On this podcast, Karl Eggerss explains what is an RIA. It stand for a Registered Investment Advisor. You may have heard the term, but don’t know the definition.

Welcome to the podcast, everybody. This is Karl Eggerss, and you have landed on Creating Richer Lives: The Podcast. Our web address is also CreatingRicherLives.com. That’s what we try to do every day. And of course, it’s beyond the financial aspects of trying to create a richer life. We help clients with all types of things in their life. And really, our tagline is lifestyle, legacy, philanthropy, and we don’t prioritize those based on what we’re looking for.

We prioritize that based on what our clients are wanting to do with the assets they’ve accumulated or are accumulating, and that’s what we do is we help you figure out at Covenant do you have enough to do the things you want to do on your own lifestyle, for your own lifestyle, in retirement, while you’re working? It doesn’t matter. Do you want to leave money to the next generation, the next generation, and maybe even the next generation? Does this need to be legacy money? How do we best do that? And then thirdly is the philanthropic part. And it doesn’t have to be in that order, but a lot of people do do it in that order, and some are done simultaneously, of course, but our job is to figure out the how to do that, so we walk through the lifestyle, legacy, philanthropy process with our clients. And it is a great process, and it’s something that is very beneficial because, again, most of us can probably figure out if you have enough money to do the things you want to do, but are you doing it the right way in terms of the execution?

And we have a lot of things up in the air right now in terms of taxes and estate planning and all of those things. And I’ve been meeting a lot of people lately that are saying I need to develop a relationship with somebody, a firm, because I’m worried about my spouse or myself who takes care of the investing or the bill pay or the structures or having their own business, whatever those things are. I’m worried that I’m going to put a burden on the surviving spouse, and I need somebody to take that burden off of my hands if something were to happen to me. So they’re looking to establish that relationship.

And that is, the word relationship is huge because, as you know, in the financial industry, people are sold stuff. There are products. There’s free steak dinners where people are essentially pitching estate planning docs, or they’re pitching annuities. They’re pitching things with big upfront commissions, and they don’t have a fiduciary standard. They don’t have you, the client, in mind. They have products in mind.

And so today, what I’m going to talk about in just a minute is what a registered investment advisor is. Some people call it an RIA, not to be confused with an IRA, individual retirement account, an RIA. We’re going to talk about that because you need to be on the lookout for when somebody calls himself an advisor, that can mean a lot of different things. And we’re going to talk about specifically registered investment advisors.

210-526-0057. Our website, as I said, is CreatingRicherLives.com.

A few things that I saw this week before we get into the main topic. We’re still seeing this threat of coronavirus around the country. It’s 2021, but we’re still seeing COVID-19 around the world, I should say, not the country, around the world. More than 12 million Australians, close to half the population, are now in lockdown as they’re trying to contain the spread of the Delta coronavirus variant. Now we got some good news. Johnson and Johnson said, hey, our vaccine covers that. But you’re seeing some countries, the numbers are going up.

Now, we need to watch the hospitalizations and the deaths because, again, people can get it. Even if you’ve been vaccinated, you can get it. We know that. It’s what does it do to you? Does it put you in the hospital? Does it potentially end a life? And if we don’t see that go up, that’s great. But we are seeing some of the numbers in certain countries go up. Is it because they don’t have enough vaccines? Potentially. There’s a lot of things going on in other countries. I was talking to somebody earlier this week from another country that simply said, “We don’t have enough vaccine.” So you are seeing that. The US was kind of on the forefront of that, Warp Speed, and so we need to keep an eye on that.

But the key to this from an economic standpoint, put the human tragedy aside, the economic standpoint is what’s going on in Australia is half the country is in a lockdown. Does that spread? Because again, a lockdown would mean what? It would mean slower economic growth. And we’re not seeing that in the United States. We’re still seeing things opening up. But just something to keep an eye on as we hear more and more about that. We have that going on.

And the other thing we have is a lot of Federal Reserve officials speaking this week. One of them, Tom Barkin, said that they could raise rates as soon as next year if things go quote-unquote right. And they could also taper. The market kind of ignored that. It was kind of a ho-hum week. But there’s this really interesting thing going on with interest rates. Interest rates were down again this week. You remember two weeks ago, I talked about this is why we diversify. People are saying, “Why would you want to buy bonds when the 10-year Treasury is paying 1.5% for a bond that’s going to, for 10 years? Why would you possibly want to own that?”

Well, there’s a couple of reasons, but one of them is because it’s going up in price right now. And it goes up when other things are going down, and we saw that this week. Bonds made money again. You also use it as a source of funds. You use it for rebalancing purposes. I’m not saying to go load the boat on bonds or treasuries, in particular, but there is a reason to potentially own them. And so we talked about that a couple of weeks ago, if you want to reference that old podcast from two weeks ago. Old meaning two weeks.

And we are entering July now. Here we are in July. And the last hundred years, July has been the best month for stocks. 1.64% on average. Hat tip to Bespoke for that data. It’s the third best month in the last 20 years. So July is seasonally a good month. What’s interesting, though, is we are in kind of the dog days of summer, and you tend to see the markets, after they’ve had a run like they’ve had the first half of the year, you tend to see them struggle for a little bit. So we’ll see. We kind of saw that this week, but it’s interesting to watch.

The economy’s opening up. We got the jobs report on Friday. And yet, interest rates are not reacting. They’re actually going the opposite direction of what many people think. So is the bond market trying to tell us something about the back half of the year? And I think the answer is yes. We’ve been saying we thought inflation would taper down. You’re seeing commodities come down a little bit. This is what we said might happen in terms of some of the inflation expectations. You’re seeing it come down a little bit, so the bond market’s kind of predicting that.

By the way, speaking of bonds, you know junk bonds, AKA high yield bonds, those are the ones that are the riskier companies. They pay you the most interest. They are paying now less than the CPI. Junk bonds. So to take all this risk on, you’re getting paid less than the rate of inflation. This has never happened in history. Now, I don’t know what that necessarily means. I do know that people are assuming a lot of risk. They’re paying up for this risk, and they’re not getting compensated a lot for it. Very interesting to watch. I don’t know what the repercussions are of that. I just know it has never happened before, so we need to keep on the lookout for that.

By the way, something else that passed this week was you had to unenroll if you did not want to get the child tax credit. Sounds kind of weird, unenroll. Well, wouldn’t I want it? Well, what if you qualified for it last year. This year, you don’t qualify for it. Well, if the IRS is looking at last year’s data, and they’re just going to send checks out, guess what happens when you go to shore up your taxes next year in April, and you’ve been getting these child tax credits sent to you in advance? Then you’re going to have to pay it back.

It’s very important right now. Your financial situation in ’21 could have drastically changed from 2020. And if it did, you need to be doing some tax estimates. You need to be looking and saying, “Am I, if I’m employed, are they withholding enough? Are they withholding too much?” Don’t base this year off of last year, especially if you’re in a very different situation, and many people are because they were either temporarily laid off, furloughed, they were maybe laid off permanently, maybe changed jobs. There’s all types of things going on, so look at your financial situation and get your estimates correct so you’re not surprised next year.

Those are a few things that I saw this week that kind of stood out to me. In terms of what was working and not working, when we look at just the broad stock market, you know that the Dow is up about 1%, the Standard and Poor’s was up a little less than 2%. Tech was up about 2%. So it was a good week for stocks, certainly. Interest rates down. It certainly doesn’t hurt the … Again, the world’s looking at it going, “Hey, if interest rates are low, I can still borrow. I can still do real estate deals. All these things are great, right?” Small caps were on the other end. They were down about a percent and a half, so a little bit of rotation. International stocks were down in value, didn’t do much this week. So we’re just continuing to see this grinding along in the big picture.

Some of the things that stuck out this week. Natural gas was up quite a bit. Some of the, in the commodity space, the grains specifically were up quite a bit, almost 9% this week. Technology. Look, technology continues to go up. We’ve been saying that there’s a lot of areas of technology that are way overpriced, potentially in a bubble, but guess what? We owned some because of this very reason. When interest rates go down, it’s continuing to work. Technology up 3% this week. And that was pretty much across the board. And then home builders, up two and a half. Those were the things that kind of stood out on the upside.

On the downside, as I said, interest rates were down. The volatility index down to 15. Banks were down. Interest rates going down typically hurts the banks. They were down about 3% this week. So let’s continue to watch because, again, are they going to swing like a pendulum where interest rates start to go back the other direction? It’ll be interesting to watch that. Biotech was down. Airlines were down. There was, again, a mixed bag overall, so we’re kind of just churning around here, but there’s some things continuing to make new highs.

And by the way, a really interesting stat came out of Bloomberg and SentimenTrader. And right now, there’s a big concentration of concentrated gains. What they did was they went back all the way to the Great Depression, 1927. They looked at the number of days out of the past five that there was a 52-week high. And at the same time, less than 50% of the stocks were above their 50-day moving average. Let me repeat that. Basically, I’ll give you what it means, and then I’ll repeat the stat. The stock market is going up, but there’s a lot of … There’s fewer companies participating. That is exactly the opposite of what we want to see.

You always hear me for the last several years say we need to see broad participation to really believe if a rally is really consistent or not. And we’ve seen that certainly since last November. Everything’s been participating. What we’re seeing now is in the last five days, they go back in five-day periods, we’ve had four days out of the last five where we’ve had a 52-week high, but less than 50% of the stocks are above their 50-day moving average. In other words, a lot of stocks are in downtrends, and yet, the stock market’s going up. What does that mean? That means a lot of people aren’t going up because they’re in diversified mutual funds, and they’re not in those handful of stocks carrying the market.

This was really what we saw for a few years, right? With the tech market really leading the way. And it was the only thing working, and we needed participation. And guess what? We started to get it out of the value stocks, foreign stocks, commodity stocks. All those things started to work, and that was fantastic. Now, it’s starting to go back the other direction.

And if you look back at times when this has happened, this concentration, there’s only been a handful of times it’s been like this, and it was, yeah, you kind of guessed it. The ’98 timeframe, 2000, 1972, ’63, and just before the Great Depression unfortunately. We’re in one of those periods where hopefully this does not turn out the way some of those did, but we need to watch that.

Look, this is all temporary, but we do need to watch for further deterioration. If there is continued deterioration, that would be more than just a yellow flag. That might be a red flag for us to say, okay, things are starting to fall apart, and the market’s rolling over. This is the same thing I was talking about for those of you who’ve been around this long, I was talking about that in 2007 and eight. I was doing a radio show back then, and I was mentioning that the market was coming unwound. It was like the wheel, the hubcap falling off the car on one side, than the other side. Car was still moving. Everything was looking good. But it was deteriorating. And we saw that in 2007.

I did not know a financial crisis was coming, but the market was not real healthy going into the ’08 Financial Crisis. Again, it’s a little snippet right now, but if it continues for several weeks and months, that could tell us that we are upon … An actual bear market is upon us. Not a correction, not a sharp sell-off, but an actual bear market, which is a longer lasting situation.

All right, so those were the things that stuck out to me this week. Thought they were interesting to bring to you.

What is an RIA? A registered investment advisor. And why is it important? As I mentioned, I’ve had three couples in the last three weeks come see me to say … These are people I did not know that said I’m very concerned if something happens to me, my spouse wouldn’t know what to do. It would be overwhelming to deal with all the financial stuff, and we’re looking to develop a relationship. Unfortunately, you don’t develop relationships with people that sell you products. You just don’t. And a registered investment advisor is essentially a person or a firm who advises individuals and manages their portfolios.

Now, here’s the key. They have a fiduciary obligation to their clients. Okay? Which is a fundamental obligation to provide investment advice that acts in the best interest of their clients. Now, let me be clear, even though that is the case, there are still bad RIAs that don’t do a good job, and there are good people who sell commission products. Okay? But it does take some of the conflicts of interest out. It does take the fiduciary standard out or in.

Registered investment advisors, by definition, have to have and be a fiduciary and act in a fiduciary manner. I have always done that in my whole career, have been that, and it’s something that is a big fork in the road. So if you’re talking to places, are you a fiduciary? There are more than there used to be because it was looking like people were going to have to be that, and that momentum kind of slowed, but the wheels were in motion, so a lot of people from bigger institutions are now leaving the commission world and the non-fiduciary world and coming over to the fiduciary world.

I think it’s a good thing. It’s a good thing for you. But you need to understand what does a fiduciary do, and do I need one? And again, for us, and for most registered investment advisors, it starts with the planning. It starts with knowing your situation. And I mean knowing your situation meaning I have an autistic daughter. I have a spouse who doesn’t understand finance very well. I have two kids that are missionaries that we need to financially support. We are electing to do that, we want to reward them for this lifestyle they’ve chosen, and we want to pay for that over the next 10, 15, 20 years. Starts with financial planning. And then it leads to how do I invest the money based on those things? And then understanding, clearly understanding the tax rules, estate planning rules, so that you can minimize taxes as best possible.

That, to me, is what a registered investment advisor does. And again, as I said, there are salesmen that might do that, and there are registered investment advisors that aren’t very good and don’t know how to do that. But I believe starting with a registered investment advisor is, to me, a great starting point. And what’s nice, too, from a user standpoint or a consumer standpoint is that these people are underneath the Securities and Exchange Commission. They are also either that, or under a certain dollar amount, they are underneath the state, registered with the state, so you’re either registered under the Securities and Exchange Commission, or you’re registered with your local state. It depends on the size of the firm. And so they’re subject to periodic audits from time to time, and so it’s good. They come in, they kind of say, “Show us how you’re doing things.” And if you’re doing it the wrong way, they’re going to tell you, and that’s good, so that’s your protection as a consumer.

Now, a lot of registered investment advisors, some may charge planning fees. Some may charge tax preparer fees. Some may charge investment management fees on a percentage of the money they manage. Some may charge commissions. Doing commissions doesn’t determine if you’re a registered investment advisor or not. My issue is when people only do commission, and they are simply slinging products. You can smell that by if you hear commercials talking about the world’s going to end and the stock market’s going to crash, and you hear the words bonuses, those are all clues that you’re about to be sold and pitched an annuity or an insurance product. Okay? There are times when insurance products may be appropriate for you and your family, but it should kind of be a last resort in my opinion. And oftentimes, it’s not … It’s led with that.

That’s kind of the fork in the road. But registered investment advisors can get paid a commission, but it has to be disclosed. You have to tell them, here’s, look, we’re getting paid a commission, but to me, in the investment world, commissions should be … I don’t believe in commissions in the investment world. I believe people should get paid a fee, and they should be on the same side of the table that, look, if the accounts grow, they get paid more. If the accounts go down, they get paid less. Keeps everybody on the same side of the table.

The fees can be different, but the main thing is the fiduciary standard and also that they have to be registered with the SEC or the state. Now, just because they’re registered with the state, just because they’re registered with the SEC, that does not mean that they’re being endorsed by the state or the Securities and Exchange Commission. But it does mean that every year, you’re having to file what’s called an ADV, and most advisors will put it on the website, so you can see it right there, and it has a little history and a background and kind of how they charge and any disclosures, how much money they manage, individual people that work there, kind of their history, so it’s full disclosure there. And it’s gotten easier to read, which is, again, a good thing from the consumer side.

Those are some things that they do. Again, look for transparency. Ask questions. And if people say, “Well, you don’t pay me. XYZ Company pays me. The insurance company pays me,” that means you’re in a commission type of relationship. Or if you don’t understand how the compensation works or how your fees work, what you’re paying for to get the services, then you have to ask more questions, and that’s how you do it.

By the way, when you talk to somebody, and you’re sitting down with a registered investment advisor, I always say don’t trust, right? The trust is built over time through building a relationship. The first thing you have to do is does the work speak for itself? Are you giving me solid advice? Are you finding some things we could be doing to improve our financial situation or life and that’s worth being compensated for? If you’re not doing that, then I don’t trust you. Right? You don’t start with trust. The trust is built through a relationship over time.

But the relationship is the key. And that’s what we try to do at Covenant. If you need our help for anything, obviously, we are always available, CreatingRicherLives.com or 210-526-0057. All right, you guys have a great 4th of July. We’ll see you back here next week on Creating Richer Lives: The Podcast. Take care.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product, including the investments and/or investment strategies recommended or undertaken by Covenant Multifamily Offices LLC, Covenant, or any non-investment related content will be profitable, equal any corresponding indicated historical performance levels, be suitable for your portfolio or individual situation, or prove successful. Moreover, you should not assume that any discussion or information serves as the receipt of or as a substitute for personalized investment advice from Covenant. To the extent that a listener has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with a professional advisor of his/her choosing. Covenant is neither a law firm nor a certified public accounting firm, and no portion of the newsletter content should be construed as legal or accounting advice. A copy of our current written disclosure brochure discussing our advisory services and fees is available upon request or at CreatingRicherLives.com.

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