Ep 192 – How to Gain Confidence in Your Financial Life and Take Charge with Bradley Clark

The financial industry model is, for lack of a better word, broken. The usual pay structure doesn’t lend itself to your best interests being served.

Bradley Clark, founder of Clark Asset Management, joins Adam Schroeder and Zach Lemaster to talk about how he’s trying to turn the industry on its head, whether some of the common financial advice “rules” are worth their weight, and more.

Learn more about Clark Asset Management: CLICK HERE

Transcript:

Adam

Hey, Rent to Retires. It’s Adam Schroeder here with another episode. Joined as usual by Zach Lemaster the founder and CEO of Rent Retirement. And we are pleased to have with us Bradley Clark. He is the founder of Clark Asset Management, former publisher of the Motley Fool, and author of the new book, be The Bird. And we are gonna talk about the financial industry today. Bradley, thanks for joining us.

Bradley

Uh, thank you very much Adam and Zach. I’ve been looking forward to this.

Adam

Yeah, absolutely. Pleasure to have you on. Just tell us a little bit about, you know, like we said, I don’t think we’ve delved too much into the financial asset side of things, you know, how did you get into that and what exactly is it that you do in general?

Bradley

Yeah, I’ll keep the, how I got into it, very brief. Um, we all have those handful of moments in our lives, those aha moments that change us. And I had one in the spring of 1996, but I didn’t really know it for another 15 years. And so I was taking modern Portfolio theory at Stanford Business School from a professor named Bill Sharp. Bill Sharp is a Nobel Prize winner, the father of the sharp ratio, a big thinker in modern portfolio theory. And he basically systematically undressed the asset management industry for, for me, in a, in a lecture and exposed it as largely fraudulent based on the compensation arrangements and the way stocks are picked and the products are packaged. It had a huge effect on me. And then later in my life, I became the publisher and chief marketing officer at the Motley Fool and got reconnected with the topic. And I think at that point knew that it was an inevitability, that ultimately I would put out my own shingle and try to demonstrate to the industry and to younger, younger advisors that there actually is a way to do this that helps clients.

Adam

Yeah, I, I felt like I used to work, um, as a part of a financial firm. And I felt like in, in those environments, a lot of it is just acquiring more assets under management and not necessarily want worrying about the performance. I mean, your performance has to be good enough that people won’t leave, but that’s not gonna be the, the real thing that gets ’em in there. So, you know, when you’re, whenever you talk about the changes that need to be done, how, how can the financial asset industry be structured in a way where everybody wins? ’cause we talk a lot on this show about how real estate can be a, you know, win for everybody. Yeah. How, how can you make the financial asset, uh, a win for everybody?

Bradley

Yeah. So, so I, I’ve studied the helping professions. The helping professions are the group of professions that include doctors, nurses, therapists, teachers, social workers. You think of professions like attorneys and accountants, what have you. There’s a subset called the Helping Professions. I work in an industry, it’s not even a profession, much less a helping profession. The reason this is an industry is because of the two prevailing compensation schemes. You either, you either take down huge commissions for pushing inappropriate products on people, or you take down 1% or one and a half percent of a big pile of money every year in the form of an asset management fee, which in my, which is rife with conflicts of interest and overcharging. Okay? So that’s the problem. And those compensation schemes are keeping this industry from becoming a profession. What we did is we went out there with a single flat fee for financial planning and investment management, independent of the size of the portfolio.

Bradley

It then removes the conflicts of interest, and it allows us to counsel our clients in whatever way they want to think about their balance sheet and to build wealth. Okay. There’s three ways people have basically built wealth in this country. Real estate, the stock market, or creating their own business, or being a very early employee at what becomes a very successful business. Those are the three routes. It is inappropriate, I think, to claim that one of those three is better or worse than the other. And we need financial professionals who are holistic enough and have the fee structure right, that allows them to be agnostic as against those three ways of bu building wealth.

Zach

Bradley, uh, I want to get really basic here in terms of someone that’s never went through financial advising or, or maybe has had just like their, um, you know, a couple meetings with say like an an Edward Jones or something. I just want to really just define that, uh, very basically, but, uh, outta my own curiosity from a holistic view, since you brought this up, before we get into the foundational aspect of financial advising, um, and, and wealth management, I’m just curious, out of the wealthy individuals that you work with, sure. They need a holistic view and approach to building a, a diversified, uh, wealth strategy. But out of business, real estate and, and stocks, uh, is there one of those that seems to be more heavily influenced for the wealthier individuals?

Bradley

You’re, you’re saying in in my clientele specifically? Or do you, or do you mean in the country overall?

Zach

Well, I think, well, obviously you can speak directly to your, your clientele, but I guess it’d be more appropriate to ask for countrywide statistics, um, because yeah, this is, we just put out an article on this and, and we’ll, uh, I’ll tell you about our findings, but I’m curious to hear your, your opinion on it.

Bradley

Yeah. So you, you, so you probably have, if you researched and wrote an article, you probably have better data than I do. So I, so if we look at, if there are, pick a number, if there are 10 million people in this country with more than 3 million bucks, I don’t even know if that’s the number. If you, if you analyze those 10 million and you say, where did this wealth come from? Right. So some of it’s inherited, that’s gonna be a small percentage. Some is through real estate, some is through starting businesses, and then some are w two employees with who are high income, who are 50 years old, who have lived below their means and they just sock away every year and they build it up in the stock market. Right. But I don’t know the splits, if you know the splits and they’re in your article, you know, that would be awesome. I’d love to see it.

Zach

Uh, yeah, just I guess in general, the findings that we generally found, and this is, this was broken down by, um, by like wealth level. So income level. And it was like, you know, below there, I think our first category was a, was a hundred thousand dollars is like, what, what is your wealth made up of? And the majority of that was like your primary residence was a big part of it and very little was, was stocks and little to no real estate and like zero business. Then when you get to the, like, the one to $3 million range, it actually was, um, it was, it was pretty, uh, even between like income stocks and uh, and real estate and very little business. ’cause usually those would be people that are maybe, maybe self-employed or, or high income earners and have just saved over the years.

Zach

But then it was interesting to see when you get to like the three to $10 million range of net worth, um, actually the, the majority of the assets for those individuals were held in real estate still with very little business and actually very minimal stocks, but above 10 million when you get into, um, kind of the ultra net worth with like 30 million and above, it’s like business, the business aspects, these are people that have built large businesses. That’s where the majority of their wealth was created. And actually they, they still owned real estate, like real estate was an aspect in all of these, but business was a much larger aspect of that. And they actually had a little bit larger stock portfolio. It’s like they were more diversified, but they also had, like, the business was what created that large wealth. That was like generally the findings we found. I thought that was interesting. Right.

Bradley

It’s, it’s very, it’s very interesting. The, the three to 10 surprises me a little bit, but depending on the numbers, if what you’re saying for the typical person with 6 million that it’s almost all real estate. I mean, that’s certainly not been my experience, but, but my client base is obviously going to be skewed versus, you know, the, the, the, the, the broader the, the, you know, the broader data in the United States, right? Because because our services are financial planning and investment management, and what we mean by investment management is stocks and bonds. So somebody who, who has 99, 90 5% percent of their assets in real estate and loves investing in real estate and not the stock market is unlikely to hire us down. But, but, but if they have 3 million in real estate and 3 million in a stock portfolio, then they’re very likely to hire us and then we can incorporate what they’re doing in real estate kind of into the broader financial plan.

Zach

Yeah, and we didn’t, we didn’t extrapolate out age ranges in that, and I think that would be extremely important as well. Um, because I, I think depending on where, like where you’re looking at with age ranges, like for example, I think both in and I, I’m not a huge fan of stocks. I don’t do any stock investing and I don’t know, I don’t know stocks, uh, um, you know, this is obviously a real estate specific show, but if just kind of looking at this, um, from, you know, our perspective, it’s like if you just invested, I mean even in like a handful of houses or even some, some generally good stocks for a long period of time. Um, but it is certainly in real estate in the right locations where there’s strong appreciation. Like it’s not difficult to get to that, that three to $10 million range over a lifetime.

Zach

Correct. The goal obviously would be to expedite that. Um, so that’s one thing we didn’t extrapolate on was age ranges, but let’s, we got a little off topic. I was just curious to pick your brain on that, but I want to get back to like the financial advising aspect of this. Um, and certainly we’ll get into like your specific, um, business. I think that’s very interesting how you’ve taken a different approach on this. But generally speaking, we, most people, I think they’re, we, we haven’t had a financial advisor on yet, but I think most people’s experience with financial advice is like us, like I mentioned, just someone walking into an Edward Jones or having like an individual, uh, financial advisor that maybe gives them a general, uh, generic, uh, vanilla plan of here’s where your age is, here’s your risk threshold, here’s how much you can, you know. But can you just define like what is, for someone that’s never had any, who doesn’t know what, like a financial advisors do or really hasn’t gone through that, just give us a breakdown of fundamentally what, like what is that profession and generally what are they trying to help people accomplish?

Bradley

For sure. So if you, so to keep it extremely simple, when I hear the word financial advisor, two sub-services come to mind. That doesn’t mean that every financial advisor office offers both sub-services, but, but the two sub-services are investment management and financial planning. If most financial advisors are focused on investment management, and I, you could argue that’s because it is easier to stick somebody in a 60 40 portfolio and because they’re paid a percentage of the assets, that that is the dominant orientation. Over the past 30 years or so, a bunch of, there’s been a lot of progress in financial planning. So there’s now a credential called the C F P Certified Financial Planner. There’s 80,000 of them now more than ever, you can actually actually get a decent or more than decent financial plan, right? And so that’s basically everything else. So that’s, when do you wanna retire? How much risk should you take? Uh, do you have insurance gaps? Uh, are you optimizing your social security? If you have a kid, how much life insurance do should you have? How much can you afford to spend? Are you saving in the right vehicles? It’s basically everything else. And the irony is that the value tends to actually be in the financial planning, but the way the services are, are priced and charged is off of the portfolio.

Zach

And, and how does pricing work? Can you break that down too? I don’t think a lot of people understand that.

Bradley

Yeah. So the do, so it used to be, if you think about a stockbroker, a stockbroker, an old school stockbroker would earn a commission every time they bought or sold you in or out of something. And there was tremendous incentive to churn accounts to generate commissions. That still exists, but not as much of it. So now the shift has been to something called the a u m model, which is instead is somebody who’s gonna charge you one or one and a half percent of the assets under management a u m assets under management. So if you have 500 grand and you go to your Edward Jones guy and he is like, okay, it’s 1.5%, that’s 7,500 bucks a year for the half million for them to, to buy some securities for you and sell them or manage that. Now as the assets grow, their fee grows with the assets.

Bradley

And at first blush, that seems smart because incent incentives are aligned, but where it gets subtle is I certainly don’t believe that that Edwards Jones guy or anybody can out guess what the stock market’s gonna do or pick individual stocks. So the question is, as your portfolio grows, should you be enjoying the economies of scale in your portfolio, or should you be sharing those economies of scale with your advisor? And I would say don’t share them. The other problem here is the conflicts of interest. Because if once that Edward Jones guy gets, your cat gets your investment, if you then say, Hey, I’m thinking about, you know, uh, buying a piece of investment real estate. Now that Edward Jones guy has a massive built-in conflict of interest there, because if he agrees with you that you should go buy this house or whatever, you’re, he’s basically taking money out of his pocket. Now, he may be the nicest guy in the world. And the most ethical, the troubling things about conflicts of interest is that our brain, that we have blind spots in our brains where we can’t even see the effects that they have on us. That’s troubling.

Zach

Yeah, no, I, I think that’s, uh, thank you for breaking that down. You did an excellent job on that. And, and the, just the psychology behind it is, is extremely important to understand because certainly financial advice is, is good. Um, but I think one, one point I always try to mention is when I’m seeking financial advice or any advice in my life, in any aspect, I like to take advice from people who actually are doing it themselves and are at a better place, place than me. Um, so, so certainly what you mentioned about like the conflict of interest with Yeah, and, and I hear this, we hear this a lot is not a lot, but sometimes people are like, well, my financial advisor says I shouldn’t buy real estate because I wanted to do this. And it’s like, well, yeah, because they’re compensated based on you keeping your money with them in the stocks, right?

Zach

But you need to, no one’s gonna look out for your money in your, your financial planning more than you will yourself. It’s, it’s your capital. And so you need to take some sort of accountability there. But ultimately, I do encourage people to look for professionals. I mean, people like you Bradley, who have been successful, but, and, and this is with any aspect of life that are people that are in the place that you wanna be. Why would I be taking financial advice from someone that if I wanna invest in real estate and do these other things that they have no knowledge of, um, or that I’m already ahead of financially, uh, in, in where I’m at. So just, just something to think about. But Adam’s gonna stop me from getting too far down on my soapbox with this.

Adam

So before we, before we get started talking and recording, um, we mentioned the 4% rule, which is one of the things that, um, you said there was a study that showed what are some of the common, you know, you hear about things like, you know, your age should correspond or correlate with the bonds you hold and all of that. There are a lot of those kind of general advice you hear out there. Are there any that hold more truth than others? And are there any that, you know, people have heard that you know of that are just absolute garbage?

Bradley

Wow. Yeah. Um, there are some, I mean, I don’t know where to start, but I’ll keep it very brief. Let me just pick on the two that you mentioned. So your agent bonds, um, I think is losing steam. So it used to be that the rule of thumb was just your age a month. So if you’re 25, you have 75% in stocks, 25% in bonds, and then when you’re 75, by the time you’re 75, that has inverted. Okay? So fine, it kind of makes some sense, but, but there’s been so much thinking sense and so much emphasis on something called sequence of returns risk, right? So let’s say may, let’s, let’s say that you’re investing in real estate. It doesn’t matter what you’re investing in, but you retire at 55, well, you’re not gonna claim social security, let’s say till 70 to maximize the benefit.

Bradley

So there’s a, there’s a kind of a vulnerable window there of 15 years. If your real estate empire is robust enough and you have very predictable cash flow that you already have built, then you’re laughing. You, you’ve, you’ve got all that passive income. If you’re not that person, then, then you, you’re gonna have to spend some of your assets over those 15 years to get you to social security. Once you’ve got social and the real estate is there and the dividends are there, you, you’re arguably, you’re in fat city during that more vulnerable period, you are particularly subject to sequence of returns risk if you’re involved with stocks. So to ameliorate sequence of returns risk, people have have said, look, let’s, let’s swing for the fences in our twenties, thirties and forties. Let’s take some risk off the table to, to, so we can sail through sequence of returns risk.

Bradley

And then when we emerge in our seventies on the back end of it, just let the stock portion run, right? And, and so it’s a more dynamic and powerful view of asset al allocation over someone’s life, right? Than, than than than that old, you know, percentage in bonds. And I will say, even though I’m not a real estate investing expert, if I have a client with million dollars of real estate, at the end of the day, that’s just another asset. And so we have to look at that. Is it leverage, is it not leverage? Is it risky or is it less risky? Should we think of it as more of a bond? Should we think of it as more of stock or 50 50? How variable are the cash flows? Like all of that can be InCorp can and should be incorporated into what’s happening on the stock and bond side. Right. Your other exa Go ahead, Zach.

Zach

Oh, no, I just, you got my, my brain turning here with like, I’ve, I’ve never actually looked at different, I’m thinking about different asset classes just in my own portfolio of like, Hey, is this more of like a, say, is this more of a bond type of real estate or is this more of a, you know, aggressive stock? Like maybe your, your flip or, you know, your real aggressive short-term rental, uh, could be more of like a, uh, you know, more of your stock or aggressive play where you have higher risk potential, higher return. Whereas like a lot of the commercial or long-term rentals that we own, I think those would be in a, in a bond category, uh, yeah, where you get maybe a little bit lower return, but it’s predictable and safer. So I’m sorry to interrupt. Yeah,

Bradley

No, I think it’s very smart to think that way. And, and I heard one professor who said, look, instead of thinking about asset allocation as stocks and bonds or equity and fixed income, he softened the term, he said, let’s see, you have 5 million bucks of assets. It doesn’t matter what they are. It could be real estate, it could be stocks, it could be bonds, it could be cash. What portion are in equity like investments, which, which to your point, Zach could include the flips and the more speculative stuff that you’re doing and which, what portion is in bond like assets. And you could shoehorn into that commercial real estate. So he’s offering a broader frame on thinking about assets. Very powerful. So, so now it’s no longer, okay, we’re real estate investments and your stocks and bonds, and this other person is X. It kind of, uh, is an umbrella. It, it, it kind of transcends all of that, and it just says, let’s start looking at assets on whether they’re more equity like or fixed income. Like, and that’s powerful.

Zach

Yeah, it’s very interesting. I would say that the majority of our listeners are, are diversified across multiple asset classes. Um, certainly they, if I, I think vast majority of people have retirement, uh, accounts set up and things like this. Not everyone is as aggressive as say, me who is only real estate, um, because that’s what we know. Um, also we have, you know, the business side, which is, you know, um, as you mentioned, that’s, that’s the investment, uh, the third investment way, uh, as well. But let me ask you this, because this is something, this is, uh, something I remember that stands out. It’s been, uh, you know, over a decade since I’ve had any sort of, like, from, from a financial planning standpoint of someone that’s like in that, that category or that profession that’s really, um, identified as a financial planner telling me like when to buy stocks and things like this.

Zach

But, um, I remember going through that, um, meeting where it was showing me a graph and he said, okay, like year 65 or whatever, which I was like, well, I don’t wanna retire at 65, I wanna retire earlier. He is like, whatever day you wanna retire, you need to have more, more bonds. And he is like, okay, if you have this amount of money, you can anticipate a, and maybe there’s a term for this, I forget, but you can have this like safe return. Like this is what you would expect your, your portfolio to produce. And it was like three and a half percent or something like this, at least at that point in time. Um, and I’m looking, I’m thinking about this going, man, and this is after many years of like, okay, inflation and future potential. I was like, I would need millions and millions of dollars to retire at what I would be comfortable with at three point a half percent. And I know it’s, I know it’s a mix, and you kind of talked about this with the 75, 25 rule, but can, can you just al like give us your opinion on that at all as far as like what kind of the standard expectation is and, and how you think about like retirement in general with these type of assets and what kind of expected return? Um, you, you see a lot with a lot of your clients.

Bradley

Sure. So

Zach

That was kind of a shotgun, an or question No, with a lot of, I apologize,

Bradley

It’s, it, it, it’s helpful. Let me define a couple of terms. Um, expected return to me says you own an investment of any kind, and what, what are you expecting to return from that specific investment? Now you can extrapolate that to say you own 20 different investments. And so let’s look at the weight average, the weighted average, blended expected return across all of the assets. Expected return is not a guarantee of return. One way to think about expected return that’s taught, which I like, is there’s something called the risk-free rate. The risk-free rate, the benchmark for that has been US treasuries because the federal government has never defaulted. And we may have opinions about whether they will, but the federal government has never defaulted. So most academics will agree that the risk-free rate is US use US treasury note, okay? Then you get a risk premium, which is how you are compensated for taking investment risk.

Bradley

That’s the risk premium. If, and the, the, the bigger the risk you take, the more you have to expect to be compensated for that risk. So if I buy a stock, the risk premium might be five points above the risk-free rate. So if the risk-free rate is four, I expect that stock to return 10% a year. If I buy a bond, be 4% plus one, if I buy a piece of real estate without leverage, right? Then that’s gonna be somewhere in that range of five to five to nine. If I do something more advanced, like lever the hell out of it, or I can reliably pick pieces of real estate that are under priced, or I have access to tradespeople who can do work under, you know, under certain, I mean, if there’s, there’s all these levers that one could theoretically pull in real estate to, to get essentially returns higher than the risk. So, so a purist would say in investing there’s no such thing as expected returns higher than the, than than the risks. Risk and return is inextricably linked, right? I generally believe that in real estate, there are people who have been so successful using leverage and buying things under market and tax

Zach

Benefits.

Bradley

Yeah. So you can add all this, you can, you can add all this stuff up and then talk yourself into the idea that the returns are actually much greater than the risks. So people who are all in on real estate have convinced themselves that the return expectation is far higher than the expected risk.

Zach

And that, that kind of, and this is really interesting to me, but I’m kind of hearing all of this with one underlying theme of, at least in the real estate aspect of control, right? Having a little bit more, like if you are a savvy investor and savvy individual and you can go out and create this opportunity, then that gives you a little bit more control to create that return. It’s not maybe inherently there, but by being engaged in the asset, you, you can create that threshold where the return is maybe a little bit more attractive than the risk threshold. But, um, I think this, that helps to compare a lot of things like apples to apples too, if you’re just looking at like a, an investment that you’re just, you’re just buying.

Bradley

Um, yeah. And one of the interesting things about our clients is they tend to be older. I mean, my specialty is helping people that are gonna be retiring in the next five years, reposition assets to drive income, you know, during retirement. Okay? So some people show up with these giant real estate portfolios and there’s enough stable income there that they’re laughing. Other people show up and they may have one or two investment properties, but the income there is nowhere near enough to, on its own carry the day. So they have to compliment that with social security and a pension and dividends and all this other stuff that we do to, so expected return of an investment or of an asset is a different concept than the, um, the percentage of the asset of the value that we can safely pull out every year to support a spending plan for life, right?

Bradley

So there is a difference, but let’s say a client shows up with $4 million of assets, and I don’t even know what the hell they are, okay? Without looking, even knowing what they are, I would probably multiply the 5 million bucks by let’s say 5% or 4%. So that gives me 200 to two 50, uh, before taxes. I will then add whatever pension or social security benefit they will have in the future. Okay? That, that gives you a very rough swag at, at the amount of income that they should, that they should be able to reliably generate for the rest of their lives before taxes. Then you need to understand, okay, what state do they live in? What are, what are the embedded gains? What are the different types of accounts to get some type of reasonable tax rate? And not all of this is back of the napkin crap, right? If they hire us, then we will fire up our sophisticated planning software and turn over every rock and really build something kind of, you know, bo you know, bottoms up. But, but that’s how I would think about, you know, your other question and this very important difference between expected returns on an investment versus how much money can you afford to pull from your assets to support spending the rest of your life. They’re different concepts.

Adam

So when you look at, um, your assets that you have, you know, with real estate, it’s fairly, you know, your property is doing what it’s doing, you can choose, you’re saying, Hey, this property is having maintenance issues, or I’m having tenant issues and it’s time for me to sell this and do this, that, and the other. When it comes to, especially like stocks and your investment, uh, you know, whoever you’re using for your, you know, to manage your investments, how do you know going in or what should you be looking for to see if you should be selling assets or if you should be firing your manager? Kind of what are some of the things that people should be looking for in that regard to make sure that they are not being taken advantage of?

Bradley

Yeah, great questions. Totally different questions. I’ll take the second question first. If you think about a doctor, you know, there’s that, there’s that joke. You know, what do you call the guy who finished last in his, uh, medical school class? You know, doctor? Okay. Unfortunately, in the financial advice world, anybody can call themselves a financial advisor. I mean, there’s really no regulation, uh, against calling yourself a financial advisor. But you, but you can’t say you have an MD without actually having an md, right? That’s the first problem. There’s massive, just there’s a massive competence problem. Okay? And then I alluded to the conflict of interest problem. So if you take low competence and you mix it with conflicts of interest, you’ve got an issue. So you, so, but there are ways to kind of sniff out competence and conflicts of interest. So of the 250,000 financial advisors out there, there are some who do have their C F P, there are some that do charge a flat fee.

Bradley

I mean, they exist, right? So you can screen out 90 or 95% of the noise if you care to do it on your first question, which is like, when do you know to buy or sell or all these things? To me, that’s a almost philosophical or religious question, right? There are two different belief systems out there when it comes to participating in the stock market. One of them, and the one I prefer is best captured by the brand and firm Vanguard. So Vanguard is the king of index investing. So they will build, they just build a SS and P 500, the s and p 500 is an ex, is an actual list of stocks. Vanguard just grabs the grabs, the, the list owns those companies in that proportion. Does it for almost free, does it tax efficiently, and then you just buy that E T F.

Bradley

But for every one of those, there’s a piece of junk that may own 500 random large stocks purportedly chosen by an expert. That’s no better than a chimpanzee that’s charging 50 or 80 times as much as Vanguard is. So if your advisor has put you in the piece of junk, then you should swap it out with the Vanguard E t F. That’s what I believe. The other religion believes that smart people who do enough research and have enough skills can predictably outperform the stock market. Unfortunately, the evidence is not there. And even Warren Buffet who has 150 billion is on record saying that hedge funds are bulls*** And that his clients, he, he, he would advise all Americans if they’re gonna participate in the stock market to just buy the s and p 500 from Vanguard.

Zach

Yeah. And there’s a lot of, a lot that goes into that, right? Like why is the average person, if you even an educated individual, not, not outperforming, uh, but there’s a lot of, like, timing is a huge emotions, individuals, um, you know, different, different life, life circumstances. I mean, it’s just, I who, Adam, I forget who the guy was that we interviewed, um, not too long ago that talked about this actually, no, it was, uh, Keith, um, <inaudible>, uh, that talked about the seven different ways that, uh, or the seven different things that come into effect when you’re, you know, decision making and stock buying. And that’s, that’s leading to why people are not outpacing the market as a

Bradley

Well, there, there’s a, there’s a lot of sabotage, self-sabotage, like you cannot afford to blink. So like I had, you know, I had a couple clients who blinked in March of 2020, so Covid hit stocks were down 30%, but only for a couple weeks. He blinked. I begged him not to blink. He was my only client that blinked. We sold a couple million dollars of stock, it immediately rebounded. And he, you know, has he essentially lost a million dollars by blinking, okay? So if you’re gonna participate in the stock market, you can’t blink. You have to ignore the volatility. You need to trust in risk taking and entrepreneurship around the globe and stick it in that box and then take it out 30 years later and don’t allow what is happening in the news or what your neighbor is saying or claiming to make you blink.

Zach

Yeah, a lot of, a lot of emotions there. Emotional turbulence. And there, there’s always something, um, you know, that’s, that’s obviously a lot of <laugh>, a lot of the fluctuation we see in the market is, is due to emotional influence in, in the media, right? With just different things going on just in, in general. But, uh, Bradley, do you, do you only work with high net worth individuals? I mean, what’s, I’m just kind of curious, your, your typical, um, yeah. Demographic for clientele.

Bradley

Well, right, so I don’t, I don’t have a policy that says I only work with high net individuals, but our fee structure tends to result in that. So we charge $9,500 per year per client, per client household. So if it’s a husband and a wife, we’re not gonna double dip. It’s $9,500 per year. Okay? So for that, you get financial planning and investment management. If you’ve got half a million bucks, that’s 2%. So next to the Edward Jones guy, I may be more expensive. He may be at 1.5%. If you’ve got 5 million bucks and you’re paying the 9,500, then we’re a huge bargain. So, so, so we are very idealistic. We’re one of the only firms out there in the market with a single fixed flat fee for these services.

Zach

That’s..

Bradley

That has mm-hmm. <affirmative> that has tended to attract larger portfolios. The people who tend to have larger portfolios tend to be older. And so when I recognize that this is what was happening, i, I, I, I bet the firm on becoming true experts in retirement income planning. And so that’s the special sauce, right? So we’re experts in Roth conversions and income floors and bond ladders and withdrawal sequencing and tax planning, like all these things that this, that people need. And, but I didn’t set out for that. I set out being idealistic around the fee, and then I ended up backing into the target demographic.

Zach

Yeah, I, thanks for defining that. And I’m guess, and that’s just happened naturally from, um, you know, the, the clients that are attracted to your services. So that’s interesting. I guess my, my question to you, well, would you, I wanna talk about the income floor, but be, before we do that, can you speak to, so just something about like, you know, what, what have you seen, just in general, this doesn’t need to be real specific, but just outta curiosity, like with the clients that you’re working with that have been successful and are in a good position to retire, whether that’s financially or, uh, well, obviously financially, but maybe even earlier than they anticipated. Like, what, what are some common things that you see these wealthy people doing, uh, throughout their lives, um, that has led them to be successful where they’re at now?

Bradley

Yeah, I mean, I, this is gonna sound so trite, but I, I do think that people who start early and who know that living, who, who know that living below their means matters and who have the, uh, fortitude or emotional intelligence or whatever’s required to actually live below their means. So whether it’s 5, 10, 15, 20% that you’re able to save from your income and invest. And then I think the other related point is the fortitude to just not blink very often, right? To be comfortable with risk and to recognize that you’re making long-term decisions, uh, right, uh, that, that seem, I would say those are the attributes, and I would say, whether it’s stock market investing or real estate or something else, I, I feel, I feel like that, that, that those two crowds, you know, presumably would have a lot of those same traits.

Adam

Yeah, I remember, you know, you were talking about blinking there, I don’t remember where I read it, but a few years ago, I remember reading that if you look at, you know, people say the stock market averages 10% a year or something like that, but realistically, if you miss a few, just a few key spots here and there, it’s a lot lower than that. And like you were saying, Bradley, if you blink, if you happen to be blinking during one of those timeframes, your returns are not gonna be anywhere near what they could have been if you just stuck with it

Bradley

Through it. There’s, there’s awesome charts where, like, there’s 200 trading days a year, so the past 20 years, there’s 4,000 trading days. Well, if you missed the 40 best or something like that, your returns are half of what your returns would’ve been if you just stayed invested. I mean, you know, people have crunched those numbers and it’s, and it’s dramatic. And the, the expression there that has nothing to do with investing, but I love would be you have to be in it to win it, right? So you have to, you have, right, you have to be in it, and you have to, right? And you have to stay in it. And if you’re, if you’re either so scared or, or so arrogant, I think the arrogance is even worse that you can outthink the stock market by reading the, the tea leaves. Like, okay, well the debt ceiling, and I’m concerned about currency in Japan and, and the unemployment rate that came over here, therefore I’m gonna sell my stocks. Right? C convincing yourself that you have that type of power is the ultimate expression of arrogance.

Zach

Yeah, that’s, that’s huge. And I think that’s, you, you probably hit the nail on the head, Bradley, why, why I’m not, uh, a real savvy, uh, stock investor is just as too sophisticated for me. I’m a simple guy, right? Adam, and I like just buying simple cash flowing properties again and again. But we just talked about, um, this will come out probably after this, but I just did a recording on the five things I’ve done over the past decade of investing that has allowed me to be really successful to the point I am. And the, the number one thing is just start investing, never stop as just keep, just buy. And obviously, and then the second one would be intentional on where you buy. So location is important, but, um, I think the point is, and we talk about this all the time, it’s, it’s time in market, not timing the market, uh, and just, just investing wisely, having a plan and following that plan and consistently doing that time and time again. Let’s talk about the income floor though a little bit, because that’s something that I’m not super familiar with. I’m interested to hear, you know, like what is the income floor and, um, you know, anything else you’d like to, to share about that?

Bradley

No, I’m glad we’re gonna get a chance to talk about this because I would argue that cash flows from commercial real estate, cash flows from the portion of your real estate holdings that are the safer portions of the real estate holdings. Those cash flows definitely could be someone’s income floor or be a component of an income floor. So here’s the aha. You know, Einstein said we should keep things as simple as possible, but know simpler. My industry is guilty of making in this dimension things too simple, which is how risk tolerant is an individual investor. I don’t care if it’s, again, stocks, bonds, real estate, whatever. How much risk should an individual investor take the amount that lets you sleep at night? That, that, that question is a little bit baffling and it has baffled the, uh, financial advice industry. So, so in any case, I think what some thinkers did about 20 years ago is they said, it’s the wrong question.

Bradley

All of us, almost all of us, are carrying around two different, um, uh, relationships with risk when it comes to our non-discretionary spend, right? Our groceries, keeping the lights on. Everything else. Most of us, if not the vast majority of us, are not risks risk tolerant, especially when we think about stopping working and having, you know, cashflow in retirement, right? So we’re risk averse with respect to the amount that we spend on non-discretionary items. However, we are perfectly comfortable with risk for the assets that are used to spend on, uh, more discretionary things. Like if we wanna go to Tuscany every year for three weeks, but it turns out we can only go every other year, and in the down years we go to Florida for, for, for a week. Like, your life is not over, right? But, but if you cannot maintain your core lifestyle each month in retirement that you’ve, uh, gotten used to, that’s kind of disappointing.

Bradley

If you can’t pay for your grandchildren’s education, or you can’t lee endow a chair at your alma mater, eh, okay, it didn’t work out. But you need to be able to, you know, uh, buy clothes and groceries. You get, you guys get the, the distinction. Yeah. Okay, so, so, so p so the industry has failed because it has failed to understand all of us are walking around with these two different relationships with risk. Enter the income floor. So if you come to me with 5 million bucks of anything, and we do a financial plan, and we look at your spending and we say, you wanna retire at 55, you’re not gonna take social security till 70. You, you maybe have a pension, but maybe it’s small. There’s generally a gap that we need to finance, okay? So, so that, so that you have line of sight into the cash flows, that they’re predictable and safe to finance your needs.

Bradley

A lot of the successful people that are listening to you are have a massive headstart on this. You could argue, because if they have enough safe real estate that’s throwing off enough cash, they already basically have their income floor lined up or locked in. But, but a lot of people don’t have that, or they may have enough from the real estate to do half of the floor, right? So for those people, we have different techniques, different types of products, ETFs, d you know, income, annuities, different things that we can use to, to different Lego pieces to round out your income floor. And then with the rest of the assets, we just, we just, we, we just take a lot of risk, right? So, so the rest of the assets are in stocks, or maybe in your world it would be in more speculative real estate, and we use the risk assets to keep up with inflation to finance the wants and wishes, right? To finance legacy to our kids. And, and so part of this is functional, part of this is mental accounting, but in a very positive way that’ll, so if you have a robust income floor, no matter what the components are, that really helps you shift your mindset from an accumulation mindset when you’re working to a decumulation mindset, which is beginning to live off of your assets in retirement.

Zach

So would it be appropriate to say an income flow is basically like the baseline residual income you need to maintain the lifestyle that you want?

Bradley

Yeah. And you could yes, and you well to, to, to, to maintain the portion of the lifestyle that you regard as needs, because you may want a lifestyle that includes $80,000 of travel, but I doubt mo most of my clients do not equate a dollar of travel as a dollar of groceries, right? They’re gonna say the groceries are needs that travel is a want, right? That distinction is important. They’re both in your ideal lifestyle, right? But do you, do you see the, how, the distinction?

Zach

Yeah. And I think this, this is interesting to me because I’m tying it back to your previous point about, um, you know, the, the successful people that you work with that you’ve seen over the years have, have maintained or been conscious about living below their means and maintaining a level of, of lifestyle that is still, you know, productive and, and makes them happy, but not, not doing what we call this, this income creep thing. Um, or this lifestyle creep where you, you, you earn a little bit more money and then you spend a little bit more, and then you earn a little bit more and you spend a little bit more. And, um, I think a lot of us in, in America at least, are guilty of that. Uh, which, which can be challenging to really like get ahead and yeah. And create financial independence. But Adam and I are actually just after this, this is a lot of good nuggets of knowledge. You’re leaving us with Bradley because we are going to record an episode specifically on thinking about risk and how to take risk. ’cause I would argue that every action you take financially, uh, has risk associated with it, including, including inaction on, on not doing anything, inflation and everything else is economics happening, whether you’re taking action or not. So all very interesting things to hear about.

Bradley

Yeah, the, I actually have a chapter in my book about, about this, and I don’t know if you’ve ever studied what a chief risk officer does for a corporation, but they maintain something called a risk register. And I agree with you that like holding bonds, you could say is not risky. However, you’re now ex bonds don’t do well against as a hedge against inflation. Real estate and stocks are the only two proven cost-effective inflation hedges. You get a bunch of people waving their arms about gold and all this other stuff, but it’s really, stocks and real estate are the inflation hedges available that are cost effective and addressable. So when you make the decision to take risk assets off the balance sheet and replace them with cash or bonds, you’re just toggling from market risk to inflation risk, and you’re now exposing your balance sheet to inflation. So there is a bit of pick your poison, and I do agree with you. It’s not just the risk of inaction, but any action you take could reduce one risk and increase another. And so I’ve increasingly thought about our role as being the ch chief risk officer in our client’s lives, where we can look dispassionately or clinically at this register of risks, and then help with the strategies for each one, recognizing that you’re not gonna eliminate all of them. And if you address one with too much exuberance, it’ll just show up in other places.

Zach

That’s interesting. Well, and I have to ask, before Adam wraps this up here, but, um, we, where does crypto fit into any of this, or, or at all? I’m just, I’m just curious into anything, Zach <laugh>, we get asked about it. I mean, and we got the, like digital, I mean, is that, is that a space you even like talk about at all or? No.

Bradley

So, so, so we really don’t, I mean, I personally have not kept up with it. I it’s too new to have any data on like, how does it correlate or not correlate with other asset classes. It’s so interesting. You can hear, you can find any theory you want. Uh, we don’t, uh, put it in any of our investment models. Some of our clients have it if they ask us about it. I mean, I, one of the guys on my team did write up a short one sheeter that kind of summarizes how different people are talking about crypto, I guess I would say. Uh, what what we care about is diversification, right? So we, we are taught as financial advisors, and I’m sure you think about this in real estate, in a, if you own a million dollars of stock, if any one stock, any single stock represents more than 10% of that million, if you’re working with a financial advisor, they, they should say, okay, that’s a concentrated position, let’s talk about it.

Bradley

Okay? And so maybe in real estate, you know, you guys have the same concept, I don’t know, right? But, but diversification is important. And so, and so we, in, in my book, I also talk about core and explore as an investment philosophy. And you could think about that in real estate too. So, so core and explore might be, let’s take 80% of our assets and invest them in a broadly diversified index fund from Vanguard or in your world, let’s have a bunch of commercial real estate properties that’s the core of the portfolio. Now, around the edges, let’s explore with different ideas. And if a client to, to me of mine says, okay, it’s 80 20 Corn Explorer, and within the 20, one of my explorations is crypto, and another one is angel investing. And another one is what? Private equity or something. It’s like, knock yourself out. Even if it goes to zero, it’s not gonna have a material effect, you know, on the portfolio, but I don’t you’re gambling

Adam

Money, right?

Bradley

Is what, yeah, some people call that their Vegas account, but one of my favorite lines is my crystal ball is still hazy. So if one of my clients tries to come to me and ask me if they should buy crypto, I’m not gonna get, I’m just not gonna get sucked into giving an opinion. Does that make sense? Yeah.

Adam

Especially whenever there’s so many different crypto coins out there and you never know what’s gonna win and all of that fun stuff. Yeah, it’s, I would agree that it’s, uh, completely Vegas money and just, uh, invest what you’re willing to lose in crypto is my, uh, <laugh> is what I would say about that. But I’m also not a financial advisor or planner. So Bradley, I really want to thank you for joining us today. The website for everybody is bradley clark.com. That’s bradley clark.com. Again, Bradley is the founder of Clark Asset Management, former publisher of the Motley Fool, and he has his new book Be The Bird. Um, Bradley, would you mind just giving us, uh, a quick one minute rundown of what, uh, what be the Bird is?

Bradley

Yeah. Well, it started as just another book about retirement planning, and then I, after I wrote it, I’m like, does anybody even care? There’s thousands of these. So it ended up actually being a book about confidence. And I explore, not a PhD in psychology, but I really interviewed a bunch of people and I read voraciously. And it turns out that confidence decay peaks generally at 55 or 60 in general because we, we have, we have all this cash flow coming in, we’re still fit, we feel powerful, we feel in control. It, it turns out confidence decays can decay after that because our bodies are breaking down and our minds break down. Uh, if, if we were the leader of a big organization, now we’ve retired and they, and, and we don’t have the validation or the power, whatever, and I, and because I serve people that are swaying into retirement, it fascinated me. So I dug into all this stuff around the power of positive psychology and the power of optimism and habit and all those things. So this is a book about how to achieve and maintain the feeling of relaxed confidence in your financial life for, for life. And then below that includes a powerful financial architecture, but also some powerful ideas from other disciplines like s psychology and life coaching and, and other things.

Zach

We’ll have to have you back Bradley to talk about the psychology of retirement because it’s something that so many people are striving for, especially early retirement in this case, and creating, taking control of your financial picture. But you know, it, I think it’s an interest, interesting thing to explore the personal development and mindset that happens when, when you actually achieve that. And then, and then what, um, you know, typically we found the people that are driven to, to achieve early retirement just go on to do bigger and better things. Uh, and it’s just like, it’s just a concept, you know, it’s interesting. But

Adam

Yeah. All right, well, everybody, you can check that [email protected]. If you wanna check out some, uh, potential investment properties to add into your, uh, plan, you can check us [email protected]. That’s rent to retirement.com. Uh, you can see all of our podcast episodes there, see our inventory, and just see in general what we’re about. Really appreciate the time you spent educating yourself today. Don’t forget, leave us a review on whatever podcast platform you use. Take a screenshot and send it to [email protected], and we will get a gift card sent out to you as a thank you and enter u n a $500 closing cost credit giveaway that we’ll be doing on July 1st, 2023. Again, thank you so much for joining us, and we’ll talk to you on the next episode.