Wild West - Providing Fiduciary Advice to Public School Employees

Mini-Memoir

There are several million public school employees working or retired in the United States. A small minority contribute or have contributed to a defined contribution plan such as a 403(b) or 457(b) — plans explained in Chapters 5 and 8. Almost none receive financial advice from a fiduciary. I want to change that.

I’ve had the pleasure to serve school employees as a financial advisor for more than 15 years.

It started in 1998, when my wife and I were freshly minted college graduates living in Santa Ana, California, a diverse city situated between Disneyland and the beaches southeast of Los Angeles. I was working as a Registered Representative Sales Assistant at Merrill Lynch and my wife, Shauna, was in her first year of teaching seventh-grade science at a school in Newport Beach. I had been in the financial services industry for five years, in the brokerage world for less than two and was working my way up from the bottom at what I then thought was a world-class company. I was blissfully unaware of the world of 403(b) plans.

Back in 1998 the United States was in the late stages of one of the greatest bull markets in history. The stock market was reaching new highs seemingly every day and talk was in the air of a new era in which market cycles were a thing of the past. Budget deficits had turned into budget surpluses, the tech boom was fueling the NASDAQ to valuations never before seen. “Irrational exuberance” entered the lexicon and I was getting an earful from brokers upset with the sign on my desk that said, “Don’t confuse brains with a bull market.” Even in my lowly days as a sales assistant I had an antagonistic side that looked to rattle the establishment.

Don’t get me wrong. Even though I thought stocks were in a bubble, I thought there was money to be made. I remember a client of a broker I worked for who had just made a killing on some dumb Internet stock, one that would later go bankrupt and never have significant revenue, let alone profits. He asked me what the next hot thing was. My crack research had led me to believe that selling gift cards online was a business with unlimited possibilities, so I made the recommendation. The stock crashed, the client lost the money he had gained, and I learned a valuable lesson.

My stock recommendation was one of the rare occasions that I drifted from my rule of building a diversified portfolio and doing real financial planning for clients. I was on my way to becoming a Certified Financial Planning Practitioner, and my true focus was paying my dues so that I could start my own CFP practice. While the majority of brokers at Merrill Lynch had no financial planning training, they were trained to present themselves as planners and to sell “financial plans” in order to gather assets under management or sell expensive financial products. After reviewing several of these canned plans (the data was sent to a central processing unit and a two-inch thick binder was sent back to the broker) it was clear to me that they bore no relation to the client’s actual situation.

I began using my CFP training to rewrite the boilerplate plans for a broker I was working for, and then I helped him present the plans to clients. My initial financial plans were very rudimentary, created on an Excel spreadsheet using static rates of return and charts I created myself. But these plans were meaningful to the people the broker was working with because of the specific recommendations and clear path designed for each client. The plan became the center of the relationship, not just another sales tool to gather assets.

This planning path eventually led me to discover the Financial Planning Association (FPA), the National Association of Personal Financial Advisors (NAPFA) and more importantly, the term fiduciary (and eventually stewardship). It’s not an understatement to say that discovering what a fiduciary is and does changed the course of my life and career. For a kid who was fascinated by the books Den of Thieves, Liar’s Poker, Barbarians at the Gate and the quintessential finance movie of all time, Wall Street, a new world had opened up — working with money in a way that was honorable. I was going to be a fiduciary.

There was just one problem, I worked for a company where fiduciary was more associated with a different f-word, the four-letter kind.

At the same time I was trying to find my way in the brokerage industry, my wife was working her way through her first year of teaching. A degree in biology helped her get a job as a science teacher while she pursued her credential and master’s degree. She could tell you all you wanted to know about the anatomy of a tiger shark — trust me, it’s more than you’d want to know — but when it came to money and retirement planning, it just wasn’t something she was interested in, let alone a topic she could easily dissect.

One day a man showed up at my wife’s classroom door after school. He introduced himself, said he was sent from the school district and the state retirement system and had just met with some of my wife’s colleagues about their retirement. He inquired whether she had a few minutes to sit down and learn about her retirement benefits. This fateful meeting would have implications for my life I could never have anticipated.

Given that I worked for a major Wall Street firm, my wife asked if the man could come back at a time when I could join them. We met a week later in my wife’s classroom and the man quickly explained how the state retirement system worked, then moved on to explain to us that we could begin contributions to something called a 403(b). He used the term “TSA” for tax-sheltered annuity. I’d heard of these accounts before and knew they were associated mostly with public school employers, but had yet to encounter them.

A few more minutes passed and the situation became uncomfortable. The man who said he was “sent from the district and the state retirement system” had now shifted into a sales pitch for a product called an Equity Indexed Annuity as well as cash value life insurance. Confused about why a person who worked for my wife’s employer and the state would be selling commission-based products, I asked him whom he really worked for. It turned out he was an insurance agent, he did NOT work for the state; he did NOT work for the school district. He had lied his way into my wife’s classroom in an attempt to sell us products that were not in our best interest. This was 1997 and little has changed.

I kindly asked the man to leave and reported him to the school, the district and the state. I never saw him again, but thus began my journey into the dark world of 403(b) plans.

You might be thinking that as a Registered Representative of Merrill Lynch I was the pot calling the kettle black, but I was a strict no-load mutual fund guy. For years I had advised my parents on their retirement accounts and remember helping them out of their “loaded” Putnam funds and replacing them with T. Rowe Price and Vanguard. I believed low costs were important to a successful investment and retirement outcome. While this belief was antithetical in the brokerage world, I was just a lowly sales assistant at the time, not a broker selling product. I was beholden to no one, so I thought.

The conniving 403(b) salesperson angered me. I didn’t appreciate salespeople running around our educational institutions lying to educators and selling them products that clearly were not good for them. I wondered whether this was an exception or common in the public schools. I soon came to find out it was no exception, the 403(b) was the Wild West of retirement plans.

My next step was to call the school district office and get the truth about what was available for my wife’s 403(b). It turned out the school officials were clueless as well. I was faxed a list of more than two dozen companies, some with phone numbers, some without. None of the companies listed offered no-load or low-cost products, so if you wanted a 403(b) you had to go through a broker and pay commissions. I remember thinking how absurd this was. I decided I wanted nothing to do with the 403(b). We’d invest elsewhere.

A few years passed and I was learning a lot about the brokerage world, mainly what not to do. The focus on products, not people, drove me crazy. By this time I had changed firms twice, spending a year at Solomon Smith Barney Citigroup and landing as an “Advisor Trainee” at Morgan Stanley Dean Witter (MSDW). Smith Barney was no different than Merrill Lynch, and MSDW would turn out to be more of the same.

In the year 2000, with markets entering a downward spiral and the beginning of the crash in tech stocks I began the trainee program at MSDW. I was sent to Manhattan for three weeks, staying in a hotel across the street from Madison Square Garden with a friend from my days at Bank of America. MSDW bused us every morning down to the World Trade Center, where we made our way up to the 66th floor. Being that high up at the Trade Center was awe-inspiring. Looking down on the Statue of Liberty from that height made it appear miniscule. I remember staring out across the waters and seeing planes in the distance flying into the various airports. A year later, the building would be gone.

Wall Street at that time still held great fascination for me, I was walking on air. Downtown Manhattan was bustling. I was wearing my best suits, power ties and making friends...