Personal Finance

DR 123: Interview with Joshua Sheats, CFP, of Radical Personal Finance

We interview Joshua Sheats, CFP of Radical Personal Finance.

I met Joshua Sheats earlier this year at a blogger conference. In the span of 30 minutes we talked about everything from budgeting to investing to careers to podcasting.

A certified financial planner, among other things, Joshua spent many years in the business. Recently, he hung up his calculator and started a podcast full time at Radical Personal Finance.

I asked if he would be a guest on the podcast. I wanted to pick his brain about being a CFP, transitioning into podcasting, and everything in between. The result is, and I kid you not, a 2 hour interview! You can listen to the interview . . .

. . . or read the transcript.

Joshua Sheats Interview Transcript

Rob: Joshua, welcome to the show.

Joshua Sheats: Rob, thank you for having me.

Rob: We met at FINCON for the first time and had some very interesting conversations about financial planning and about your podcast which we’ll get to in a bit, but I’m grateful for you taking the time to come on the show. For those listening, why don’t you start off by telling us who you are and what you do, Joshua?

Joshua Sheats: Well, I’ve always been a personal finance junkie which is probably the most germane information to start with. I was always a nerd. At 13 years old, when I should have been out playing football I was reading books on investing, personal finance and security analysis and all of that. But I was always involved in the personal finance side of it. On my 18th birthday I vividly remember sitting at my parent’s dining room table and opening up my first Roth IRA and opening my first credit card. I was very much trying to be on the ball with all of my financial stuff.

Rob: Man, you are a money geek.

Joshua Sheats: I’m telling you, I was a total nerd.

Rob: At 18, where did you open up your Roth IRA?

Joshua Sheats: USAA, actually. They were offering a deal at the time. I started banking with USAA when I was in my early teens and they were offering a deal on one of their funds that had a low minimum purchase of $25 so I opened it up with $25 a month, auto-debited right into their mutual funds. I kept that account for years.

Rob: How does someone in their teens get so interested in this? Did your parents sort of guide you into this or did you do this on your own? How did this happen?

Joshua Sheats: My parents are not they do fine but they’re not really connected to all the details of it. I read a lot and was educated at home for the first half of my educational career, so with that you get the opportunity to read a lot. I read about everything I could possibly find on personal finance because I wanted to be rich. It seemed so simple. If I just did A, B, C, D, E all the charts in the books said, “Joshua, you’ll wind up rich.” I just found that I really enjoyed learning about it and I was good at it. I was that annoying kid who was telling people what to do with their money when I really had no business doing so.

Rob: Okay. So you started this in your teens. You opened up your first Roth IRA at 18. Made a contribution so you got that 5-year rule starting to tick away. And you’re past that by now, I’m sure?

Joshua Sheats: Yes.

Rob: Then what happened?

Joshua Sheats: I started building my credit score and then I started putting my way through college. I had purchased a book on how to build your credit score and my philosophy I’ll tell you how crazy it went my philosophy was that I wanted to invest in real estate at the time. That is what I saw as my path to riches. My plan was to build my credit score so I could easily access credit for the purpose of buying real estate. Through college, I systematically raised the limits on my credit cards to the point when I was a junior in college (in 2006) I had $100,000 of credit line available to me on four credit cards.

Rob: I’ve just got to stop you right there for a second. Isn’t it absurd that a junior in college can get $100,000 in credit?

Joshua Sheats: A junior in college earning just a few thousand bucks

Rob: I mean, honestly, that’s just insane. Of course, this was in 2006 you said?

Joshua Sheats: Right.

Rob: You probably wouldn’t have been able to do that in 2009, I’m going to guess?

Joshua Sheats: Right. It’s very different now. But I was very systematic about it. I just had a tickler file so every 3 months I’d call each of the cards and request a credit increase and they’d give it to me. I’ve never been late on a payment of any kind for any reason, so systematically, they kept expanding it. Now, I shudder in horror at how stupid I could have been but I wanted to be able to buy a house on a credit card if I needed to.

Rob: Yes, of course, why not… A house on a credit card. Think of the reward points you’d get.

Joshua Sheats: Think of how rich. After all, I was reading all these ‘get rich quick with real estate’ books and they were telling me how rich I could be. So

Rob: I’m curious. What book did you read to understand credit scores, if you can remember?

Joshua Sheats: I don’t remember. It was something I bought on line. It was one of those pdf things.

Rob: Oh, okay.

Joshua Sheats: As a teenager, I got sucked into the world of real estate investing. The no-money-down world. I attended a couple of seminars and found a lot of information that way. The key thing they always said was to build your credit score. That was what the scammers and the shysters at that time were focusing on so I just built my credit score. It was just some book. I printed it off the Internet and followed it.

Rob: Did you ever invest in real estate?

Joshua Sheats: I didn’t. The first piece of real estate I ever bought was the house my wife and I now live in and that was two and a half years ago. And, I’m so thankful I didn’t. It was a miracle that I didn’t wind up going bankrupt. I had several friends from college who did get heavily into real estate investing here in Florida, in a stupid way before the crash, and lost everything and went bankrupt. A couple of them have recovered and a couple of them haven’t. I started going to the seminars, you know, the free hotel seminars where you go to the one-hour thing and then you go to the three-day thing? At the three-day thing, I vividly remember when I was in college I don’t remember which year but I think it may have been my sophomore year, I came home from a three-day real estate seminar with a buddy of mine and I was all fired up and ready to put down the $20,000 for a private mentoring program with the real estate guru. I was ready to do it and my dad just basically said, “Joshua, stop! Don’t be stupid. Do not do it!” Thankfully, I listened to him. That decision saved me because I was a pretty aggressive guy. I was pretty hard core. I would have gone out and bought five properties, just by following the ‘get rich in real estate’ books without any actual foundation before it. And I would have been destroyed in the resulting correction because I didn’t know what I was doing.

Rob: Well, good for your father.

Joshua Sheats: I have thanked him many times for that.

Rob: Yeah.

Joshua Sheats: I’m also thankful that he put a ‘respect for parents’ into me at a young age that I listened to him. The older I get, the smarter my dad gets.

Rob: Yeah. I hope the same thing applies to my kids. We’ll see. So, you didn’t go into real estate. What did you do after college?

Joshua Sheats: In college I studied business. I thought I was going to be one of the corporate, you know, Fortune 500 CEOs. I liked business. My degree is in International Business so after college I went and worked at a marketing and brand management consulting company. This was the fancy ‘after college’ job that I could make sound impressive to anybody if I tried. I had a little bit of travel and was working on these big accounts with these Fortune 500 companies as a junior analyst and making pretty decent money. But then I got laid off. Thankfully, at the time I had been following Dave Ramsey’s, Baby Steps, as my plan. My brother gave me a copy of, Total Money Makeover, when I was in college and I thought it was very interesting. I read it once and it didn’t make any sense to me so I read it again and it was like, “Wow, this guy actually makes sense.” Then I read it a third time and decided to get out of debt. I worked like a maniac my senior year in college and paid off some credit card debt I’d accrued. I’d paid my way through college at a private university here in West Palm Beach, so I was able to pay off some credit card debt. Then I paid for my senior year. And two weeks before I graduated, due primarily to the influence of Dave Ramsey and his ‘get out of debt’ message, two weeks before I graduated, I wrote a check to Sally Mae and paid off all of my student loans and graduated from college, debt-free.

Rob: Wow, good for you.

Joshua Sheats: It was awesome. I worked hard, I tell you. I vividly remember it. I worked harder that year than I’d ever worked. I took 19 hours of senior business classes. I worked 40 hours a week. And I actually learned more that year than I had learned in any of the previous years, including a year where I didn’t work at all during school. I just put all my school bills on student loans and my teachers were far smarter than they were in any of the other years and I got better grades. I actually got straight A’s in my senior year which I had not got in my undergrad years when I had more time to study. I learned the power of focus and time-budgeting from that experience. It fundamentally shapes it shaped me into who I am.

Rob: That’s good, okay. So, you got laid off from your first job?

Joshua Sheats: Right. I worked for a year at this marketing company and I didn’t like it. I just hated the corporate world and just wanted the ability for geometric growth. I didn’t want it to be just step-by-step growth. I wanted to have the opportunity to have compound growth really massive, geometric growth in my income and business. But I got laid off about six months before I was planning to leave. This was in 2008.

I graduated from college in 2007. And in January 2009 I had planned to leave the company I was with and I wasn’t sure what I wanted to do. But, in June of 2008 I was laid off. Looking back on it from this point, I’m so thankful that I was because I don’t know that I’d have the courage to actually leave in January of 2009 when, ” the world was falling apart.” Looking back on that now, I’m thankful for it. But it was a total surprise to me. I thought people just got laid off because they were bad workers or slackers. I had just got an 8 percent pay raise at my job and was highly commended, but the company just eliminated my job position.

Thankfully I was out of debt. I had a six-month emergency fund and some savings so I was in pretty good shape. A couple of weeks after I got laid off I was talking me friends I was friends with bosses and the CEO of the company who said he’d help me any way he can. So, we were having lunch a couple weeks after I got laid off and laid out for him (the CEO) the five things I was looking for in a business. I knew what they were but I didn’t know how to do them and he told me I ought to go look at financial services. That it might be a good fit for me. I told him I didn’t want to go into financial services because brokers are out to make you broker and insurance is a scam and a waste of money. I thought I could do better on my own and told him I didn’t want to go into financial services. He said I ought to at least consider it because everything I had just described sounded like financial services. His son had interned with a company called Northwestern Mutual.

They have a large college internship program and his son had had a good experience. I don’t think he continued with the company after the internship, but had a good experience. He had contact there and sent me to his contact for an interview. I went in and I was really impressed with the person I interviewed with. Basically, based upon that, it kind of opened my eyes to the financial services business which I had never considered. Then I went around the industry and interviewed at a few different places and did a bunch of research. Then a month or two later I ended up joining Northwestern Mutual in the fall of 2008. I worked them from the fall of 2008 until June of 2014.

Rob: And that’s when you quit there and started the podcast?

Joshua Sheats: Exactly right.

Rob: When you joined Northwestern, was it as a financial planner?

Joshua Sheats: That’s a Let’s get into some industry terms. I know from our conversations, you can handle that.

Rob: We’ll see.

Joshua Sheats: The term, financial planner and the term, financial advisor, is a very nebulous term. It doesn’t actually mean anything. A financial planner is simply one who plans their finances and a financial advisor is simply one who advises on the perspective of finances. In financial services there are many terms that people use, that they probably shouldn’t. There’s a long history of all these words in the industry and many people are upset about it. So, yes, I was working as a financial planner. I was not a certified financial planner which is what most people are thinking about in the same way they call an accountant a CPA. A CPA actually means a certified public accountant but that’s a licensing agreement. You can be an accountant and not be a CPA. So I was a financial planner but I was not at that time, a certified financial planner a CFP designate.

Rob: That’s a good point because I’m looking at your LinkedIn profile and I’ll just read it for everyone; Joshua Sheats, CFP, CLU, CHFC, CASL, CAP, REBC. What exactly are you?

Joshua Sheats: It’s even worse than that. There’s a couple that don’t fit in

Rob: So many you can’t fit them all? We’ll email Mr. LinkedIn to see if he can expand the name field.

Joshua Sheats: It’s a little bit obnoxious. There’s actually an RHU and a MSFS as well that I just finished. It’s a little obnoxious. All that stuff means is, each of those is a unique, specific industry designation. And each of them has a meaning but the meaning is different. So, unless you’re actually in the financial services business, it’s pretty hard to actually understand what all of these designations are. If you’re interested, I can go through them and explain what they are, but the more general question that you’re asking let me answer that first. All of those things simply mean I’ve spent a lot of time studying and taking tests. That’s basically what it means. It’s hard for an outside person to know that just because someone has a bunch of letters after their name doesn’t mean they’ve actually taken any hard tests. In our business, there are some designations that consist of basically 8 hours in a hotel conference room and a 20 question test that can get you some letters after your name. So you have to do some due-diligence to understand which designations matter. Which ones actually signify a lot of work. I’d be happy to tell which ones are the most meaningful. Would that be helpful?

Rob: Sure, why not.

Joshua Sheats: Okay. In the financial advisory business, the two most prominent designations will be a CFP designation. CFP stands for, certified financial planner. And a CFA designation which stands for chartered financial analyst. They’re kind of different. The chartered financial analyst, in my opinion, if probably one of the most difficult exams. There are three exams you have to pass for that one and it’s extremely technical, extremely intense and it’s very appropriate for people who are involved in the day-to-day management of portfolios. It’s very theoretical though and it’s very much about portfolio management and investment management.

The CFP bill themselves as the most – the highest – I don’t know what their lingo is, but they bill themselves as the highest financial planning standard or something like that. What that one is… I think you have to take 6 or 8 classes. Something like that. Then you have to pass a comprehensive exam, which, when I did it, it was a two-day, 10-hour exam. And that covers all aspects of financial planning. So, financial planning and portfolio management are two very different disciplines. Those are the two common ones. The other ones that are also common would be CHFC which stands for chartered financial consultant. That is a designation that’s awarded by the American College in financial services up in Pennsylvania. That one is a financial planning designation as well.

A few more classes than the CFP but it doesn’t have a comprehensive exam. It’s a little more in-depth in some areas than the CFP. Then there’s also a CLU. The CLU is probably the initial it’s a very old designation primarily focused on the insurance business. It stands for chartered life underwriter. Somebody who has that has done some detailed education on the topic of insurance. There are dozens more but those are probably the main ones people will benefit from knowing.

Rob: What’s interesting to me and something that I’ve learned more recently, as you pointed out, you don’t have to be a CFP to be a financial planner. For that matter, you don’t have to be a CFA to manage someone’s portfolio. And on that score, it’s simple. It’s taking the Series 65 exam and putting the paperwork together to get licensed. And, voila! You can manage $100,000 in assets if you can get the clients. The truth of the matter is, I just took the Series 65 and I suppose if you have no background it would be a challenging exam, but the truth is, it’s not that difficult. It surprised me how easy it is to be licensed to manage someone else’s investments.

Joshua Sheats: Right.

Rob: Anyway

Joshua Sheats: Yeah, you’re right. I agree. It’s really not that tough. If you were a newly mentored financial advisor and you join a large firm, you need to be able to sell any kind of securities of any type. You need either a Series 6 or a Series 7 and also, usually a Series 63. To be an investment advisor you need a Series 65 which is what you’ve just done. I took the 6, 63 and 65 and I did those three industry examinations as well. But it’s very difficult for an outside person to actually penetrate and understand what these things are. Becoming a financial advisor doesn’t take much, but becoming a good financial advisor is a very different proposition. But it doesn’t take much to print a business card that says ‘Financial Advisor’ on it.

Rob: That’s kind of what I want to touch on so folks that are listening who might be thinking about hiring a financial planner know, is that it’s not so hard to become one. The challenge for consumers is figuring out how to find a good one. Since you worked as a financial planner at Northwestern for a number of years, what goes on behind the scenes? What goes on that your clients don’t see? What are financial planners doing behind the scenes to advise their clients? How does it work?

Joshua Sheats: It depends hugely on the firm. One of the biggest challenges with even a conversation like this and I’ll do my best to give you specific detailed answers to your questions, but one of the biggest challenges to a conversation like this is that the accuracy of the answer is going to depend on the education of the listener.

So, if you are well educated on financial topics and you have a high financial IQ, you’re highly financially literate, then the answers will make sense. But, if you not familiar with some of the terms it’s really hard to be able to figure out what makes a good advisor and what makes a non-good advisor. There is a dramatic need for specialization in the financial planning business. A good financial planner can’t be good to all people in all places so you’re going to have to have some area that you specialize in. That specialization may be something like the difference between specializing in financial planning or specializing in portfolio management as an investment manager. That would be one scenario. And this is my opinion. Some advisors would disagree with me vehemently.

But, I have always more enjoyed working as a financial planner rather than as an investment manager or portfolio manager. The reason is because the job descriptions are very different. As a financial planner the primary job you are doing with a client is helping the client to understand and clarify, specifically and clearly, what their financial goals are, analyzing where they are and figuring out what path is going to help them achieve their goals. That’s, in essence, what a financial planner does. So a financial planner is going to spend a lot of time trying to figure out what’s going to work for the client and that may come on a basic level of cash-flow management, budgeting, something like that. It may come from a product perspective; applying appropriate insurances, making sure that certain life insurance is taken care of, making sure that disability income insurance is taken care of, to doing a review of someone’s property and casualty insurance coverage to make sure that’s it’s adequate.

There may be some on a portfolio perspective just to make sure that the investments that somebody has is appropriate. Making sure the tax strategy is on track. That’s different than an investment manager or portfolio manager. In that person’s job, they’re tasked with guiding the performance of the portfolio. The problem is, is that the financial planning occupation requires a lot of time with clients and not a lot of time spent on a computer looking at the ticker for whatever stocks you’re tracking. The portfolio manager does not need to be with clients, but needs to be in an office where they are able to actually looking at, and managing the portfolio. That’s one of the primary distinctions I think you’ll see in most firms that are fairly well recognized, is that it’s difficult to do both things. You’ll usually have a team approach depending on how the firm is structured. You’ll have a team approach where you have a portfolio manager and a financial planner working together. And they both have different duties.

Frankly, a lot of it’s going to depend on the firm and it also depends on the compensation of the structure… That’s where you get into these very confusing words like, fee-only, fee-based, commission-and-fee, commission-based, sales-based all of these type of words that are very confusing to people as well. You also get into specialties within the practice. For example, there are financial planning firms that are boutique estate planning firms. The only service they provide is comprehensive, in-depth, detailed estate planning services. This would be for people with $150 million net worth. All they do is estate planning. That’s very different than maybe a new representative at one of the large wire houses who’s out kind of beating the streets, bringing in new accounts, rolling over 401ks into IRAs and things like that.

Rob: When you were at Northwestern, were there times when you were working with clients, sitting down with them trying to come up with a budget?

Joshua Sheats: Yes. There were.

Rob: So that would be sort of the cash-flow management?

Joshua Sheats: Right.

Rob: Would you help them try to figure out a strategy on how to get out of debt? Which debts to pay first and how to find more money to put towards those debts?

Joshua Sheats: I would. But it’s really tough and here’s why. That’s actually one of the reasons I started the podcast. I would spend a lot of times on those types of things. Trying to help somebody plan a budget, trying to help someone figure out a debt management plan. But, unless there’s a compensation arrangement where the planner can actually be paid for the work, then it’s very difficult to spend a lot of time doing those type of things. Let’s say I come across a client who really needs to get out of debt but they don’t have a lot of needs other than that, that I can help them with, it’s very difficult for me to sit down for several hours over a period meetings and help them for free. Now, I’ve done it. Yes.

But you know, for the first few years I would carry around copies of Dave Ramsey’s, Total Money Makeover book in my trunk and I’d say, “Listen, I can’t come back and help you every week to do a budget review with you and show you how to do that. So, here… read this book and follow what it says.” Or I would send them some articles or send them to a website or podcast, something like that. So there has to be a compensation function where the planner can actually get paid. The problem is, the people in our country who oftentimes need the most help, who need help getting out of debt, who need help setting up a budget or something like that, usually aren’t in the position to afford the best advise because they simply can’t, or won’t, pay for it. So you have this very strange dichotomy that the wealthy are willing to pay massive amounts of money for excellent financial advice.

Every time congress passes new tax laws, I do not understand why they do it the way they do. I tell my friends, “Does congress not understand that there are armies and armies and armies of us financial planners, attorneys, CPAs, accountants and things like that, who are going to sit around and dissect this law and figure out a way around it?” And we’re well paid to do it because if we can save a client two million bucks in a year, that client will happily pay us $50,000 or $100,000 for the advice. What happens is, if you have money already, you can get world-class financial advice. But, if you don’t have money already, it’s kind of tough because you can’t really afford to pay for it and those of us who are world-class aren’t going to really be able to effectively serve you.

The only way I can figure out how to actually serve people who are in those needs is doing things like what Dave Ramsey does where you’re giving away great information to a beginning level audience or what guys like you and me are doing in our podcasts, giving away the information or writing books. There are some people who are trying to work in that area as far as being budget coaches and things of that nature. I haven’t really seen it working effectively yet. My hope is that it will. Then, because the needs are fairly simple, the solutions are fairly simple. There’s not a lot that somebody making $40,000 a year, with a family, needs to know other than how to build that up, pay off your debt, fund an IRA, maybe get some appropriate term life insurance. That’s about it. Now, if I get a client walk in with $400,000 a year, there’s a lot I can do. I can work some tax magic on their situation. I can save them tens of thousands of dollars with the right planning technique so it’s kind of a catch-22 and I haven’t been able to figure out how to solve that problem.

Rob: Okay. I think we may have lost a little bit of that last answer. If someone is making $400,000 a year, should they have a financial planner?

Joshua Sheats: Absolutely!

Rob: And what’s the financial planner going to do for them

Joshua Sheats: It depends on how good they are.

Rob: Well, okay. Let’s say a very good financial planner. Maybe one named Joshua Sheats. What would a good financial planner do for someone making $400,000 a year. You know, they’ve got a couple million dollars in the bank, they’re a family of four… What kinds of things would that person need?

Joshua Sheats: You’re going to be frustrated by this answer because there is not one answer to it. Let me expand on it because this is one of the problems with selling financial planning services is that oftentimes people are looking for only one thing. And there isn’t, one thing. For example, on my show I’ve been working through, trying to teach through some tax planning strategies and I rely on a statistics from a book called, How To Pay Zero Taxes or something like that. In that book there is a statistic that’s quoted. The author is a tax attorney up in the north east somewhere and he quotes he goes through each year, the various levels of income and the amount of income tax paid by various households and various families. The only year I remember, which is the latest year I have read in his book, is 2009 where he quotes the statistic that in the United States of America, based on publically available tax return data, there were about 20,000 people who made a household income in excess of $100,000 who paid zero dollars of federal income tax.

Rob: Let me just stop you right there. Is this the book by Jeff Schepper? How To Pay Zero Taxes

Joshua Sheats: It’s a big, thick book that goes through

Rob: I don’t know. I’m looking at it on Amazon right now.

Joshua Sheats: Yeah. How To Pay Zero Taxes… Yes, Jeff Schnepper’s book. Exactly.

Rob: Here’s my question. I know every situation is different, but just give me a rough idea of how it’s possible for someone to make $100,000 and pay no taxes.

Joshua Sheats: It’s a bunch of things. It may be, for example, how their income is structured. Is their income structured where it’s not structured in the form of wages where you can remove some of your employment taxes if your income is not structured in the terms of wages. What kind of deductions do you have? And Schnepper’s book is the best place because he goes through each and every one of those things. I can’t actually answer the question because there are so many little things that you can do. A perfect example; I love the early retirement community and one of the things let’s say if you don’t need any money. You may have $100,000 for you and your wife. Let’s say total household income of $100,000 and if you don’t need that income, all you need to do if you’re self-employed is set up some 401ks and defer $50,000 into one and $50,000 into the other and you’ve cut out your taxable income.

Rob: Let me follow up on that though. You’ve got someone that’s self-employed, right?

Joshua Sheats: Right.

Rob: That would be an individual 401k, right?

Joshua Sheats: Right.

Rob: You’ve got your employee contribution, 17.5 and for the employer contribution it’s 25 percent of your income, right?

Joshua Sheats: Right. So I’m being a little bit loosey-goosey with the numbers.

Rob: I’m sorry, you just got me excited. I’m thinking, “Okay, how do I do this?”

Joshua Sheats: Buy Schnepper’s book because from our conversations, you’re detailed enough that you would enjoy it. Buy his book. That’s a really good one. There’s another really good one by a guy I don’t remember the author’s name, but I have it as well. It’s called, How To Really Lower Your Taxes, Big-time. It’s also good. Schnepper’s book is very academic and it lays it out in scope. Hang on one second. Hit pause and I’ll go grab it

Rob: No, no, that’s okay. We’ll come back to it.

Joshua Sheats: Okay

Rob: By the way, I hate hitting pause so I’m going to keep all of this in. It’s the real life part of interviews. People who are listening, understand that. But, I will link to both of those books in the show notes for people listening.

Joshua Sheats: Awesome. I’ve also got a tax series if people are interested in this subject and my attempt to actually teach what I could never find in the personal finance space. I had to kind of read through all the boring academic books and I started teaching through a tax series that illustrates

Rob: Well, if you send me links to those, I’ll include those too.

Joshua Sheats: I’d be happy to do that. I’ll make sure to do that. So the answer is not just one thing. There are a number of different techniques, that in the right situation could be helpful. And it would be very unusual to be able to wipe out all taxes. I’m not sure of those returns that can do that. There may beI don’t want to get too deep into the weeds. I’ve studied some but I still can’t figure out exactly how it would work to do exactly that. But, it’s a lot of things. Somebody with $400,000 of income you know, you figure… Let’s just use round numbers. Let’s figure 25 or 30 percent of taxes, I mean, you’ve got $100,000 of income tax. There are some easy ways to lower that. And it would usually be higher than that depending on the state, depending on the situation. But you can do a lot as a financial planner so if you can cut that bill in half, you can do a lot to earn some substantial fees and have a happy client and a happy planner.

Rob: Here’s my concern about hiring a financial planner, for me personally. Granted, my situation is a little bit different as I spend my days studying this but I still recognize that there’s no way you can know it all. And I certainly don’t know it all. But my concern is that I’ll spend a fair amount of money getting some sort of financial plan and in the end I’ll conclude I didn’t learn anything new. You know, I spent this money and he or she didn’t really tell me anything new or save me a substantial amount in taxes. Maybe that’s a silly concern. I don’t know. But, have you ever had people come in and you go through a whole financial plan and at the end of the day they were already doing things right and you really weren’t much help to them?

Joshua Sheats: I had one guy in my career. In six years of meeting over a thousand people, I actually had one guy that fit that mold.

Rob: Okay. One out of a thousand. Alright.

Joshua Sheats: And I’ll tell you, it’s actually an important story. He was also one of the few people to ask me proactively for an appointment without me having to approach him for an appointment. This was very young in my career where I was still just completely scared silly when I would talk to people and ask them to talk about their money. Just the emotions of the business, learning to talk with people. I went to this networking event here in Palm Beach. It was a lunchtime meeting. I can’t remember the name of the club but it’s a bunch of old Palm Beach guys, retired guys, who get together and I thought, “Oh this will be great. A bunch of rich Palm Beach guys.” So, I go there and sit down. I’m the youngest guy in the room by about 40 years. The guys were asking me what I do and said I was a financial planner. At the end of the luncheon, one of the gentlemen leans over to me and says, “Hey, I’d like to have you take a look over my stuff if you could, and if you would?” I said, “Yeah, I’d be happy to.” Inside, I was falling off my chair because this was the first time someone every said, “Hey Josh, can you look at my stuff?” Up until now I’d been out prospecting and basically jumping out of bushes asking people to talk about their money and you’ve got to deal with a certain amount of rejection. Well, he comes into my office. He’s in is early to mid 60′s. Anyway, he slides a piece of paper down. And on the piece of paper is his complete balance sheet. All of his assets, all of his liabilities. It has an income statement. Very simple, but an income statement showing what his sources of income were. It shows what his expenses are. It shows what his concerns are. And on one sheet of paper, he basically has his complete financial plan. This is actually the first time anyone has ever put that in front of me and I thought, “Wow, this is great. Why doesn’t every client have this?” I was still learning how to do it for clients. I go through it and ask him some questions. Then about 15 minutes later I tell him, “Listen, I think you’ve got everything squared away. The only thing I can think of is maybe this one area. But even that, frankly, I don’t think you need to worry much about it. So, I think you’re pretty well squared away.” And I learned something from that experience. I couldn’t actually make a recommendation that helped him and I learned something from that experience. When I first started working as a financial planner, I thought that the easiest people to meet with would be the poor people, the broke people, because they would need the most help. And the most difficult people to meet with, would be the rich people because they’d have all the money and have everything already taken care of. Well, I’ve made a lot of phone calls in my career. You’ve got to, as a financial planner, you have to learn how to make some phone calls to get some appointments. The easiest people to reach, I’ve found, are the rich people. The hardest people were the broke people because the broke people were so concerned about their situation and were so embarrassed basically, about their situation, that they would not want to talk about it. They would not want to tell you anything. They would not want to reveal themselves, naked, basically. But the rich people… Now I might only get 5 minutes but they’d give me 5 minutes because they figured maybe this guy’s got something I need to know about. Maybe he’s got an idea. Maybe he’s got something. I learned how to be very quick on my feet when working with wealthy clients but that they were more likely to give me time than poor people. And I thought, is it the fact that they’re that way because they’re rich, or did they get rich by seeking out and taking good advice? I’m inclined to think it’s the latter, but I can’t prove it.

Rob: It’s interesting. Maybe I need to reach out to a certified financial planner at some point. One of the mistakes I made was assuming that my tax account was also a financial planner. And not even the insurance side of it. I wouldn’t expect him to evaluate my insurance. But even on tax issues… I had an accountant for a number of years that did my taxes and not once did he mention to me, “Hey, you really ought to consider a back-door Roth.” Not once did he mention to me, “For your business, you ought to consider a defined benefit plan.” The other thing he did is make the mistake of advising me that my 401k contributions at my employer limited the amount I could contribute to a completely unrelated SEP IRA with my business. Mind you, he’s perfectly fine at preparing tax returns but wasn’t great at tax planning which, as I think about it, frankly, he should have been. So as I sit here thinking about if I should go and see a certified financial planner, I think the answer is, yes. For folks that are considering that too, how do they find a good one?

Joshua Sheats: I don’t know an answer to that question.

Rob: Okay, well, listen Joshua, it was great to have you on the show…

Joshua Sheats: I think a lot about that question, Rob, but I do not know how to answer it. Let me answer just in connection to your accountant question. I’ve struggled with this as well. I have worked with a number of accountants here in my area and it’s very difficult to find an accountant who has a proactive planning practice. The key is, you have to look at the structure of incentives. In my opinion, this is a problem in the financial planning business and in the accounting business. In general, most accountants are being paid for the production of a return. That may be very simple as far as, “Hey, I need my 1040 simply for my personal taxes.” It may be more returns. So we’re doing a couple of corporate returns, we’re doing some individual returns as well. But basically, the incentive structure and the payment is being made, usually for the returns. Now, I’ve heard that there are some very high-end accountants who are providing advice on the basis of an hourly fee or something like that. But most clients are so slow to actually walk into their office and plunk down $500 for an hour of time, that most accountants are going to recognize that the more returns they can do, the more money they’re going to make. That is the fact, and that is what they recognize. The structure that many accounting offices are going to is, there may be one CPA (or a couple of CPAs) and an army of return preparers. Those return preparers may be there in the office. They may be outsourced. They may be in India, who knows? And the CPA is just taking a quick look at it and they can a produce a much higher hourly wage by focusing on that, than they can by meeting with you and doing some proactive planning. I found that most of the accountants are willing as long as I’m not calling during tax season, to sit down with me but they’re not accustomed to thinking that way. It’s the same with financial planners. As a financial planner, you have to look at how your planner is being paid. Let’s say that you are paying an advisor a management fee. Let’s say you’re paying a one percent fee on your portfolio for management. If you’ve got enough assets and you’re a big enough fish in a planner’s portfolio, they can afford to spend time with you throughout the year. But even in that situation which is probably the better of most situations, they’re less incentivized to actually spend a lot of time doing that proactive planning with you because they’re getting paid upon keeping the assets. So all they’ve got to do is keep the assets. The same thing with commissions. If you’re earning your income off commissions, whether that’s the sale of investment products or insurance products, then you’re going to be spending you time focused on what makes you more money. Let’s say I’m selling you a life insurance policy and you’re buying the life insurance policy from me, once you buy that life insurance you probably don’t need any more so it’s more in my interest to go and find another person who needs life insurance and call you in a year, than it is for me to come back next month and sit down to go over your budget with you. But, I do have a solution. The best idea I’ve come up with is the idea of basically billing your fees. Instead of billing a fee that’s based on asset management or billing a fee based on financial products, billing a fee that’s a pure retainer for advice. This is often done on an annual basis but it can also be done on a monthly basis. The best thing I’ve come up with is, I’d like to have a stable of clients who are paying me a monthly fee. And it’d have to be a fairly high monthly fee in order for me to do this, but who are paying me a monthly fee and who could fire me at any time. In exchange, what I’d expect them to do is to talk to me every month. What can happen then, is in the context of a deep conversation and in the context of a relationship, we can continually look at tweaking things. Because there’s no way that if you meet with your accountant in February 2015, he’s going to remember in February 2014, that you got these things going on and that he needs to research these things right in the middle of tax season. So if you can create a much closer relationship between planner and client where that relationship is based upon the delivery of ongoing coaching advice and it’s a much closer relationship, then I think you can get better advice. But only a few people are trying this and I don’t know if it will work. It should, but I don’t know if it will.

Rob: I’ve talked to several financial planners who are doing something similar to what you described. They will charge usually an upfront fee for the initial financial plan. Although, I’ve seen it reasonably low at around $1,000, $2,000. Again, if you’re trying to climb out of debt, that’s a lot of money.

Joshua Sheats: Right.

Rob: One to two thousand dollars and then an ongoing fee of say, $100 or $200 a month for that continued support to execute the plan. Do you have any sense as to whether that kind of arrangement is appealing to consumers of financial planning services?

Joshua Sheats: Basically, we’re finding out that people at a certain income level often have an aversion to paying for advice based on what it’s worth. Two weeks ago I was up in Pennsylvania finishing the final class for my Master’s Degree in Financial Planning and I was in a room with 15 other advisors. And these are all seasoned, experienced advisors. The oldest guy in the room was 75 years old and he had been practicing for 45 years. His minimum planning fee is $10,000 (I think it was $9,500). That’s where it starts. So, the average person I mean, you’re coming from a legal background. How often did you find an attorney friend of yours who’s making a couple hundred thousand bucks say, “I’m going to go plop down $10,000 to get some great financial advice?”

Rob: Not too many.

Joshua Sheats: Pretty rare, right?

Rob: That’s the problem. Lawyers think they know it all, anyways.

Joshua Sheats: That’s often true as well. I’ve had a few attorney clients but I generally found that I liked working with entrepreneurs more than attorneys.

Rob: Yeah, lawyers are a pain.

Joshua Sheats: You said it. Not me.

Rob: Yeah, yeah. It’s true.

Joshua Sheats: The good thing about it is this, if you actually look at how the financial planning business has developed over the past 100 years, this business, this profession is very much in its infancy. It was just 25 years ago, basically, that very few people had a financial planner. Most people would have had a stock broker and an insurance agent. Prior to 1999 with the Financial Services Modernization Act, you could not sell insurance and sell stocks. You could not do both of those things. You had to either sell stocks or sell insurance. So you had this incredible silo effect where either you had an insurance agent or a stock broker. And insurance agent and the stock broker would always be picking at each other which is why you had these stupid debates going on where the stock broker would say insurance was a scam and the insurance guy is saying stocks are a scam. The agent would say, “You’ve got to buy whole life insurance or annuities because they’re a better investment.” And the stock broker would say, “That stuff sucks, buy my stocks.” So first you had the mutual fund industry develop which revolutionized stock investing. Then you had the low-cost brokerage world come which revolutionized stock brokering. Then you had the Financial Services Modernization Act in ‘99 come which has revolutionized the business. Basically, it’s only been about 15 years that in many ways, the comprehensive nature of a comprehensive financial planner has really developed as its own profession. There were people prior to that time who always did comprehensive planning. I know some guys in my firm who were in the 80s and 90s and you would have been lucky to have them as your advisor. But, as a business as for structure, they had to go above and beyond what many people would do at the time in order to make it work. So, we’re still in our infancy. What I’m excited about is, if you look at the last decade, the financial planning degree at the undergraduate level now exists. The American College (there’s another college too) is producing PHDs in financial planning that is adding a lot to research and the ability of producing professors with PHDs who are able to go out and teach financial planning at the college level. That means, instead of like me when I was 23 years old going out and getting a Series 6, 63 and a life, health and annuity license to get started, now you have people coming in with four years of undergraduate education in financial planning. Just like many CPAs do who come out of college and immediately sit for the CPA exam, people are immediately sitting for the CFP exam. So the whole tenure of the industry is coming up. And because of the incredible market pressure on fees because of indexing on mutual funds and the incredible openness of information that’s put this massive pressure on fees, planners are actually turning around and having to say, “What am I actually delivering for my fee?” And that’s awesome because it’s bringing in great market forces and really raising the caliber of the industry.

Rob: Yeah. It’s interesting, the whole fee arrangement and this idea of the monthly fee. By the way, have you started taking clients under this approach yet?

Joshua Sheats: No.

Rob: Do you plan to? Have you figured out a time when you might launch this?

Joshua Sheats: It was supposed to be a couple of months ago.

Rob: Are you going to get a few more letters behind your name first or what are we waiting for here?

Joshua Sheats: Frankly, when I left my firm, I left because I wanted to start this show. I loved my firm. I had an awesome experience and an awesome stable client base. The most difficult decision I had to make was actually leaving that because I walked away from a lot of very happy clients. I walked away from a phenomenal situation and I didn’t have any reason to leave. Except, when I was looking around the financial media space I could see that, even though there were a lot of well-intentioned people, there was also a lot of really bad information getting put out there. A year ago, I couldn’t find many people that were producing audio. There were some really good blogs. I think you were blogging more than a year ago. But, I couldn’t find people that were producing great audio or video content to actually teach people financial planning. Everybody had an agenda. They were either selling their book or selling their firm on Saturday morning AM radio which there’s nothing with that, but nobody was giving the nitty-gritty and the details. So I said, “Somebody’s got to do this.” And I decided I was going to do that. But, with my show the challenge is My show is a daily show and it’s in-depth. So to be prepared for that show… Rob, how many shows are you putting out a week at this point?

Rob: Well, I tend to put out two or three. I’d like to put out one every weekday but I just don’t have the systems in place yet to do that and still have time to sleep.

Joshua Sheats: Yeah. It takes a tremendous amount of time to produce content, especially if that content is teaching content. An interview is relatively easy. All you’ve got to do is ask some good questions and find some engaging guests, things like that. I listened to your show on you did one on the Roth 5 year rule or something like that?

Rob: Right, right.

Joshua Sheats: I guarantee it took you several hours to prepare for that show, right?

Rob: Yes. And I hate that rule. Those rules drive me crazy.

Joshua Sheats: It’s awful, awful. I know. You’ve got to be so detailed and so careful. You can actually present the information but the time it takes to prepare for that is tremendous. I produce a show every weekday so that probably takes I would say, 4 to 6 hours a day to produce it. Plus, I don’t have a clue… You were ahead of me when it comes to actually knowing how to run a website and all of that stuff. I’m a total ignoramus when it comes to tech stuff. My learning curve is huge and I just haven’t been able to make the time to produce a great show and also get the firm going. I’m still working on it. That’s why I haven’t launched yet.

Rob: I want to ask you some questions about your show and you site in just a second but I want to circle back to one question you ducked, I think, kind of. You’ve got to give listeners some idea where, in terms of trying to find a financial planner, where should they start? Should they go to the fee-only financial planners or ask friends for referrals? Can you give them something on what to do?

Joshua Sheats: Okay, I’ll give something. But

Rob: You can caveat it all you want.

Joshua Sheats: Here’s the problem. It is a rare person that goes out and seeks financial advice. Very, very unusual. Most of the time, the reason people start working with an advisor or planner is actually because the advisor called them. How I worked in my business with Northwestern is I worked on 100 percent of referral. It was friend to friend to friend. So if I were working with your friend Tom, I would say, “Tom, listen, I’d love for you to introduce me to some people you think highly of.” And he’d say, “I’ve got my friend, Rob. He’s awesome. He’s an attorney and he’s a really good guy.” Then I’d call you. You might give me an appointment. And at that appointment you’ve got to try and test me out to see if I know what I’m talking about. That is how most people in my experience come up with financial advice. Number two is, even if that’s not how it happens and you’re taking advice based upon the recommendation of someone else… Let’s say that you and I are friends and you have an advisor named Jack. You come to me and then Rob calls Joshua and says, “My friend Jack is having a client appreciation event. I think you’d really enjoy going to see him. He’s been for me. Let me tell you, my portfolio has gone through the roof. He’s been great. He’s done a good job,” and I go to the client appreciation event with you. The problem is, you as an attorney, not you as Mr. Finance Guru, you as an attorney probably don’t know enough to judge Jack’s performance. So, even when people are recommended, it’s really hard to understand if that person is technically competent or not. My answer to it is, the number one thing a person needs in a planner, is to have a confidence and trust in that person’s character. The problem with that is that it’s the most difficult thing to manage and measure. I don’t know how to do that other than saying I’m a person of character, a man of integrity and I’ll always tell the truth. Over time, I’ve found that clients can figure that out for themselves. So test your planner in some way to find out their integrity and character. If you have a planner who is a person of integrity, they will know what they know, and know what they don’t know. And not everybody needs a high-priced tax consultant. If you need a life insurance policy, you need a life insurance policy. Frankly, anyone who’s been through whatever your state’s licensed requirements are, that person can competently and accurately advise you on how to calculate an appropriate amount of life insurance on the different types of life insurance that are available to you. They can also educate you on their firm and other firms so that you can make an informed decision. You don’t need somebody with a bunch of letters behind their name necessarily to do that kind of insurance planning. Now, if you’ve got 100 million bucks and you’re trying to set up a ‘second to die’ life insurance policy inside an irrevocable life insurance trust and you’re trying to figure out if you should pick a guaranteed universal life policy or go with a traditional whole life policy, you’re probably going to want to talk to somebody who’s been doing this a little while. It’s a very nuanced answer. But to start with, I’d ask, “What do you actually need and want?” If somebody came to me and said, “Joshua. I want you to manage my portfolio and produce 100 basis points of alpha,” I would say, “Sorry. I don’t do that. It’s not my deal. I don’t know how to do that. Not interested. Can’t even promise it to you…”

Rob: Nobody produced 100 basis points of alpha. Most of the listeners right now are wondering what the heck 100 basis point of alpha is.

Joshua Sheats: It means an extra one percent of return that’s not based upon the general market return. Basically, investment prowess is what that means.

Rob: Warren Buffet.

Joshua Sheats: Sorry. Go ahead…

Rob: No, I was going to say, that’s your alpha. You follow Warren Buffet.

Joshua Sheats: Right. Well, I’m a weirdo. I actually believe much of the academic research but I don’t believe it all the way. It’s a long conversation for another time. The point is, that’s not what I do. I’m not a stock picker so you can’t come to me and say, “Joshua, can you do this?” But that doesn’t mean that the advisors who carefully craft a portfolio of blue-chip stocks to specifically fund the needs of the client’s account, that they can’t do that. I’m going to answer the question and I think this is valuable information. I’ve never actually heard of this being discussed on a podcast. I haven’t even talked about this on my show, but the next thing that people say is, “Well, if you weed out compensation models, you can then figure out how to get people to be honest.” So you get into the world of fee-only versus fee-based versus commission-based. What fee-only means is that you’re taking your compensation purely as a fee off of the account and not based upon any special sale of any specific products. The idea behind this model of compensation is that this is theoretically supposed to eliminate the conflict of interest between choosing to sell investment company A’s products, because they pay you a higher commission rate than investment company B. Company B’s products are actually better, but because they pay a lower commission rate it’s supposedly better than A’s. And I don’t buy it. I think there are a lot of crooks that probably could figure out how to make a lot of money in a fee-only world. I’ve never been a fee-only planner in the past. In the future I will be a fee-only planner but I don’t necessarily think that’s going to affect me personally as to how I would deliver advice. The advice that’s probably the safest, if I had to give advice, is call a fee-only planner. You could call somebody with an hourly fee. There are two options for that. One is the most well known option called, the Garrett Financial Planning Network. They only do hourly fee planning. Number two would be an organization I’m involved with called, the XY Planning Network. That’s a group of advisors who are primarily targeting Gen X and Gen Y, younger people. We’re trying to build out this monthly model. Or, if you have some assets you can go and contact an organization called NAPFA which I think stands for National Association of Personal Financial Advisors or something like that. Those are all fee-only advisors. The reality, Rob, is this If I die, my wife does not have instructions to go online and call a fee-only planner. She has instructions to call a friend of mine at Northwestern Mutual, whom I trust. Some of my friends and former colleagues at Northwestern Mutual? None of them are fee-only planners, but they are men of integrity that did a great job. But there are some people, even at that company, who were not who I would never trust with my money. It’s a very much, a buyer beware world. And the only actual answer I have found to deal with this is to educate the consumer. Not with a bias such as, “This is what we always do,” or, “This is what I believe in” “I believe in indexing,” or, “I believe in active investment,” or, “I believe in term insurance or I believe in whole life insurance.” Let me just educate on how they work. What you should do is press your planner. Press your advisor. And ask the difficult questions. I loved it when clients asked me the difficult questions because it showed they cared about what I was doing. And it showed they had done enough research to allow me to actually educate them on why, in their situation, I was making the recommendations. I don’t have a better answer than that. That’s the best one I’ve come up with. But I’m still working on it. Call me back in a year and maybe I’ll have a better answer.

Rob: Let me give you my two cents. And I promise it’ll be worth every penny. You eluded to this earlier. Financial planning and investment advice are two different things. They’re obviously related, but they really are two very different services. And like you’ve pointed out, what you enjoy most is the financial planning side. I’ve talked to I’ve got one guy in mind who manages over a billion dollars in assets and the last thing he wants to do is financial planning. He wants to manage investments.

Joshua Sheats: Right.

Rob: When I was taking the Series 65 and going through all of that, one of the things he said to me was to forget the financial planning and get the assets under management. That’s what he knows and does. Another thing he told me was to think twice about doing both. Because, even if you’re a fee-only advisor, there’s almost an inherent conflict of interest because a lot of folks who do both do pull people in with perhaps an inexpensive financial plan, but the real objective is to get assets under management through that introduction. For example, “I’ll give you a financial plan for a few hundred bucks.”

Joshua Sheats: Right.

Rob: And it may be a perfectly fine financial plan or maybe not but the real goal is to get your $500,000 or million bucks and manage it for one percent a year. So I see this sort of inherent conflict even with the fee-only planner. I think if I were going to reach out to a financial planner I would want to find someone that charged by the hour or with some type of fixed fee and that had, upfront, no interest in managing my investments. Don’t even talk to me about managing my investments. Now that doesn’t make them a good financial planner. I’ve still got to figure out if this someone I think is competent and has the experience and all that sort of thing. That’s not to say that you won’t find someone that does both and does it well. Certainly that’s true. But there is that conflict, so if I were looking for a financial planner I would stick with someone who is just going to be a financial planner even if I wanted someone to manage my investments. I’m a big index fund believer although I do own actively managed funds and I own individual stocks. But, it is insane to pay an advisor 100 basis points to manage and index portfolio. Even if you want an advisor, Vanguard will do it for 30 basis points. Rick Ferrie at Portfolio Solutions will do it for 37 basis points. That market is shrinking. There’s a lot of pressure on fees. I think the days of charging 1 1/2 percent to manage a portfolio of mutual funds, I hope, is coming to an end. I mean, it’s not going to end tomorrow but those kind of fees are just ridiculous. Anyway, you mentioned charging a monthly fee to work with people on financial planning. I’ve thought about the same thing to help do-it-yourself investors. I’m not going to manage your investments for one percent, but I will help you manage your investments for a much, much smaller fee. You know, maybe it’s an upfront fee for a complete asset allocation plan and a relatively small monthly fee so that you have someone you can reach out to. Not unlike the financial planning side of things, this would focus on investing. To make sure you’re on track. To make sure you’re not making any mistakes. Someone to talk to when the market’s gone down by 10 percent and you’re scared. But this fee would be far less than paying an advisor one percent or more to stick you money in mutual funds. Anyway, that’s my perspective.

Joshua Sheats: I think you make good points. But, for a friendly debate among gentlemen that I think will benefit the audience, I think I’m going to respond to all three of them.

Rob: I made three points? I don’t remember making three. Okay. Good, good.

Joshua Sheats: You made two and then I made note of a third point on the last thing you were going to say. Here is the problem with the approach of trying to find a good financial planner on the basis of a low fixed hourly fee or on the basis of a fixed hourly fee. If I am a good financial planner, I’m probably a skillful person. By the way, I’m a very good financial planner. I’m not good at some other things but I consider myself an excellent, competent financial planner. I’m also good at some other things. Usually, people who are capable of learning the skills of financial planning and are adept at working with clients means you’re probably capable of other things. Let’s compare these two things. The ideal business model I was working at prior to starting as a financial planner is the investment advisory business and it’s very simple. If I have $100 million under management and let’s just assume I have a fee of one percent, that $100 million under management gives me one million bucks, gross, into my practice. That million bucks grows and after expenses and taxes I’m going to be left with a very nice lifestyle. All I need, to have $100 million under management is maybe 100 families with one million bucks or 200 families with half a million bucks. Maybe I need 400 families although that would be a very challenging practice to keep an eye on, so let’s stick with between 100 and 200 families. If I’m a skillful person with some experience, I can build that kind of practice over the course of, let’s say, 10 years. It could be done in less. I know you have a friend that has a billion. I know some people here in town that have a billion under management, but those are some massive fees that are coming off of that. Even when the fees are substantially reduced. I’m just using the one percent number purely because it’s simpler to do the math. It is very motivating to people who are capable to have the prospect of making half a million dollars of net income just by working with 100 families, all of whom love me and care about me like I care about them. That’s a really ideal business to have. Now, let’s say I need to make $500,000 of income, net. That means I need to actually I’ve still got to bill one million bucks. So if I’m going to bill a million bucks of income to go into the hourly model… And this is the problem that people don’t talk about much. If I’m going to get a million dollars of gross revenue into my practice, then let’s just divide that by 50 and let’s divide that by 40. That means that my hourly rate is $500 an hour. Here’s the problem. Nobody that I’m aware of, can fill a financial planning practice 40 hours a week where you’re billing 40 hours. You come from the attorney world so you know how difficult it is to bill at those rates for those many hours. So, what’s the maximum number of hours I can bill? Maybe 10, 15, 20, something like that? Now I’m at $1,000 an hour. Do you know how challenging it is from a marketing perspective to actually reach the thousands of people who you would need to reach to fill that seat across the table from you at $1,000 an hour to make the same amount of money that you make with $100 million under management with a one percent fee? It’s unlikely… There are some very good planners working on an hourly basis. And if you are a middle-America person, that’s probably great and you’ll probably do fine, but I’m telling you, I’m a pretty capable person and I would view it as the idea of making an income-based upon hourly fees as a financial planner is very unappealing because I can’t figure out any way to structure the practice in a way that works and that’s a good business. It would drive me out of the business. So I think it’s tough to find a world-class planner in that. Now, I know some guys and I want to meet more because I haven’t met a lot. Maybe I’ll change that opinion in a year, but just from the sheer financial reality of the business, it’s tough to find… Yeah, maybe you can consult an hourly planner and they can do that but that person may have just passed the CFP curriculum and they may not know some of the tricky advanced stuff.

Rob: That’s pretty depressing because what you’re basically saying is it’s going to be really hard to find a super financial planner who is willing to work on just an hourly basis or at least an hourly that costs some sort of reasonable fee, whatever that might be. And you’re right, it is tough because they’re wanting to do one of two things. They’re wanting to sell you something. I’ve got a good friend who just became a CFA and he worked for a number of advisors and they pushed two things; expensive annuities and I understand that annuities sometimes can be a good solution. But I think in a lot of cases they’re not. But they push clients into expensive annuities and expensive non-traded REITS. And they did that because it funded their practice. That’s how they could afford private school for their kids and the country club. The flip side is, a lot of those advisors, instead of doing that are saying, “Hey, I’m a fee-only. Pay me one or o1 1/2 to manage your investments.” That’s how they do it.

Joshua Sheats: Yes, you’re right.

Rob: But, I think that’s going to be harder and harder and harder for advisors to do. It won’t be impossible. There are still plenty of people out there that just do not understand the significance of fees when it comes to investing. To them, one percent or 1 1/2 percent they don’t know any better and they pay it. They don’t even see it come out. They don’t understand what that does to their retirement over 20, 30, 40 years. I guess, to your point though, it may be hard to find a financial planner who’s good, to work on an hourly basis. I don’t know, Josh. I think they’re out there. Are they?

Joshua Sheats: I’m sure they’re out there.

Rob: Okay.

Joshua Sheats: I just don’t like I haven’t spent enough time with enough of them to do it. The problem with an hourly practice is that you have a marketing problem. The only way to do it is if you have incredible marketing behind you, you have a world-class podcast of some kind and you’re reaching tens of thousands of people, then that’s the marketing problem. That’s the issue that comes up.

Rob: On point one I absolutely agree with you from the advisor’s perspective. $100 million under management or perhaps selling a lot of commissioned products would be much more appealing as a business model than the drudgery of hourly work. No question.

Joshua Sheats: Right. I agree. And I spend a lot of time with attorneys here in town and I don’t know an attorney who likes the hourly model. Even attorneys are trying to get away from that as well now. It’s more problematic because that’s the standard. Are you still billing hourly in your law practice?

Rob: Always. Always. And the fees are unbelievable. I can’t tell you how many lawyers in my firm charge more than $1,000 an hour.

Joshua Sheats: You have to. There’s no way because to be a competent you’ve always got to look at the market. People wonder… Oh, let’s not go down that path.

Rob: That was point one. You had two more points.

Joshua Sheats: Two more points. Okay. Here’s the flipside. And here’s the analysis of the problem as I see it. Generally, when people assume a financial advisor is not worth their fee, their 100 basis points on a portfolio of index funds, they’re assuming that the client is going to perform identically well without the services of the planner. The assumption is that the client can do it themselves and so the client is actually able to go and choose some good Vanguard index funds. And that client is going to put the money in there and they’re going to be in as good a situation as if they had billed the financial advisor one percent. If that is true, then all financial advisors should immediately be fired. I do not believe it to be true. At least not for me and with my clients. It is inconceivable to me that if I have a good relationship with a client who is productive, who is motivated and who I’m able to encourage, it’s inconceivable to me that I can’t return to that person untold multiples of the fee that I receive. The example is, if you invest and you get a 10 percent return without fees and you get a 9 percent return with fees, yes, 30 or 40 years from now there’s a massive difference in that. I think, if you put me with a 15-year-old and you have that person meet with me and talk with me on a regular basis throughout the course of their working lifetime in a very close consultative way, I guarantee you that my client would be double, triple I don’t even know because I’m making these numbers up, would be way more wealthy than any others and here’s why… Number one is that the problem with most investors’ portfolios is the behavior of the individual investor. There is a massive amount of research being done, and more needs to be done about how to help people address and affect their behavior. The average person is not emotionally equipped they’re not equipped intellectually, with knowledge, with experience, with perspective to be able to handle the emotion of successful investing. The do-it-yourselfers are. So you, Rob, you are equipped because you’ve been studying this stuff. But the average person at your firm is simply not because they have no background, no education and they don’t know how to handle the emotion of it. And the studies prove this. Go look up the Dalbar study and you’ll see that basically, every year the average investor underperforms their own investment by greater than 50 percent. It’s astounding when you look at it. But the reality is that there are a series of predictable behaviors that a client is going to make that are going to cause them to make bad decisions and cause them to get out at the wrong time when they should be getting in, and get in when they should be getting out. This can be on a micro-scale as far as whatever the latest technology is that we’re you know, when the next bubble is going to pop. Or it can be whatever the next greatest depression is going come and we’re going to get destroyed out. The number one thing that an effective financial advisor has to be able to do is to help the client manage their emotions and manage their behavior. That is what I told every single one of my clients. That’s what they need to hold me accountable for and that’s what I expect from them because that’s the only thing I can promise. I can’t promise that I can outperform. In fact, I actually don’t care. If I were running a portfolio of actively managed funds or index funds, I could do well in either because I can make arguments for either. So to me, that’s not the most important horse in the race. The most important is, did I help the client understand their plan and stay with their plan? Number two there are a whole host of behavioral modifications that a good financial advisor can make in a client’s life that have nothing to do with their portfolio. Whether it’s the type of account they hold the portfolio in, the amount of money they put in the portfolio, or even where they invest their money completely disconnected with mutual funds. What’s going to make a bigger difference, the person getting an extra one percent. Cutting out a one percent fee and funding their account at the same amount, or me as their financial advisor coming along the side saying, “Listen Rob. You’re doing well but you need to really enhance your career right now. I heard about ” What field of law were you in Rob, when you were practicing?

Rob: I still am practicing.

Joshua Sheats: Okay. Is it corporate or litigation, or

Rob: I don’t know if I’ve ever discussed this on the show. I defend auditors of publically traded companies in proceedings brought by regulators such as the SCC and PCAOB. I know, very exciting stuff!

Joshua Sheats: I like that. I’d love to talk to you about that sometime. I’m reading through the history of the financial crisis and I just read a case study on a country

Rob: Countrywide?

Joshua Sheats: No, not Countrywide. It was the other sub-prime mortgage company – it doesn’t matter. The point is, in your career the number one most valuable asset that you have and the best investment you can make, is in your income. The difference between coming out of law school and getting your first associate job and making, you know, $70,000 grinding out paperwork in the back office, versus becoming partner of a big firm that gets contacted when we’re being sued by the SCC of the FTC or whoever it is that you’re defending your auditors and having the potential and I’m not saying make or don’t make (because I don’t have that knowledge) but then becoming a partner and making $3 million a year. That’s all career development. And that all has to do with good financial planning and good financial advice as far as me coaching you to build your career. And me coaching you to have the appropriate coverage’s in place and me coaching you and forcing you to get out of the office and go take a vacation. What I’ve learned is that a good financial planner is much more than a number guy. It’s much more about the coaching relationship. Almost like this life-coach role. If I can build that, there’s no doubt in my mind that you give me my client and you go take your client and toss him into low-fee investments and no financial advisor, and you give me my client and you let me coach that client through all of their major life decisions and work with them and I’m their advisor, their most trusted advisor that they turn to. There’s not a doubt in my mind that my client would be worlds ahead. That’s what’s missing in this whole conversation. Not all planners can deliver that but all planners can learn to deliver that. The final thing then I’ll shut up because you’ve been very gracious to allow me to go on my rant. The final thing is, people sometimes forget that it’s worth it to pay for convenience and it’s worth it to pay for skill. At the end of the day, the only reason anybody should hire a financial planner is if the financial planner can apply a measure of skill to their situation. I polled my clients before I left Northwestern. I sat down with my clients, as many as I could get with and I said, “Listen. I have a question for you. Why did you pay me the fees? Because you know very much. You see it every quarter reflected on your statement. You know the fees I was getting. Why did you pay me that?” What I learned was that the clients valued me doing things for them. And they valued me applying the skill. They valued me partly just simply doing the work. They valued partly me helping them through their decisions. They valued all the ancillary services. They valued me helping them on estate planning. They valued me on their tax plan. They valued me consulting with them and with their accountant. They valued me talking with their son or daughter and helping them. They valued me enough to pay me the fees. The fees are not undisclosed and if they are undisclosed, they should be. My preference? I would love it if every single dollar of commission, every dollar of a fee were very clearly displayed so that it was all out on the table. Then let me earn that money. As long as the client is happy paying me that money, then I can earn it and I can deliver that value. The problem is that the people who are often guys like you, a do-it-yourselfer. There’s nothing wrong with guys like you who are do-it-yourselfers. I was a do-it-yourselfer. But that’s not everybody and so I would recognize that there are a large number of people who are capable of being do-it-yourselfers and who want to be do-it-yourselfers. But these are the people that populate online personal finance forums and online websites and start blogs because they’re going to teach that. I think that’s awesome and they should do more. But there’s also a large percentage of the population that doesn’t want to do it themselves or can’t do it themselves. And those are the people financial planners work with. I very rarely see that kind of differentiated in that and I am very much a consumer advocate and I want to continue being a stronger consumer advocate to let the consumer choose, with their dollars, where they place value. I think the best thing that’s happen is, all these new options that are coming online… The robo-advisors there’s just a massive growth with some of the robo-advisors. It’s phenomenal because it’s smoking all the real crappy financial planners out of the business. In ten years from now, there’ll be a lot of people who are completely dead and gone because they didn’t provide any value that justified the money they were earning. And there’s going to be a whole team, a whole raft of people who are delivering far in excess of the cost of their fees. Rant over. You were very gracious!

Rob: Rant over. That’s funny. I don’t actually think you and I disagree so much. For example, there’s no question that you’re right. There are some people, that for one or more reasons need or want a financial advisor. To be clear, someone to manage their investments either because they just don’t want to spend the time to do it or maybe because they don’t feel like they have the skills or the knowledge, or both. So there is no question that there is a large group of people that fit within in that category. Where I think things are starting to change though, is that kind of advice is some ways being commoditized.

Joshua Sheats: Right. Exactly.

Rob: I don’t think that’s a bad thing. It’s interesting. You mentioned robo-advisors and I’ve talked about Wealth Front, Empower although Empower is a little different. These things make investing very, very simple. If the person’s need is for something that makes it easier to do and that they’re comfortable with doing themselves, the robo-advisor may be a good fit. But, if you’re talking about someone who says they’re afraid that when the market is down they’re going to do something stupid, the robo-advisor won’t be a whole lot of help.

Joshua Sheats: Right, exactly.

Rob: Here’s the thing. If someone needs that kind of help, and there are plenty of people that do, I’m not so sure that the days of paying one to two percent of fees under management to get that kind of help that those days aren’t numbered because there are already plenty of options for folks to help you do just that. Help you stay in the market during difficult times. That have the ability to charge far less. Obviously, if you’re working with someone and you trust them and they’ve worked with your family for years, you’re probably going to stick with them. And that’s fine. That’s the decision. But particularly as the younger generation enters the market, I think it’s going to be harder and harder to justify paying those kinds of fees. In your case though, what you’re describing for your potential future practice isn’t a percentage of assets under management. You’re talking about a monthly fee to provide the kind of services you’ve described. Like you said, that formula is still a bit untested at the moment but it’s a formula that seems to be viable and would result in a practice for folks like you (and maybe me) that would work but that would also result in lower fees for the client. I guess only time will tell. One question on this subject before we move on. People say that if you have an advisor, you’re less likely to do dumb things with your money. That’s Dave Ramsey’s big thing. He says, “Go use one of my ELPs, commission broker. Pay 5 3/4 commission fee but you’ll have an advisor that will keep you from doing dumb things when the market’s down.”

Joshua Sheats: Yes.

Rob: Are you aware of any actual studies that demonstrate that if you have an advisor you’re, whatever percent, more likely to stick to your plan?

Joshua Sheats: I’m not aware of any. In fact

Rob: I keep asking this question because I know a lot of advisors and back in 2008, 2009, do you know what they told me? They lost all their clients. They pulled out of the market. Part of me thinks maybe they weren’t doing their jobs but that’s probably way too judgemental because at the end of the day it’s the client that makes the decision. But I can’t find a study that actually says they’ve surveyed 10,000 people and those with advisors stick with

Joshua Sheats: Yeah, I would actually doubt that if you surveyed 10,000 people that you’d find those with advisors did better because I think there’s a lot of really sucky advisors out there. The best thing that happened in 2008 is that a lot of advisors got a wake-up call to the fact that they’ve got a problem. There was not much good that came out of it though. I don’t know of any academically rigorous studies that would demonstrate that. I don’t know if they’ve been attempted or not, or what the results are. I’m ignorant on their existence. It is difficult for me to conceive and I could be deluding myself. I very well could be. But it’s difficult for me to believe that given how carefully I’ve coached my clients and how carefully I tried to teach them what to expect, what emotions they’re going to feel and that this is what’s going to happen here and happen here and happen here that I couldn’t do better. But, I can’t prove it. This comes back to the other point I was going to make. Proving who does better and what does better. Alpha is not everything. Alpha, being the amount that you’ve beat the market, that is not everything. And people forget this a lot of times when they’re actually working with clients is that the client doesn’t really care most of the time whether or not they beat the Standard and Poor’s 500 Index. They care about whether or not they have enough money to put their kid through college. Or enough money to retire on. This is the major disconnect between most of the formal academic financial literature and the actual experience of actual advisors because it doesn’t I’ve talked with clients and it’s like, “Listen. If you tell me I can hit my goals (which are excellent goals) with a 4 percent return, do I really need to deal with the rest of it to shoot for the 9 percent?” It’s very often and frequent that a client will say they don’t care about the 9 percent. They want to know the 4 percent is actually there. There are a ton of intelligent ways to manage a portfolio where the portfolio will always underperform the S&P 500 because it’s designed to do that. Building an immunized bond portfolio for a client’s college educational expenses is a tremendous value. And probably every single time, that will underperform the S&P 500. So there is a big difference between the academic side of analyzing mutual fund performance versus other performance and actually working with a client’s financial goals. But I will give you one piece of data you may enjoy and your audience may benefit from. And I don’t know if I agree or disagree with you

Rob: Okay. You sound like a lawyer!

Joshua Sheats: Well, I actually do disagree on this basis about the indexing not going to destroy fees. Right now I think I’ll do the monthly fee approach because that seems the most straightforward way. But frankly, the reason I started the podcast and the reason I do this is because I want to create the media. And I want to create a much bigger depth of media. If I didn’t feel that over time I could serve my audience and my audience can choose to pay me for the service I provide… If I didn’t feel that I could do well financially with that in the long run, I would never have left the business I left just to start this new firm idea. But I do think the firm idea is going to work. There is a mutual fund company called, Dimensional Fund Advisors, DFA for short. DFA (I think) is the second biggest indexing fund company in the world. All they do is passive investing. It’s all indexing. But you cannot buy their funds on the retail market.

Rob: I know. I hate that fact.

Joshua Sheats: Right. Exactly. And here’s what… There’s a whole level of sophistication that is often not discussed but I’ll tell you why. The reason why you cannot buy their funds on the retail market is because they need advisors to control their clients. And in the mutual fund business, this is called, hot money. So, if you’re managing a portfolio and you’re a portfolio manager of a mutual fund, the worst thing that can possibly happen is if all of a sudden your investors call up telling you they need their money and you’ve got to sell out. This is why in hedge fund management you’ve got a lockout period where you put the money in and you cannot get it out for whatever the lockout period is. In the mutual fund business though, the mutual fund portfolio manager doesn’t have this option. And this is just my opinion now, but I think one of the big challenges of why, many times, actively managed funds underperform an index’s net of fees is because oftentimes the active fund manager has to deal with maybe more flows when you’re comparing that to the index. Now the index maybe has the same thing so my point may not make sense. But, if you’re managing a billion-dollar fund and all of a sudden the market’s going down and your fund has been reduced in price to $700 million because there’s a 30 percent general market decline, all of a sudden all your investors start panicking and you’ve got $100 million of outflows That means you’ve got to sell $100 million of investments when they’re all down. And that destroys your performance numbers. What DFA does is, it only sells through advisors. And you have to go through a gauntlet to become an advisor with DFA. You have to go through extensive training, behavior management training and you have to teach your clients very carefully what to expect. The key is, DFA, because they only sell through advisors, they avoid hot money. That means that the client who is likely to sell out a portfolio when the market declines by 15 percent will not find a DFA advisor willing to work with them. That would destroy DFAs business model. What they can do though, is take the approach of passive investing of indexing and they can use some of these swings. And because they don’t have the outflows of their fund that some of the other investment companies have, they’re able to produce much better numbers. What’s happening in the investment business is that people often think it’s cut and dried or they often think it’s Vanguard or else it’s either passive investing or else. Well, when you actually start studying it a little bit, it’s not the case. There are a lot of people. And, I don’t remember who exactly is on DFAs board but many of the guys – the academics who actually developed the information that led to the resurgence, the massive re-growth of passive investing, they’re the guys on the board that are advising. DFA has been able to, on a basis of indexing, bring in some of these other portfolio tweaks that have really helped their performance. So I think that’s a good example. And they are a force to be reckoned with in the mutual fund world. So, you’re going to be paying one percent for an index fund and they’re doing very, very well.

Rob: FAMA and FRENCH are both on their board as is Roger Ibbotson. He’s on there too.

Joshua Sheats: Right.

Rob: One thing I will say, there are studies that show the outflows from index funds were lower than outflows of actively managed funds in the 2008, 2009 time period. I don’t disagree with you that it’s a mistake to say that all actively managed funds are bad. I think it depends on the cost of the funds, its investment objective and also its market. I do think it’s harder for an actively managed large-cap US-based fund.

Joshua Sheats: Absolutely.

Rob: You know, when you get into things like emerging markets and foreign markets and other things it’s a different story. Well, you got the last word on that so I’m going to leave it there. I know I’ve had you on the line here for quite some time but I did want to move over quickly. Why did you quick your cushy job and leap into the world of podcasting? What were you thinking, Joshua? And did you consult a financial planner before you made that decision? And, since you’ve made that jump, how are you and your family eating?

Joshua Sheats: Good questions. For me, I am not heavily motivated by money in the sense of equating net worth with self-worth. It’s easy for people to say they aren’t motivated by money. Bologna. We’re all motivated by money to some degree. To me, I’m a young man. I’m 29 years old. I’ve lived a phenomenally blessed life. And I have found that I’ve been happiest at times where I’ve never spent any money. Now, I’ve been privileged in some ways that are just amazing. I’ve had dinner with the former richest person in the world. Not Gates or Buffet. And I had dinner at his house before he died. Like, who gets an opportunity like that? I was in college. I drove a $2,000 Honda Accord to his house and parked it there and got to sit next to him for an evening of dinner. Things like that. So I’ve learned that very little of the things that I value in life are connected with money. What I do value is time. And I value having meaning and joy from time so when I started my show it was purely just for fun. An experiment. I just got sick and tired of Dave Ramsey, Ric Edelman, Suze Ormon and Clark Howard speaking for the financial business.

Rob: Now, wait a minute. Dave Ramsey helped you get out of debt. What happened?

Joshua Sheats: Go listen to my show that I recorded with Steve Stewart from Money Plan SOS about, do financial broadcasters like Dave Ramsey do more harm than good? And

Rob: What’s the show episode? The show number?

Joshua Sheats: I’ll look it up.

Rob: Shoot me an email with it and I’ll include it in the show notes. That will tell us your current views on Dave Ramsey?

Joshua Sheats: Yes. Dave has been a huge benefit to me but there’s also some stuff about his advice that’s extremely dangerous so I was very careful in that show to kind of lay those things out. But I just got sick and tired of it. The problem with the financial business is that those who are great at financial planning are usually working in the business. By the way, it’s episode 66. So it’s, Do financial broadcasters like Dave Ramsey do more harm than good A frank conversation between to fans. The people that are in the financial planning business can’t speak to the public because everything they speak to the public is marketing. I sat down one day with a digital voice recorder in the middle of my bed and said, “You know, I wonder if I could create some audio content?” So, I just started talking. And I was nervous as anything at first. But then I found I really liked it. So I did it anonymously and tossed some files up onto the Internet. I didn’t tell anybody who I was or what I did. I just thought, let me try this. I did it for two weeks. What I found was that people say to do what you’re passionate about which is fraught with problems, yet it’s also wonderful advice. The problem is, I’ve always been working at getting closer and closer to the things I love and I love doing financial planning. But, what I found when I was teaching, was that I really enjoyed it. I loved the teaching of it. And, even though I don’t like to get up early, I found myself getting up 4am, 5am and working in the morning for 4 and 5 hours trying to figure out how I could create some really useful media content to teach people about financial planning. Then I’d go to the office and work my 9 or 10-hour day, then I’d come home and I’d be excited to think about what I was going to do the next morning. And I thought that was amazing! Then I saw people starting to create content online and see people building very healthy businesses with their online content and I wondered if I could do that too. So, I had to take the showdown because I was doing it unauthorized even though I was licensed and everything. But, I recognized I said, “Wow! I loved doing that.” When I sit down and develop an outline around some information, I sit down in front of my microphone and I speak to my audience. I enjoy doing that. And when I sat down and said, what would I do if I had $10 million in the bank? For the last 17, 18 years I’ve been obsessed with finance and obsessed with finding the angles and the tricks. And I said I would do that if I had $10 million in the bank. I don’t have $10 million yet, but I would do that if I did. And I could do it now. And I think I could ultimately find a way to earn an income on it. So I decided to do that. I made plans but I made a couple of dumb moves in my own personal finances. My wife and I this was the extra challenge as far as me figuring out a business transition because the world of podcasting and blogging is very much like the world of writing books. Everyone wants to write a book. The people that actually do, are few. And from those who do, the vast majority make no money. A tiny, tiny small percentage makes a lot of money. And a maybe slightly bigger but still really small percentage make some money. So you can’t exactly say, “Oh, I’m going to and start a podcast and have that be a great financial plan.” That’s kind of a dumb move if you’re doing it for the money.

Rob: I’ll second that, by the way.

Joshua Sheats: Right. I knew that I wasn’t willing to do that but the problem was, I have always been a good saver. My wife and I bought a house in January 2013 that was exactly what we wanted, in a neighborhood we wanted. It was three-tenths of a mile from office so I could save a lot of money because I didn’t have to commute. It was exactly what we wanted but it was twice the price range that we wanted to spend on the house. But, when we shopped in the price range we wanted to spend on a house, we weren’t able to find a house in that range that was going to work so we went ahead and increased our price range. When I bought the house, I put $50,000 down on it and that wiped out a lot of my savings. So, instead of being able to have this nice cushy position where I closed my practice down and I walked away from a lot of money to leave and start a podcast. But, instead of being able to walk away and say, “I’ll shut this practice down. This is going to be great. I’ve got a couple years of income in the bank so it’s no big deal. I don’t need to worry about it,” all of a sudden I found myself strapped for cash because all my money was locked in a house and home equity and locked in retirement accounts where I couldn’t get it out. I stressed about this for awhile and couldn’t see a way out. I figured I’d just have to keep doing financial planning. But the problem with financial planning, if you’re planning to get out of financial planning, you’re going to be a really bad planner. Because, every time I would look a new client in the eye and create a new plan they’re giving me their trust that I’m going to be there to care for them. Now if I know I like this podcast thing and I’m going to leave in two years. I just have to save a bunch of money so I can do it. That wasn’t working. Finally, I sat down with my wife one day and we decided I was going to do it. I would figure it out. What helped us was that we were both pretty frugal. We didn’t need much to live on. We needed about $3,000 a month to live on at our current lifestyle. I figured I could go out and get another job. If I could get a job that is outside of the financial business, then that will allow me to create the show. That way I’d just work 8 hours on the job, 8 hours on the show and I’ll sleep 8. It’ll be good. Everything will work. I don’t mind working two full-time jobs for awhile. Not forever, but that worked so I started pursuing options. I looked for a few different things. I looked for some dead-end stuff. I even delivered pizzas for a week because I heard you could make a bunch of money doing that. Not true. But, I figured if I could go deliver pizzas five nights a week and make $3,000 a month, work for 5 hours a night, 5 or 6 nights a week, that would be great. Unfortunately, it was not worth any time. The whole time I’m wondering if I should start the firm. If so, how do I structure it and all that kind of stuff. So the show at this point is 3 or 4 months old. I’m at episode 77 or 78 and I love doing it. And the response from the audience has been wonderful. It’s been humbling and awesome and I feel like they’re starting to coalesce a group of people who are really benefiting from it. My hope is that I think I can bring other services and other products to them, with time, that will allow me to actually earn some money from the show. In the meantime, I ended up working at a consulting contract in the financial planning business. So I have a consulting contract that pays my bills and that frees me up while I start the new firm. If I can ever wind up actually getting it going, I expect that to fund my life. And thankfully I still have a pretty decent cushion of cash in the bank which is also my… I don’t like to spend money and I don’t like to spend reserves. I know many people will start businesses off of that but I prefer just earning income as I go and keep the cash and reserves in case something goes wrong. That’s my story. That’s how I started the show.

Rob: Wow. Okay. You’re enjoying it so far, I take it?

Joshua Sheats: I love it.

Rob: You’re happy with your decision?

Joshua Sheats: Thrilled.

Rob: Your wife’s happy with your decision?

Joshua Sheats: She likes seeing me happy and having the ability to

Rob: That’s a good wife to have.

Joshua Sheats: Right. You know what’s refreshing? I’m a pretty crazy guy. You can probably pick that up.

Rob: I had not noticed that, Josh. Also, you don’t have very strong opinions about things. You’re kind of wishy-washy. You really are. You might want to look into that.

Joshua Sheats: Build a backbone and spine on opinions, right? The cool thing is, I love to… My show is called radical personal finance but the problem is what I learned for the first time because I’ve been self-employed for the last 6 years is, I never got a paycheck. Everything was based upon if you work and produce, you make money. That’s how my life has been for the last 6 years so I’m very comfortable with the topic of entrepreneurship. But, when you’re behind a larger corporate umbrella, you have a responsibility to the brand of that umbrella. You can’t be as crazy as I often am. After I left and I was just kind of on my own, I recognized the awesome responsibility of that but also the total freedom. I interviewed a guy on my show who is a war tax protestor who hasn’t paid taxes since we invaded Iraq which was 12 or 13 years by now. I did a show on what we can learn from dumpster divers and vagabonds and hobos. I do shows on in-depth complicated tax planning. I’m planning to do some shows on how to do multi-billion dollar trusts for estate planning. To me, I enjoy those crazy, far-out, whacky subjects but it’s tough to find a firm who’s got to be conservative Let’s put it this way… there’s not a chance in the world that Vanguard or American Funds or Fidelity would ever sponsor my show. And that’s okay because I don’t need them to because they’ve got to protect their brand image. But I enjoy being able to look at the subjects that many people don’t look at.

Rob: Right. That’s terrific. I started listening to your show and have enjoyed it very much. I haven’t listened to the tax strategy episode yet. I’m going to focus on that myself. One question about your show, then I’m going to have some rapid-fire questions for you at the end which I expect you’ll be brilliant at. Here we go. A question about your show. I notice you leave SpeakPipe which allows people to leave you a voice message.

Joshua Sheats: Right.

Rob: I toyed with that for about a day and a half. It’s not on my site at the moment but I do have a SpeakPipe account. With SpeakPipe, rather than emailing you, a listener can leave you a voice mail and that would give you something to play on your show so that other listeners can hear the person asking the question. Are your listeners embracing that?

Joshua Sheats: They are. I think I’ve received… It took me forever because I’m not a techy guy. Like, I can’t stand the technical stuff. I threatened to do it for 4 or 5 weeks and finally installed it about 4 weeks ago. I think I’ve received 6 or 7 voicemails which is great.

Rob: Okay.

Joshua Sheats: I accidentally cleared them all out on last Friday’s show and I forgot to tell the audience that if they had questions, they have to call them in again. So I’m going to remind my audience again.

Rob: I’m going to put that backup. I get a ton of email which is great but I think it’d be kind of fun to hear people’s voices and play that, so I’m going to give that a try.

Joshua Sheats: I think it adds a lot.

Rob: Okay. Rapid-fire questions. Are you ready?

Joshua Sheats: Ready.

Rob: Okay. Best personal finance book. What should people read?

Joshua Sheats: Richest Man in Babylon. No question.

Rob: How about for investing? Same one?

Joshua Sheats: The investing one is hard because I don’t like how most… Like when people hear investing

Rob: This is a rapid-fire Q & A. No, just kidding, Josh.

Joshua Sheats: There really is no one book on investing so

Rob: Okay. That’s fine.

Joshua Sheats: But, I’ll give you one actually.

Rob: Okay.

Joshua Sheats: Here’s what it is. If someone has passed just the novice level of investing, read a book called, The Fund Industry, by Robert Pozen and Theresa Hamacher. You will gain insights into the managed money business that you’ve never known and you will not find any of this stuff in the personal finance world. So read a book called, The Fund Industry.

Rob: Alright. Do you use a tool for your budgeting?

Joshua Sheats: I keep an Excel spreadsheet and I don’t budget.

Rob: Excel spreadsheet and you don’t budget?

Joshua Sheats: I mean I don’t budget proactively in a forward-looking manner. I do it in a month-by-month. I take a look at the previous month.

Rob: Okay. Do you use tools to track your investments?

Joshua Sheats: No.

Rob: No. Okay. Your investments. What are you invested in? Well, let me ask you this… What’s your asset allocation?

Joshua Sheats: One hundred percent stocks.

Rob: Wow! One hundred percent stocks.

Joshua Sheats: Yeah, yeah. I don’t get bonds. This is purely for me and not client advice but I think it’s very simple… owners get richer than lenders and I have a stomach of steel when it comes to volatility and you will always have the highest total average return from a 100 percent stock portfolio versus (in my opinion) bonds simply because of the inherent volatility. If you can handle the volatility you’re going to get richer with stocks. But the vast majority of people can’t handle the volatility. I have a stomach of steel so I am 100 percent stocks all the time.

Rob: Stomach of steel. That’s the title to your next book right there! All mutual funds or ETFs?

Joshua Sheats: Presently, but I’m struggling with… Actually, over the last year, I’ve had a major ethical crisis of trying to figure out I am not comfortable with many of the companies that I own in my mutual funds and I’m having a major ethical crisis over profiting from that.

Rob: Interesting.

Joshua Sheats: So, I am heading down a road actually, and we’ll see, but it’s possible that in the future I’ll be selling all my mutual funds and taking over management of my portfolio myself so that I can control the companies I am profiting from.

Rob: In other words, individual stocks?

Joshua Sheats: Right.

Rob: Because you know there are mutual funds that avoid the ‘sin industry’ so to speak.

Joshua Sheats: Right. But the problem is, the things I have issues with, almost nobody else does. For example, I don’t care a bit about alcohol companies but I’m uncomfortable owning some of the major banks. There are a lot of examples but the social screens for the social mutual funds… I haven’t found one that actually matters to me.

Rob: They probably don’t exclude banks, I’m guessing.

Joshua Sheats: Right. Things like that. But I don’t like the banking cartel that we have in this country right now and I don’t want to profit from it. So this is like a major personal ethical crisis for me. I’ve never experienced this in the past. I would always tell clients not to worry about that. But now that I’m going through it, it’s causing me to rethink everything and I’m probably going to be going in a different direction with my investing in the future.

Rob: That’s interesting because from my perspective as an investor, I love monopolies and cartels because they make a lot of money. Okay. Your mutual funds we’re almost there… Are your mutual funds primarily index or active or a complete mix?

Joshua Sheats: Primarily active. I have a few index funds, but primarily active.

Rob: What mutual fund companies?

Joshua Sheats: American Funds.

Rob: American Funds. Do you pay the commissions or can you bypass that given your background?

Joshua Sheats: I just paid a commission but I paid it to myself with a little bit of

Rob: There you go. See, you’re an insider! You’re one of the people we talk about.

Joshua Sheats: Exactly. Just because it flows through to me anyway. The commission, by the way, is an interesting discussion. The commissions have been destroyed over the last number of years. But here’s the thing, if I were working with a client, almost 100 percent of the time, I would rather have fees than commissions because commissions are just one time. If you’re talking about selfless interest, people that accuse commission-based sales of investments to be wrong as compared to that fee is somehow better? Selfishly speaking, I would rather have fees because I have larger stable revenue over time as compared to commissions. I’ve never bought that argument so I have some actively traded funds with American Funds and I have some Vanguard funds as well in one of my retirement accounts.

Rob: You know, it’s funny because I bought that argument for a while but I agree with you. Particularly if you’re paying a fee-only advisor one percent or more. Long term, if you stick to a plan you would be better off paying the commission. And American Funds, they’re good funds. I think most of them that I’ve looked at are probably in the 60 to 70 basis points. Certainly higher than an index fund but also significantly lower than the average actively managed fund. It kind of reminds me of Dodge and Cox that doesn’t have a commission, but their expense ratio is about the same. I own a Dodge and Cox fund and I think they’re pretty good. Of course, a lot of folks and I know we’re getting off this rapid-fire question round that I had going, but a lot of folks say commissions versus one percent fees, commissions win. That’s true, I think. It can win but my response to that would be that you haven’t listed all of the options because those aren’t your only two options.

Joshua Sheats: Right. And I would say also, you have to look at the service. For example, if I sell somebody a commission product and I earn a commission on that, do I have as high an incentive to come back and service them year after year after year? Most of the people who just buy a small account don’t have much of an incentive to respond. Here’s the flip side though… Somebody had $70,000 you can’t charge a fee on that. That is way too small to deal with that.

Rob: That’s why they have minimums.

Joshua Sheats: Right, exactly. What happens is that people get into these academic discussions and they’ve never sat with a client that says, “I need help with my investments.” When I say call Vanguard because you’ve got $22,000, the client says, “But I want you to do it.” What happens is, if you cut out commissions you close out the ability to work with middle and lower-middle America. That is one of the neglected things that I’ve heard. The other problem is, that lower middle America has been screwed time and time and time again by stockbrokers selling crap. How do you deal with that? I don’t know other than to say, find an ethical advisor, a person of integrity. Train them well and make them knowledgeable and give them what they need to work with tools in each client’s portfolio. And I do want to make a comment before you continue on with your rapid-fire round.

Rob: Good. I’ve got one last question.

Joshua Sheats: Cool. Just because I miss-spoke. I think a moment ago you said active or passive and I said all active. That’s not right. Sorry. I have some actively managed funds and I have some funds at Vanguard bout one’s in a retirement account. I think people have to actually look at the asset class. And you made this point earlier, but to me, this makes sense to me. If you’re going to own an actively managed fund, it needs to do something that an index fund can’t. But, not indexes are created equal. That’s my current thing

Rob: That’s true no, no, go ahead.

Joshua Sheats: I’m going to try and get William Sharp and some of these other guys on my show as time goes on. And who knows, maybe they’ll change my mind. I don’t know.

Rob: Okay. One last question. Any favorite online resources, blogs, websites or whatever, that you regularly follow in the personal finance and investing circles.

Joshua Sheats:

Rob: Okay, okay. That’s a good one.

Joshua Sheats: Yes and no. I actually don’t read many blogs these days and I think blogs are really causing problems with peoples’ ability to comprehensively grasp a subject meaning, more books, fewer blogs. Because, blogs even though we try to produce something, we can’t produce a coherent story. So, as long as you have a foundation in books and you’re going back to books for knowledge, augmenting them with blogs is great. If you’re not actually starting with books and you’re just trying to build an education from blogs, it’s really tough because no matter how well-intentioned or how knowledgeable the writer is, when you’re writing 2,000 or 3,000-word essays, you can’t convey a comprehensive thought and comprehensively teach. I enjoy Pete’s blog, Money Moustache because he’s produced the most motivated group of people. I enjoy Jacob Lund Fisker’s book, Early Retirement Extreme. I don’t look to the blogging community for much on financial planning advice. I read, in the financial planning world, Michael Kitces’s blog a lot. So that’s

Rob: That’s what I read.

Joshua Sheats: That’s what I read for financial planning blogging. I like Todd Tressider’s work at I think he’s done a very good job. They’re talking about the wealth-building side which is something that is never talked about in financial planning, by the way.

Rob: Yeah. He was at FINCON too.

Joshua Sheats: Yeah. And we had a good time.

Rob: Well, alright. Great. You’ve given us a ton of resources. I’ll link to all of them in the show notes as well as to your show. Shoot me an email with any podcasts you think really stick out. I’ve got the one, episode 66 on Dave Ramsey. But if you have any others, shoot me an email and I’ll include those in the show notes as well.

Joshua Sheats: Okay.

Rob: Alright, Joshua. Well, I appreciate your time and your views. It was very enlightening for me. It was great having you on the show.

Joshua Sheats: Thank you, Rob. I appreciate it.

(Personal Capital is now Empower)

Rob Berger

Rob Berger

Rob Berger is the founder of Dough Roller and the Dough Roller Money Podcast. A former securities law attorney and Forbes deputy editor, Rob is the author of the book Retire Before Mom and Dad. He educates independent investors on his YouTube channel and at

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