Ep. 1974: Who Watches the Insurers?

SPEAKER_03 0:06

The tenor and the baritone The lead and bass agree The sweetest cord in finances alone A low low fee so hold it all and tilt it small and let the decades ring And when the market's out of tune That's when we love to sing Making money make sense Sweet and slow Hold the cord for fifty years and watch the money grow We're talking real money talking real money By request on the Talking Real Money program that's

Barbershop To Insurance

SPEAKER_03 0:52

a barbershop quartet that comes to you from one of our listeners who's in a barbershop quartet.

SPEAKER_06 0:56

Therefore, he requested a barbershop quartet. Self-serving, yes, but interesting nonetheless. And it's another musical genre on talking real money. Now I know, I know we've gotten a couple of comments recently from people who say don't like the music. However, we've gotten a lot more from people who say, I do like the music. So I do like the music. I don't know if Tom likes the music, but I think I like the music.

SPEAKER_04 1:19

I, you know, I was just in a barbershop recently, and and uh No, they did not.

SPEAKER_06 1:25

I would give up my flobey if they would sing when they cut my hair.

SPEAKER_04 1:28

I see if I can arrange that.

SPEAKER_06 1:30

I would I would go to a barbershop if there was a quartet. Uh there okay, that's the end of the levity in today's program because the rest of this darn thing is going to be really serious. We are we are literally appalled right now. We are appalled. I can see

Insurance Industry Exposed

SPEAKER_06 1:46

it on your face. We're once again, the insurance industry. I really believe that the insurance industry is exactly the opposite of what they make themselves out to be, which is your friend. They're there to help you. Are they there to help you? Or is it totally, I mean, almost completely self-serving, Thomas? Well, let's give you a couple of numbers.

SPEAKER_04 2:10

First, this number is still Americans paid more than three trillion dollars in premiums last year for property and casualty, title, life, accident, and health insurance. Yeah, that's a lot of money.

SPEAKER_06 2:23

It doesn't include the money they put into annuities and cash value life. That's just for the property and casualty stuff.

SPEAKER_04 2:30

Yeah, remember we re the the amount that went into annuities last year was half a trillion dollars or something.

SPEAKER_06 2:37

Okay, so we're talking with whole life and that. We're talking five trillion dollars, maybe four trillion.

SPEAKER_04 2:43

Which it's their business. They can do that. They can, you know, they good for them. They're selling stuff. Yeah. We don't like the product. Okay, that's fine. But here's the part that's even a bigger struggle than the crummy products, the high expenses, the lack of liquidity, all the things we complain about. There's nobody keeping track of any of there's no regulation to any of this.

SPEAKER_06 3:03

There's no but wait, don't we have state insurance regulators who independently, wait, who independently in each state in the union, because this is a country that was founded on on a republic basis, that all of these individual state insurance commissioners independently regulate in their states the insurance industry for their specific needs and their constituents. Isn't that the way it works?

SPEAKER_04 3:30

No, there's a thing called the National Association of Insurance Commissioners. I'm sure you're very well aware of that. Yes, I'm sure you know these people very well. And I'm sure they send you a Christmas card every year.

SPEAKER_06 3:41

No, it's a matter of fact, as this article in the Wall Street Journal said, the first rule of the organization, the National Association of Insurance Commissioners, if you're part of the organization, you don't talk about the organization.

SPEAKER_04 3:52

Yeah, this is like Fight Club. The first rule of Fight Club is you don't talk about fighting. You get it. It the the point is. So, okay, so this we can say this laughingly, but it really is no joke because other than the NAIC, there's really the regulation really doesn't exist. They don't make their accreditation rulings or findings public. It's all private. That's it. There's they're the ones writing basically the rules and the regs and all that stuff.

SPEAKER_06 4:24

And they accredit all of the regulators. So you've got to follow the NAIC's rules, okay? Now that wouldn't be so bad if the NAIC was truly an independent nonprofit. But who foots the bill for the NAIC? NAIC.

SPEAKER_04 4:42

Is there insurance in there somewhere? It's uh the do they have anything to do with it? I'm just asking. I I gotta I

Who Funds The Regulators?

SPEAKER_04 4:48

gotta ask.

SPEAKER_06 4:48

I'm pretty sure. Well, of the of the $161 million in revenue they reported in 2024, yeah. 94% of that came directly from the people that they write the standards for, the insurance industry. And how are we able to get that report? Well, let me tell you a little something. I look these up all the time for people. Form 990s, that's a form that is filed by a nonprofit tax exempt foundation. Education C or 501. These guys are, I don't know how, but they are a 501. What charitable work are they doing? This allows the insurance companies to write off everything they pay to them as a charitable contribution,

State Insurance Failures

SPEAKER_06 5:40

too.

SPEAKER_04 5:41

And this comes to light uh due to a recent article in the Wall Street Journal where they brought up the fact that New Mexico insurers decided not to renew more than 6,000 homeowner policies in 2025. That based on apparently wildfire risk. I get it. There's there's things that could be very expensive to cover. But this raised this whole issue of really who is paying attention to what's going on with state regulation of insurance companies. And as you point out, this organization is getting basically all their money from insurance companies. Where are they likely to lean in terms of making the rules around all this?

SPEAKER_06 6:19

Yeah, and by the way, their rules apply in all 50 states, even though those agencies in every state are supposed to be independent and not national. Well, this is essentially national regulation for all intents and purposes. The argument has been, well, we're gonna let the states. That's their right. We're gonna let them regulate the industry. No, the states don't do it. We really we need federal legislation and federal regulation like we do for uh investment advisors and brokers and and the like. We're not gonna get that because there's too much money involved. But some states are starting, starting, maybe a little to ask.

SPEAKER_04 7:02

Well, you said states. I only know of one.

SPEAKER_06 7:05

Well, no, Michigan required them to file an annual report now.

SPEAKER_04 7:08

Oh, okay, that's right. And New Mexico's the other one.

SPEAKER_06 7:10

So New Mexico's actually thinking about dropping their stuff because apparently they suspect that maybe they're not as um independent as they l lead us to believe. And isn't it hard to get a homeowner's policy in your neighborhood? Oh my gosh, are you kidding? Most people, uh particularly coastal people, most coastal people in Florida have to get their insurance policy through the state itself.

SPEAKER_04 7:35

Aaron Powell And is that good or bad? I mean, that's not good.

SPEAKER_06 7:38

It's incredibly expensive. Right. It covers very little. As a matter of fact, the policy my insurers, my homeowner's insurance policy people dropped my neighborhood completely. They stopped writing policy for the whole state, actually. Trevor Burrus, Jr. Because of hurricanes? Because of hurricanes and claims and claims. There was a lot of claim fraud in Florida. Florida was huge insurance.

SPEAKER_04 7:59

You told me the story once about the wasn't it roofer or something running around telling you there's a shingle there, shingle there.

SPEAKER_06 8:04

Remember that hail storm we didn't have?

SPEAKER_04 8:06

Yeah, real bad, yeah. Yeah.

SPEAKER_06 8:08

I have lived here for 30 years, never seen a hail storm. Never seen a hail storm. This guy probably got 150 roofs in town, uh paid for by insurance companies because of hail. And it's a lot of my neighbors, and they said, I said, woo, woo, I paid for my roof. And I said to these guys, what this is a scam. This is insurance fraud. And they said, I the guy said it was free, so I don't care.

SPEAKER_04 8:33

Oh, yeah. Doesn't care.

SPEAKER_06 8:34

I don't care. Your windshield's free.

SPEAKER_04 8:36

Right. Absolutely. See that little nick there? Yeah, so there is insurance fraud. There are reasons to be careful, but there are also reasons, and we're not I I can already see the cards and letters. We're not big fans of rushing the government into regulating things where it doesn't make sense. But in this case, yeah, it does make sense. It really

Protecting Yourself From Sales

SPEAKER_04 8:54

does. And the states have not done a good job with this. They've done a crummy job overseeing other insurance products that we've told you many times you should not be using. But what about me? Just a little old me, the consumer, right? And the question really goes to the at the end of the day, since the insurance companies are funding the NAIC, which is therefore then writing the rules and regs for most states. Can you trust the insurance industry?

SPEAKER_06 9:23

I honestly believe the answer is no. Not to look out for your best interest, because they don't, they have actually gone out of their way to state they do not want to ever be required to act in their customers' best interests. Now wait. If I'm a business and I want to take good care of my customers, don't I want to do what's best for them? If my motive is actually caring for my customers and being, you know, making a profit and caring for my customers. But if my primary motivation is profit, profit, profit, or my my my single motivation is profit, profit, profit, and profit, I don't want to look out for your best interests. I want to look out for mine.

SPEAKER_04 10:06

Yeah, okay. So then this goes back to the more important question is how can you protect yourself from the predatory insurance companies then?

SPEAKER_06 10:18

Question this is the answer for almost everything in this day and age. Question everything. Every I'm telling you, anybody who is selling you insurance is collecting a commission, whether they say so or not, insist that they disclose that commission. They will they will do their best to try to not disclose that. They'll say, oh no, no, no, no. The insurance company pays me. You don't pay me anything. Any commission, any fee you pay to anybody, anywhere, anytime, comes out of your pocket. There's not some magical pocket from which that money springs. It's your money that goes to the insurance company that the insurance company uses to pay its agents. You have a right to know how much they get paid, to see what their incentive is for selling you that product. And the other thing you have to do is don't believe everything you hear. When somebody tells you something, despite the fact that they seem nice and honorable, there is no real requirement that they tell you the truth.

SPEAKER_04 11:25

Yeah, can I add one other thing? Because property and casualty, title, life, accident, health insurance things talked about earlier, those you're gonna pretty much have to use an insurance company for. You have to. But when it but when it comes to retirement products, investment products, the rest of the junk that they do not use them for that, period. You just shouldn't be that's that's not what they do well. That's not their their area. I know they moved into it many years ago because it's very profitable. But my take is you should exclude them from helping you, I'm using air quotes here, in any of the with any of those products. That's what they are, products.

SPEAKER_06 12:02

Well, their extra fees are bound to detract from the return of your investments. You have to figure out the investment pool has a return to it. So whatever that return might be, that it that has a return. Stocks, you know, it's been 100 years, been about 10% per year on average for U.S. stocks. So it's got that return. Now, there is no magical return over and above that that the insurance industry can somehow collect. They can't. They want to make a bunch of money for themselves over and above what the investment industry makes, so they have to add costs. Those costs are going to detract from your return. That is just the way it works. It's math. It's just dumb math. And the math does not work in their favor when it comes to uh making you more money. It works against you, in other words. So you've got to be just be so skeptical, please, of everybody. Everybody. Be skeptical of everybody who gives you financial advice, but particularly insurance. And as a matter of fact, if it has insurance attached to it, an insurance company's name attached to it, there's plenty of other places to go. You don't need to deal with them. Skip it completely.

Retirement Glide Path Debate

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Question time here on Talking Real Money. We get questions sent in to us, although Tom's gigantic pile. Uh apparently the trees are making a comeback.

SPEAKER_05 13:25

And the pulp is dancing in the aisles.

SPEAKER_06 13:29

Piles are getting smaller. I know. So your typed questions will make Tom very happy because he literally.

SPEAKER_05 13:36

I'm getting larger and the pile's getting smaller.

SPEAKER_06 13:39

So send those in at talkingrealmoney.com. Just click the button that says ask a question. Ask a question. It's very prominent. Ask a question. Or you can record your question using the mic down at the bottom of the screen. And we have a question that came in. Actually, it's a rebuttal. It was a response to something we said that maybe we didn't say as clearly and concisely as we should have. But it was a very, very, very long question. So I edited it down and then had AI speak it so Tom didn't have to read it.

SPEAKER_00 14:19

In a recent podcast, you discussed whether retirees could reduce sequence of returns risk by starting retirement with more low-risk assets, then increasing their stock allocation after the first several years. Your response surprised me because I'd recently heard about this strategy on Tyler Gardner's Your Money Guide on the Side. According to my Gemini research, quote, the strategy you are describing is a cornerstone of modern retirement research known as the rising equity glide path. Gemini pointed to a 2014 paper by Wade Fow and Michael Kitsis, which found that starting retirement with a conservative allocation such as 30% stocks and 70% bonds, and gradually increasing stocks to sixty percent could reduce both the probability and severity of portfolio failure. Kitsis later described a related bond tent strategy, increase bonds approaching retirement, then spin them down during the first five to ten years, allowing the equity allocation to rise. Gemini also cited subsequent research by Javier Estrada supporting rising equity glide paths. Given this research, why did you dismiss increasing equity exposure as retirees get older?

SPEAKER_06 15:38

Now I did not go back and check our answer, uh, but I remember this thing coming up before in the past. This was from a study done by uh Michael Kitsis, who's an old financial advisor guy, and Wade Fowl, who's a uh professor at the American College or American, yeah, whatever. He's he's he's a big he runs the New York Life School of Economics. Ah, I knew we're gonna get to the conflicts of interest here.

SPEAKER_04 16:06

So sure.

SPEAKER_06 16:07

Anyway, so they they did a study that showed something wacky about glide paths. It said, well, become more conservative when you retire and then get more aggressive later on. And there was a lot of I remember the news and we, but there were a lot of other studies done subsequent that kind of rebutted it. Uh there was a Morningstar did a study that said that uh the the that it was actually the opposite, that being more conservative early on was better, or being less conservative.

SPEAKER_04 16:39

This is this goes back to the rate of withdrawal from your portfolio and the accompanying asset allocation. Sort of should you have a reduction in stocks and more in bonds when you retire, or should you go on a glide path to slowly reduce your risk over time? Or in the case of this particular instance, they're saying, yeah, when you retire, take a lot less risk and then later on build up your stock portfolio again. And I just want to say before we even get into this that Christine Benz is the only person I know who's right about this. You know that, right? Because she's the one who said the only the correct withdrawal rate will be the one you'll know after you're dead. Then you'll know that it was a correct withdrawal rate.

SPEAKER_06 17:20

I am not saying that this is illegitimate research. It is research. And it was I've seen the paper. I've we had I i I don't know what we said, but I may have forgotten about it because this was from 2014. This paper was originally done. Wow.

SPEAKER_05 17:33

Okay.

SPEAKER_06 17:33

So it it's it's legit. The these guys found potential benefits under certain assumptions. But um who was it? I'm trying to find the guy. Uh well, okay, one was David Blanchett, uh did another study, and I'm gonna pull that up here in the Journal of Financial Planning, and he tested this under a number of different scenarios, and he found declining equity exposure was generally the most efficient, while the writing rising equity See, he found the exact opposite results, doing a study that was published, peer-reviewed in the Journal of Financial Planning.

SPEAKER_04 18:16

Yeah. Which is what if you went to most advisors, they're gonna tell you, yeah, you just sort of go to the you start out with 60% in stocks, 40% in bonds, maybe you rebalance next year when you take your money out. Now you're down to 5545. The next year you're down to 50. You're you're reducing the risk, the volatility, because you're you want the money to be less volatile, right? You want to move it around less as you pull it.

SPEAKER_06 18:40

Blanchett has pretty good credentials. He's Morningstar's head of retirement research, so he's kind of and but it was even more interesting. Later on, both Fow and Kitsis revisited their their inf their uh research, and they found that the advantage wasn't particularly big.

SPEAKER_04 19:00

To to do it with conservative at the beginning, and then later ramp up the stock exposure.

SPEAKER_06 19:06

Yeah, and the the the caller or the listener looked it up on Gemini, and Gemini, I think, overstated the it's it is definitely not, and no one would say it is uh settled science that that's none of it's settled science because we don't have enough time anyway to run it.

SPEAKER_04 19:25

Number two, we have no idea what markets are going to do down the road. But I will say this, because we've looked at this in a general sense, you've done classes on it, I've done classes on it. If you take 4% of the balance of your portfolio and you're in a balanced 60-40 type portfolio, your money should last for a long time. If you take 5% of the account balance, right, in other words, if you're taking out five, not then you can be a little more aggressive, but I would probably still be a little more aggressive with my stock to bond ratio.

SPEAKER_06 19:59

Yeah, I think that what we're saying is that the yes, there is evidence that shows this has worked in certain scenarios, and there's evidence that shows it hasn't worked in certain scenarios. And I think we're spending a whole lot of time overthinking what k what should be and probably is a relatively simple process. Could we have a five-year dramatic, horrible, worst ever decline in the price of stocks? Yes, it could happen. And that's why we believe you must build a portfolio, not based on some weird rule that somebody tested and then turned out it didn't work the way they thought, but based on you. It that's the key. The key is make it personal. How much risk? What's the worst case scenario you can stand? And then figure out which portfolio has worked in that scenario over the past hundred years or so. Doesn't that doesn't mean it will continue to. Might fail miserably. That's the risk we always take for higher returns than a savings account at Bank of America at 0.01%.

SPEAKER_04 21:07

Yeah, which by the way, for those of you who have not listened to your interview with David Booth, which was very good, uh stay calm, his book that you interviewed David about, there's a lot in there about that because that's such an important topic.

SPEAKER_06 21:18

Yeah, a little over I think that was a little over a week ago or about a week ago. Yeah, whenever it was.

SPEAKER_04 21:23

All right. So we're gonna move on. Uh talk to your

AVGE Versus VT Explained

SPEAKER_04 21:26

advisor. Ah, sorry. Uh John writes us from Fort Wayne, Indiana. Says, Bob, Tom, and Roxy. So apparently you've gone from Don to Bob. Um appreciate the show. I don't care what you call me, as long as you call me. Call me and don't call me late for lunch. Listen uh most every episode and have gained many good points while being engaged with the banter, and the new music has been a huge hit. Thank you. There you go. Another showing you more love for the music there. Uh Grammy nominated Don McDonald. No. Um, my question is with A V G E fund to fund strategy, which you've kind share with your listeners. By the way, again, we'll reiterate. We get nothing. We never have gotten anything from promoting any product ever, ever, ever, ever. AVGE is a mutual, a mutual fund, an exchange traded fund that was developed by Avantis, which we happen to like. Dimensional funds has one too. DFAW, these are global funds. They use the factors, et cetera. So um hold on.

SPEAKER_06 22:24

I got it.

SPEAKER_04 22:25

I got a call from Edward.

SPEAKER_06 22:27

Hey hey yeah yeah no I'm sorry I'm on with Tom Edward. I know I know your CEO uh yeah and your CEO of Avantis, yeah.

SPEAKER_04 22:36

And uh it's good.

SPEAKER_06 22:37

Oh about the funny.

SPEAKER_04 22:39

You know what's going to happen. Yeah.

SPEAKER_06 22:41

The check is he refused he refused to pay us again.

SPEAKER_04 22:44

I I called him it we can laugh about it, but people still write those reviews that you must be getting something. No, we're not getting anything. It's a good product. While trying to navigate with my 22 year old old son's Roth Iraq exchanging 529 money, right? You can now move money into a Roth from a 529. While doing some research on the pros and cons, I was able to come up with a great question that you all could answer. Pros for AVGE are like a mutual fund without upfront load and capital gains at the end of the year. Capital that's a little misleading capital gains are reduced.

SPEAKER_06 23:21

But they're reduced in all ETFs not just AVGEs.

SPEAKER_04 23:24

Not just that one but anyone they're better better than you get in mutual funds. But the con, he says, is there's a 0.23 expense ratio when I'm thinking that there are internal fees that are for each fund within the package of AVGE. No. The tw.23 is all you pay. You don't pay all the other funds that are in there as well.

SPEAKER_06 23:43

No you don't pay basically it's a straight pass-through of the total fees for the individual of what the fees are for the individual funds. There's not a fee on top of the fees.

SPEAKER_04 23:51

So you're not paying for the what we have said previously is yes you can go by VT the Vanguard total world fund for I think it's six or seven basis points. This is more expensive. Our expectation is into the future this fund will make up for it by the fact that it owns more smaller companies, more value companies, U.S. international all those kind of things. Will it for sure? We have no idea but this is our belief and we're sticking to it doggone I go ahead what's your I mean what's your response to A V G E or something else?

SPEAKER_06 24:26

Okay, what A V G speaking of David Booth What did Edward have to say? Does he tell you how to pay for the US I keep dunning him for that. No go listen to the Booth interview because Booth talks about a thing called factor investing which is what DFA and Avantis and now a few others do. Yeah. They tilt the portfolio a little bit a little bit they tilt it toward small they tilt it toward value they tilted toward profitability they tilt it toward momentum. That tilt has based on really robust academic research by the way peer reviewed and peer reviewed and peer reviewed again shown a a slight performance edge if you tilt to those securities. That's why we like AVGE. But there's a cost to that the cost to a tilt is higher risk higher inherent risk. However you mitigate that risk through diversification so risk of total loss vanishes and the while they've both done well AVGE has because it's higher risk has recently finally now that value is showing the the same kind of spunk it showed in the past finally started to outperform VT. VT performed outperformed in 22 I mean 23 24 and 25 but in 26 AVGE has come roaring back so it depends on whether you believe you if you just want to own the market you want to own it cheap own VT the Vanguard Total World Index. If you want to own the market and you want the tilt toward small value and et cetera then you own an AVGE. There isn't a huge difference and the expense ratio at this level is not enough to dissuade me from owning it. That's just not much. It's 14 basis points difference.

Edward Jones and Fund Access

SPEAKER_04 26:26

John continued he wrote us another separate actually question. He said while trying to get some Roth Ira money to work with I inquired from my Ed Jones rep if I could add A V G E to my account and their response is it isn't on their preferred company list. The suggestion was use VTI and VXU S and you'd have a similar mix of companies with a lower expense ratio.

SPEAKER_06 26:49

That's not true by the way those no no wait it's not on their preferred list but you can buy it through them.

SPEAKER_04 26:55

Yes you can but it's also not true that if you own the Vanguard funds you get the same thing.

SPEAKER_06 27:00

No you do not get the same no that's where that's where you're going to find that's where you're going to find that the guys at Ed Jones albeit they're I'm the guys and gals there, they're very nice. They're lovely they're lovely people they're sweet they're great salespeople they're great salespeople. They are their expertise is in sales uh I can tell you this from personal experience personal experience that that industry emphasizes sales skills over financial knowledge.

SPEAKER_04 27:28

Yeah and if if they're honest they'll admit the same thing which they're probably not well they're trying to make a living yeah and there's one of the my brother was just asking about this yes there is an Ed Jones in the town of which I now reside.

SPEAKER_06 27:42

Of course there is one you can have a town without an Ed Jones. I know I laughed first thing I saw I was like oh yeah there's I don't care how small the town is there is an Ed Jones office.

SPEAKER_04 27:52

I'm gonna go in there and or open an account see if they'll buy AVG form just for the fun of it. So um I have another question but I'm gonna save it because we're already we're already running up here good because you're getting low anyway so we're good I know yeah the trees are happy and we'll continue

Ask An Advisor

SPEAKER_04 28:06

to go from there.

SPEAKER_06 28:06

Oh so send us more questions go to talkingrealmoney.com click on uh the ask a question button and type them up for Tom or if you find speaking them into a microphone easier just go down to the lower right corner click on that microphone button and if you want to spend a little bit of a time a little bit of a time a little a lot of a time uh some kind of a time a great big time great time fun time an advisor from a Pellet Don is Don used to be a talk show host remember back when yes back when you could speak yes I remember that the synapses were still connecting more uh go to talkingrealmoney.com and click on meet an advisor and uh set up a meeting with one of them it's easy breezy breezy and you can include Tom because I I sh I didn't tell you this story yesterday one of our advisors Louis Salinas had a meeting with with a talking real money uh uh uh uh listener and he came on the meeting I came on the meeting and the guy says wait there's some other guy in the meeting who's that talking about me it's me he goes I didn't think you'd be on the meeting yeah I I show up on meetings so I still like me so Tom actually gets a kick out that's his favorite part of his job I think he actually talking to you every day that's my favorite job so I thanks for listening they paid me to say that by the way not Avantes not Vanguard not the Dominic paid you somebody else somebody else paid you Ed Jones paid you and thank you for the kick back thank you all for listening and remember we're here almost every day except weekends and holidays talking real money

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SPEAKER_06 29:48

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SPEAKER_02 30:01

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