice on this, but, you know, kind of general thoughts on this, you know, if you have, there are a lot of people out there that are sitting in cash, you know, even since 2008. And if they've been doing that or they're cash heavy and they still have 10 to 20 years until they retire, any thoughts about what they should do?

If you've got that long again, you're talking about quite a while before they retire. And then once they retire, they're going to live another 30 years. We hope. So you don't be in too big of a rush to jump out of a market just because it's gone down 10% after going up 200%. But interest rates are moving higher. I shouldn't say that. I hate to use the words moving because it's predictive. That's they have moved higher and the Fed said that interest rates are going to move higher still. And if we have three more increases, we're looking at money market rates being over 3%. And banks will have to compete against that. So they'll eventually be CDs that are yielding 4%. And if you believe that 4% is all you need to reach your financial objectives, you know, you could shift money into a less aggressive portfolio and leave it there. Leave it there for the rest of your life. You know, people have done very, very well here in the last bull market. Since 2009, again, you've more than doubled your money with dividends, reinvested more like 250% gain. That doesn't happen in every 10 year period. So if you wanted to take some money off the table and put it in something that's yielding 4%, even if it's an investment grade corporate bond fund which is already yielding 4% right now, that's perfectly fine. But we're not going to do market timing here. We're just simply saying, I didn't expect to have as much money as I have now because I didn't expect the market to go up like it did. But it did. And so here I am, I'm ahead of the game. Let me take some off the table and let me lower my allocation to equity and put it in something that gives me a 4% compounded return with relative safety.

Yeah.

And so it's perfectly fine.

Sure. Well, I think that does go to. I think you'll start to see a lot. Historically, everyone's been focused on accumulation, right? Save money, invest to some huge number. No. 1, you know, financial services industry doesn't really talk too much about what they right number is just as much as humanly possible. And I think more and more people are going to be turning and saying, okay, well how do I generate income for a long period of time at least, and how do I cover my guaranteed minimum? How do I cover my minimum needs in a pretty risk averse way so that I'm not going to outlive my assets and I'll have enough income to at least get by. So I think that'll become a bigger part of the dialogue for folks. And being able to be thoughtful about how to put that together is important.

Sure.

I mean, our users are typically kind of 50 plus, you know, they've got some, you know, material savings, you know, over a million bucks and they've obviously been saving and planning their whole lives. Still many of them are nervous because they're looking forward and saying, oh well, I might live quite a long time here, healthcare costs, things like that. How do I hedge this stuff? Market volatility, inflation, you know, any thoughts for folks in terms of positioning themselves to be, you know, to weather this stuff?

You know, there's no general answer for this and I hate making, you know, rules of thumb and you hear a lot about your age and bonds and all of that. And I don't really believe in any of that because everybody has to come up with this strategy that works for them. It works for them in two ways. It works for them because it gives them the required return to get to where they need to go. Might be 4%, might be 5%, but the portfolio has a high probability of giving them that required return. It also works for them because they're able to stick with it through all market conditions. So I can't say when I talk with the client, we're talking about strategy here, and let me differentiate that between philosophy and strategy. Philosophy is I believe in low cost. I believe in index funds. I'm not trying to beat the market, I'm not trying to time markets. I'm trying to set an asset allocation that'll get me to where I need to go in the long run. And I'm not trying to be active out there trying to outperform, trying to keep my costs down, my taxes down, do what I can do. That's my philosophy. It's the John Bogle philosophy, the Boglehead philosophy, the Vanguard philosophy, whatever you want to call it, that's what it is. Now, a lot of people have that philosophy. Millions and millions and millions and millions of investors had that philosophy. But I bet you I couldn't find two investors out of those millions and millions and millions who have the exact same portfolio, the exact same allocation to cash, the exact same allocation to stocks, the exact same allocation to certain sectors within the stock market. Some clients might have some CD money tucked away. Somebody else might have an annuity, a fixed annuity tucked away somewhere else. I mean, when you really get down to it and you put two people together and you look at them, there are no two portfolios that are identical. They just don't exist. That strategy. That strategy. Because each person has a strategy that they're enacting for their own personal needs. And this is where the financial advisor comes in. The financial advisor's primary purpose in life is to find out what strategy that this client should use to get them to where they need to go and to help the client implement it, if the client wants help implementing it. So that's, that's strategy. So with your question, you know, what, what should people do? Find the right strategy that works for them.

Well, first get, make sure that they're set on their philosophy and they understand it, right? What is active? What is passive?

That's true. And you know, I would say that there are people now that are doing passive investing through betterment and other means. They might be in a life strategy fund at their work. That is a low cost life strategy. They don't even know they're doing passive. They don't know, but they just know they're in this fund because that's the Default fund that the company put them in, but they're actually doing passive in that fund. And I think a lot of the education is, hey, do you know how you're investing? Let me explain to you how you're investing. You're investing passively, you're investing this way. And they go, oh, wow, that's pretty good. I've done pretty well doing that. Yeah, good. I mean, you've just shortcut a whole lot of agony to get to that point.

Yeah. Well, here's a quick story for you. Do you know Rob Berger over at Dough Rollers?

Yeah, sure.

Yeah. So I saw him at fincon. He sold his company and got a chunk of money. He did.

I did not know that.

So he sold his business, he made a chunk of money, and people are asking him what you do with it? And he said, I chucked it. I put not chucked, but I put it all in the market and the exact same portfolio I've always had, and that was it. Obviously, he's well aware that we're at historical highs on a relative basis valuations, but he's sticking with it. He's like, look, I'm not going to time the market. I have a belief in what I'm doing long term. This is what I want to do. He popped it in there and since then the market's come back a little bit. But I'd be curious to see what he says now. I'm sure I can imagine he'd be like, whatever, I don't care. This is my belief system, my philosophy, and I just put it in there.

Well, you might not be right over the next, say, three or four years, but you're going to be right over the next 10 or 15, right?

Yeah, exactly. Great. Well, that's super helpful. I did read that on your site you're talking about the philosophy, you know, that you choose and then how that it goes into your strategy and then how that goes into the discipline of actually sticking with it. And it is so hard. I think that's my big takeaway from talking with people like Jonathan Clements and different, you know, behavioral finance people. Where humans get in trouble is they cannot manage themselves. I was talking with Jim o' Shaughnessy about this, who's an active person, Right. He's like, look, I trade against the fact that the humans can't control themselves. The human behavior will always be the same. People will freak out and they will sell. It'll be interesting. If there was a huge drawdown, one giant experiment will be if there's a Giant drawdown to people who are passive index folks. Can they stick with it and just write it out or will they sell?

That's been the question at Betterment for a long time. Betterment has never gone through a big downturn. You know, maybe a few 10% drops. But betterment has only been around since, I want to say, 2010 or so. I don't know when John Stein started Bettamin, but I think it was back then. First time I ran into John Stein was at fincon. As a matter of fact, I think it was the very first fincon conference. I can't even remember the year, but I think they had less than 200 million under management. It might have been only like a little over 100 million. And I met him and I talked with him and, you know, I think I recall talking about this. You know, you're. What you're doing is very interesting. I wonder how these new investors who are just following your strategy are going to react when there's a strong market downturn. And again, this was maybe 2011, 2010, there hasn't been one. So, you know, it's a good question. I will say that the most of the clients that I had during 2008, 2007 time period, when the market went down like it did, we lost maybe. I'd say I lost maybe 4% of clients total who liquidated, and then maybe another percent of people who we need to lower their asset allocation. And those are not perfect numbers, but 95% of people did nothing. They just allowed us to rebalance, allowed us to do what we did. And that's all we did, is followed the set of instructions. I mean, to me, it was great. Wow, look at the market going down. Oh, please, keep going down, you know, so that we can rebalance and buy stocks cheaper. And I was all over the place talking about this, and people thought I was crazy. They thought it was the end of the world. And I said, this is the best time in the world for baby boomers. You should be taking, don't reduce your asset allocation to equity. I mean, I got to leave it the same. And if you're young, you should be go heavy equity. And everybody thought I was crazy, but the fact is, no, I mean, these are just cycles in the market that work themselves out over time. And if you believe in capitalism, you believe in markets, you believe in the system that we have in this country and all around the world, it's moved towards capitalism, not away from it. That, you know, these things that occur in the markets are Transitory. And eventually they work themselves out and stocks go back up to 16, 17, 18, multiple. Sometimes they higher, sometimes they go lower. When they're lower than that, you shouldn't be selling. You know, I mean, that's the last time you want to sell. Now, you know, when the stocks are high, relative multiples are high, and you're retiring and you might want to take some money off the table and reallocate some more to bonds permanently for the rest of your life. Sure, absolutely. But I remember back in 2008, people were retiring and they wanted to reduce their asset allocation to stocks, and I wouldn't let them. I said, no, no, you stay 60%. You need to stay 60%. They said, well, I'm supposed to get out of stocks because I'm retiring. Stay 60%. And they did, for the most part, like I said, 95%. And it worked out. These are just transitory things. In the long run. Stocks outperform bonds, bonds outperform cash. Might take 20 years, 30 years to do it, but most of us hopefully have 20 or 30 years. So why not follow the instructions, stay disciplined? Which is the third leg of the stool philosophy. If you have the right strategy, discipline of staying with that strategy. The discipline of staying with that philosophy is critical. It's one of the three critical keys, the three elements of successful investing.

Well, and that goes to, I think, a huge component of the value here that we've talked about, which is, you know, the human managing the behavior, letting having a fire, having the advisor almost be a firewall for keeping the. The, you know, the consumer from shooting themselves in the foot, which is what they've done historically. Now, now that people have seen more volatility and the people, more investors that live through 2008 to 2010 or 2009, you know, they'll see that, hey, you know, it can look like the world is ending and it actually works out okay.

Interesting, though, there are a lot of young people in their 20s who watched their parents go through 2007, 2008, and they decided that they weren't going to go into stocks. This is not any different than the generation that watched their parents lose everything in the Great Recession. The Depression, excuse me, the Great Depression of 1929-1932, 33, the generation after that, who were investors, who watched their parents lose everything. They didn't go into the stock market. And it took until around the 1950s, late 1950s, early 1960s, before you saw more people come back into stocks. And so these big generational shifts also occur So I was actually shocked. I mean, young people who are telling me or told me that they didn't want to be in stocks because they watched their parents lives lose money. I said, well, it's unfortunate your parents lost money. They shouldn't have. They shouldn't have. They didn't have a philosophy, they didn't have a strategy, they didn't have discipline. And they maybe had an advisor. There's lots of different types of advisors out there. They maybe had an advisor who was worse than they were. You know, when I was a broker, you know, my office manager would get up in front of the, the, all of the brokers every Friday and we'd have an office meeting. But the meeting was all about how to generate revenue for the firm and the bottom line. So if the market was going down, he'd say, if your clients want to sell stocks, you agree with them, you sell. And if your clients think this is a buying opportunity, you agree with them and you buy.

You're just acting for whatever they're doing.

You're just a window to their emotions. And the way we make money in this industry is getting them to do, to act one way or another. And therefore we make commission dollars on that. And if they ever say, I don't really like this particular investment, it's not performing well, it's a great opportunity to get them out of that and to get them into something else. Some other mutual fund that has a 6% load and they'll forget over a two or three year period that they paid 6% load and they'll be ready to pay another 6% load. And that's how that industry works. So there's two different types of advisors. So when you're talking about the advisor who is hand holding the clients and educating them and coaching them, that is the right type of advisor. That's somebody who's being a fiduciary. Unfortunately, I think they're a minority. You've got maybe 100,000 or maybe even less, maybe 60,000 fiduciary advisors out there and 550,000 people who are doing something else. Right?

Yeah, Salespeople or whatever it is. Right. Okay, well, good. Well, hey, spread the word. So I'd love to talk to you about Core4 and what that is and where you're going with that. Can you just give us a quick overview of what it is and how it works?

Yeah. About 10 years ago we were talking on the Bogleheads forum, which is an online forum@bogleheads.org, for anybody to get on and read. It's all free. It's peer to peer free advice. It's all very good, high quality advice, no commercialism. But we were talking on there about simple portfolios and how to create a simple portfolio. And I came up with this idea of a four fund portfolio with US Stocks, international stocks, real estate through real estate investment trusts and then aggregate bond fund. So that would be your bond portion. So three stocks, one bond. And I looked at it and I said, well I think I'm going to call this Core 4 for lack of a better word. This is my Core 4 portfolio. So I started writing about the Core 4 and I put it out there and it's all free. I mean I wasn't running any Money based on Core 4, I was just putting it out there for the general domain. I said this is a simple portfolio, has three, four separate asset classes. And you do have some real estate exposure in the stock market, but not a lot. Most of the real estate, the real estate is probably 15% of the global of the US economy. It's only like 3% of the stock market. So you could increase your exposure to real estate by buying a 10% position in say REITs. And so I had that in there. I said you got real estate, you got U.S. stocks, you got international stocks, all, all very low cost index funds. You got this total bond market index fund which had Treasuries and corporates and mortgages in there. It's all very low cost. You have an allocation to those four funds and you just implement it yourself and you rebalance once a year and you forget about it and that's it called Core 4. And the next thing I know, the idea of the Core 4 was self managed, low cost, low maintenance and understandable because they're so distinct the asset classes, US stocks, international real estate and bonds that it's easy to, it makes sense and easy to understand. And I kind of left it and I didn't do anything. Well, over the next seven or eight or nine years I keep getting calls to be interviewed by various journalist about the Core 4 portfolio. And I keep reading the Rick Ferry Core 4 portfolio says this and the Rick Ferry Core 4 portfolio says that and all these different places. And I realized that a lot of people actually were using it and they were running with it. So after I sold my company I decided to go out and trademark Core4 and create some other Core4 portfolios, maybe for different folks. There's an ESG portfolio for people who are socially conscious. Core4. There's a high income portfolio for people who want higher income. And So I created six different Core 4 models and I created the website called Core 4, which is Core C O R E4. And I said, here it is, you know, go do with it as you will. Here's some funds that would fit each of these categories. And this is how you use it here. You can even back test it through portfolio Visualizer if you wanted to. That here's everything, you know, go out and be happy and use it. And so that's what it is.

Nice. And do you see it becoming a business or is this really educational thing to help tell people?

Yeah, so my big thing though, as I've been turning, you know, I turned 60 this year is, is portfolio simplification. I'm going to, I'm going to go through the, if you don't mind, give me a minute to go through the four stages of index investor education. There are four stages to it. Okay. And if you don't mind, I'm going to talk about the four stages. Okay. So the very first stage is darkness. And in darkness you really have no idea what you're doing. You're just taking the advice of whomever tells you, go buy this. You might read a Money magazine article, I hate to pick on Money magazine, but why not go buy this stock or go buy that mutual fund? Or you might get a broker who says, go do this, go do that. Or a co worker might say, go do this. And you're not really giving it any thought. You're not aware of how it all works. You just basically go out and do what other people tell you to do. That's being in darkness. So that's phase number one. Stage number one is darkness. The second stage is called enlightenment. And what happens in enlightenment is you become aware. You say, I need to learn about what I'm doing. And you start to ask questions. Instead of just accepting answers, you begin formulating it, asking questions. And if you do that enough, and if you start studying, you start reading and you start looking and you start measuring. And that's the real important part. You start measuring your performance and what you're buying and what you've bought against appropriate market benchmarks, which you're reading about and learning about, eventually you're going to come to the realization that you're not doing very well.

Yep.

And eventually if you keep on going with that, you're going to realize the reason you're not even keeping up with the markets. And then you're going to start reading about indexing. And index funds. And it's going to occur to you that if you want to do better, all you got to do is do what the markets do. And so therefore, all you should do is go buy index funds and nothing else. Ah, the aha moment, you know, enlightenment. It's like the clouds clear and a ray of sunshine hits you in the face. You're like, oh, I get it. Oh, I see it. This is it. Low cost indexing. Yeah, I see it. I understand. But unfortunately, what happens is a lot of people, once they get to that stage, they go to the third stage. And the third stage is called complexity. They make it much, much more difficult than what it needs to be because they start reading all about index funds and they start reading about factor investing and reading about optimal asset allocation, and they try to come up with the perfect portfolio, the perfect plan, the perfect funds. Should I have 13.2% in emerging markets or 13.4? I just can't make up my mind. I'm going to lose sleep. This can go on for years. And so their portfolio kind of changes and it shifts and oh, I should have commodities. No, maybe I shouldn't have commodities. And I should have high yield. Oh, no, I shouldn't have high yield. And I mean, they're back and forth and making it way, way, way too complex. And if you do that enough like I did, you get to the fourth stage. And the fourth stage is simplicity. None of that stuff makes any difference really. In the end, what makes it matter? What matters? What is your stock allocation? What is your bond allocation? How much are you going to hold in cash? Whether you should have the S&P 500 as your stock allocation, or a global equity index fund as your stock allocation, or the total US Stock market fund as your allocation doesn't matter very much on the bond side, whether you have a laddered CD portfolio, or you have a total bond market portfolio, or you have a corporate bond index fund portfolio. Whatever it is, as long as you're consistent with it, it doesn't matter. And the bottom line is you have your allocation to stocks, your allocation to bonds, you have your cash allocation that you need to live on, and you don't change it. And you make it all very simple again. And therefore, you can be disciplined about what you're doing and discipline about the philosophy. And now you've gotten back to. You've got the philosophy, you've now got the simple strategy, and now you have the discipline in order to keep both of them, because you've made it simple. And so Those are the four stages of index education.

That is super helpful to hear in your own words. Okay.

Writing a book on this called the Education of an Index Investor. So hopefully it'll be out, you know, in a few months. So anyway, that, that's. I forgot how we got on. Yes.

No, no, no, no, it's good. Well, actually, so back, you know, back on this. So say that someone's gone through those four stages and they're doing the right things and then they get to, hey, you know, I've been accumulating my money, but now I want to start to decumulate this. Do you think people should, you know, stick with that and just draw off or use some kind of budget, I mean, sorry, bucketing strategy or use some, you know, annuitization on, you know, layering of income. What's your any. I mean, it obviously depends on how much money you have and what your needs are and everything else.

It gets back to straight strategy. Your strategy for distribution. Right. You've had a strategy for accumulation, now you need a strategy for distribution. I can't say do this. I can't say rule of thumb, everyone should do 4%. I can't say that. You need to figure that out for yourself. Is it putting some money in a single premium deferred annuity or single premium immediate payout annuity? Maybe. Is it just taking 4% off the portfolio? Maybe. I know you had Alan Roth on. Alan believes that when you sell some stock fund, it's the same as taking a dividend. And he's right. How you do that, how you get the money that you need to live on out of your portfolio, again, is your own strategy. And you have to come up with your own strategy in order to stay disciplined about doing it. Personally, for me, I haven't even decided that for myself yet how I'm going to take money out of my portfolios to live in retirement. Hopefully I won't have to take any money out for the next 10 years out of my retirement portfolio. So I haven't had to think about it. But anyway.

Yeah. Well, I think there's actually a lot of data that shows that people that do save when they go to retire, they keep accumulating money until they pass away and they end up with way much, a lot more money than they anticipated. I do think we're going to see that for the savers that are out there, I think we're going to see many people that end up with huge piles of money.

I told a lot of my clients this when over the Years I said, you're going to die with more money, much more money than you have right now. They would ask questions like, oh, you know, they were kind of silly questions in a way of, you know, should I, should I gift my grandchildren $500 at Christmas time or should I wait and give it to them as their inheritance? You know, just give them, give them the money you're going to have when you're dead. You're going to have so much money. They're going to get so much money anyway. It's not going to make any difference. Just give it to them.

Right. I talked to Bob Martin about this a little bit as well. He's, you know, there's, there are the people that have money and have saved it up. They're, you know, they can make better use of it in many cases for their family if they felt more comfortable that, you know, about the right time and how to, how to deploy it. What's their strategy for deploying it or sharing it if they want to do that, if that's in their interest. Right along the lines of like, do I give someone a gift or do I help someone buy a house and things like that. Because the reality is, as you get older, you don't necessarily need as much money. I mean, it actually ends up spending less money. And so you have, you know, a population of people that have millions of dollars but actually less need. They've just been great savers and everything else. Right. And then you have a bunch of people that could use it, but they haven't earned it yet. I mean, you know, anyway, they didn't save it. They didn't save it. So, yeah, that's a whole. We'll leave the whole family dynamic out of this for now. Well, that's super helpful to hear. So just as we wrap up here, any kind of key influencers or communities. Well, obviously Bogleheads that you mentioned, you've been active in that for a long time, many, many years. Any other great resources out there for folks as they go on this path of getting educated and trying to try to do the right things?

Well, I will give another plug to the Bogleheads because you brought them up and I originally brought them up. This organization is amazing. There's no commercialism in it. They will not allow any commercialism. It is one investor helping another and people might think that, well, what does an individual investor know? I will tell you, the cumulative knowledge of the Bogleheads in the forum. It far exceeds, far exceeds the professional knowledge of Wall street by a number.

Of orders of magnitude.

Orders of magnitude. You go on the Bogleheads forum and you ask a simple question and you say, look, here's my portfolio. This is my situation, this is my age, this is how much I've got or whatever, and these are my 401 choices. What do you think I should do? You will get the best investment advice for free that you can get anywhere, bar none. So I don't think a lot of people actually know of the Bogleheads or might think that it's funky. I know that there are some advisors, believe it or not, that absolutely death hate the Bogleheads because those advisors are charging commissions and fees and all the things that the Bogleheads hate. So therefore they hate the Bogleheads anyway. So that's. I think that that's a good place to start. And they've course got a big library of books and you know, here's your go to resources on all of this. And now we started the podcast, the Bogleheads on Investing Podcast. And you know, it's all good and it's all free and it's all for one purpose, to help individual investors make sound investment decisions.

Yep. Yeah, I had Jim Dahl from White Coat Investor on the podcast he's recorded and I know he's really active in community as well. So maybe you can do me a favor. Which is Dolly. Sorry, Jim Dali mispronouncing his name, but okay.

I think his name is Jim Dahl. I don't know. Dolly isn't.

Well, I think it's pronounced Dolly. D. Oh, is that how he pronounces it?

Okay, I didn't realize that.

I will have to edit this part out before we'll leave it in as like, hey, we got it wrong. That guy's. He's been doing a ton of good stuff, by the way. He's a pretty interesting guy.

And I remember when he was starting, was going to write his book the White Coat Investor. I was talking with him, I believe it was in San Francisco, San Diego, must have been 10 years ago when he was thinking about writing the book. Because I had written a couple of books at that point, two or three books. And so we had a discussion about it and that's when the White Coat Investor. I don't know if his blog was. Yeah, I mean he was just doing something on the Bogleheads as the White Coat Investor. And then he started his own blog. Yeah, he's become very successful.

Yeah, he's got a million visitors a month. So he's doing a lot of good Things. So. And I told him this, too. I got myself banned from Bogleheads because I had a user. So one of our users was on there and asking a question about our software. And I read the best practices and said, hey, if you identify yourself as the founder and address just the question they're answering and clarify it, that's okay. I tried to do that. This was several years ago. And they're like, no. And he's like, well, I've got myself banned too, but he can get himself unbanned.

Well, my. I've been banned too, so don't feel bad, all right? I was banned. I recall being banned one time. And, you know, they give you. You can come back on if you want.

I feel like I've been banned for life. Maybe you can. Maybe you can say, we'll see.

Well, what happened with me was I was. I wrote a blog. When I first started blogging, I don't know when it was 10 years ago, I put the blog on my. My business website at the time, my RIA business website. And I went on the Bogleheads and I said, hey, go read this blog. This is what it says. And it directed people over to my business website immediately.

Got banned, right? Exactly.

All right. So what I did was I went out and I started a new website. I called it. The website is rickferry.com and still exists right now. And not a lot on there, but it's. It exists. And I started blogging on that and I blogged on Forbes. So because I wasn't blogging on a commercial website for a business, because it was just my personal website, that was okay. And because I was blogging on Forbes, which is a media website, and that was all fine. And so all these rules are sort of written as you move along, you learn how to. But I'm back in good graces again. And as you said, other big Boglehead contributors are Jonathan Clemens and Alan Roth, Bill Bernstein. And so you got a lot of people on your show already that are all part of this community.

Okay. Any Boglehead listeners out there? What I want is for people to check out our. Actually give feedback on what we're doing around planning because we're trying to deliver this low cost, very efficient. Well, it's free, you know, planning tool that works for anybody that, you know, that's my. So I will be upfront about what my. I have my agenda. But I do think there's a huge amount of knowledge out there and it's clear that it spawned a lot of great things. So hopefully people can get behind. I mean, people there. There is some discussion of it. I mean, and we had, when we had Bill Bernstein on, I think that was pretty well received in the. In the Bogleheads community. There's a lot of discussion about his podcast and there probably will be of this one.

No, I hope so, but who knows?

All right, so, awesome. Well, this has been super helpful and great to hear in your own words, kind of your point of view, and I think it's always refreshing. One thing we have on here is a lot of folks that are financially independent, so they can say and do whatever they want and watch and hearing what they say and do. It's. It's always enlightening, right? Like, if they're focused on purpose or if they're focused on, you know, bringing and kind of shining a bright light on the practices of an industry or whatever it is, it's. It's always interesting to hear how people look at their lives and how they're spending their time. So that's been great. So, any questions for me?

No.

No. All right. No worries. It's all good. All right, so thanks, Rick, for being on our show. Thanks, Dato Robison for being our sound engineer. Anyone listening, thank you for your time. Hopefully you found this useful. Our goal at New Retirement is to help anyone plan and manage their retirement so that they can make the most of their money and time. And if you've made it this far, I encourage you to check out bogleheads.org, check out core4core-the number4.com where you can find Rex work. And also check out our site and planning tool@newretirement.com where you can build your own plan for free. And if you want to take advantage of our premium advanced tools and personal support. And finally, you can check out our Facebook group and us and find us on Twitter. New Retirement. So that's it. Appreciate your time.