Episode #275: David Lau, DPL Financial Partners, “The Root Of All Evil When It Comes To Annuities Are Commissions”

Episode #275: David Lau, DPL Financial Partners, “The Root Of All Evil When It Comes To Annuities Are Commissions”

 

 

 

 

 

 

Guest: David Lau is the Founder and Chief Executive Officer of DPL Financial Partners, a firm focused on the distribution of financial products geared toward the Registered Investment Advisor (RIA) and fee-based advisory channels.  Prior to founding DPL, Mr. Lau was Chief Operating Officer of Jefferson National, a leading innovator of tax-advantaged investing strategies for RIAs and fee-based advisors at broker dealers.

Date Recorded: 11/11/2020

Run-Time: 54:50

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Summary: In episode 275, we welcome our guest, David Lau, Founder and Chief Executive Officer of DPL Financial Partners, a firm focused on the distribution of financial products geared toward the Registered Investment Advisor (RIA) and fee-based advisory channels.

In today’s episode, we’re talking all about annuities. Annuities are often thought of as being too expensive and a bad product for clients, but David explains how his firm is changing that by removing the commission, which lowers the cost by 80%. We get into the benefit of annuities, which offer tax deferred accumulation and income generation, while also taking risk management into account. David explains how RIA’s are using annuities for clients and why they make sense in a world with rates so low around the globe.

As we start to wind down, we hear about the future plans for the firm, which include building out their suite of offerings and eventually offering a direct-to-consumer product.

Please enjoy this episode with DPL Financial Partners’ David Lau.

Links from the Episode:

  • 0:40 – Intro
  • 1:36 – Welcome to our guest, David Lau
  • 3:13 – Annuity overview
  • 6:03 – The case for annuities today
  • 9:29 – Fees for annuities
  • 10:48 – Basic principle for someone considering one
  • 12:08 – Behavioral benefits for annuities
  • 14:15 – Pitfalls of annuities
  • 16:26 – How DPL solves the inefficiencies with annuities
  • 21:07 – Their business model
  • 24:02 – How RIA’s are using their product
  • 27:24 – The chance of US rates going negative
  • 30:07 – Finding safety in retirement
  • 31:56 – A way for RIA’s to enhance their business and grow their AUM
  • 35:47 – Demographic of people buying annuity
  • 37:08 – Gifting retirement via an annuity
  • 38:41 – Their focus in the insurance market
  • 42:27 – Their consumer facing market
  • 43:02 – Future plans
  • 45:22 – Advice to consumers for getting smart in the annuity world
  • 47:25 – Percent of annuities that he would trust
  • 49:19 – Most memorable investment
  • 52:13 – Learn more at dplfp.com/
  • 52:34 – How it was funded

 

Transcript of Episode 275:

Welcome Message: Welcome to “The Meb Faber Show” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.

Disclaimer: Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.

Meb: What’s up, y’all? Another great show. Our guest is the founder and CEO of DPL Financial Partners, a firm focused on the distribution of financial products geared towards the RIA and fee-based channels. Today’s episode, we’re talking about annuities. Annuities are often thought of as being too expensive and a bad product for clients, but our guest explains how his firm is changing that by removing the middlemen and commissions, which lowers the cost by like 80%. We get into the benefit of annuities, which offer tax-deferred accumulation and income generation while also taking risk management into account. We hear how RIAs are using annuities for clients and why they make sense in a world with rates so low around the globe. As we started to wind down, we hear about the future plans of the firm, which include building out the suite of offerings and eventually offering a direct consumer product. Please enjoy this episode with DPL Financial Partners’ David Lau. David, welcome to the show.

David: Thanks, Meb. Great to be here. Thanks for having me on.

Meb: Where in the world are you today?

David: I am actually in my office in Louisville, Kentucky. I’ve been coming to the office pretty much throughout the whole corona environment because I had three kids in college who are suddenly at home and this was like the quietest, safest place for me to be.

Meb: Well, for most of these millennials and younger, you better get used to them being at home, post-college too. That seems to be the residence of choice. Louisville, awesome town. Last time I was there, I was giving a talk to the local CFA society, but the highlight for me, first time I’ve ever given a speech, I think, where they gave me a bottle of bourbon afterwards as a thank you for coming. So thumbs up to the local CFA, shout out. And got to sit outside at a restaurant and eat boiled peanuts, which are like my favorite thing on the planet. Need to get back. Great town.

David: Nice. Yeah, it is a great town. We at DPL give out bourbon at our booth whenever we do conferences. We do tons of events around the country. We have a bourbon giveaway every time and that’s a huge hit.

Meb: I can see why. Before we got started, who’s your baseball team? We were chatting a little before we began. You got a hometown team?

David: My baseball team is the Red Sox. I grew up in DC when there was no team and gravitated towards the Green Monster as a little kid. So I’m a die-hard Red Sox fan. And I’ve been to Fenway before this year, of course, every year of my life since I’m 16.

Meb: Awesome. I love it. We’re going to talk about something today. We’ve done over 200 episodes, and to my knowledge, I don’t think we’ve ever covered annuities. And we cover some wacky stuff on this podcast. We talk about farmland and quantitative investing. We talked about private equity in Kazakhstan or some…no, it’s Uzbekistan in a recent podcast. We never touched annuities. And I’m ready for you to just give us all the pros and cons, the good, the bad, the landmines, everything else. I think a lot of people, when you say annuities, they think of two things. They think of fees and they think of Ken Fisher.

David: That’s right.

Meb: So let’s go super basic. Most everyone on this podcast is a pro, the listeners, but let’s start basic. Talk to us about what is an annuity, general concept, some examples, and we’ll start to dig into what you guys do.

David: Yeah. So an annuity at its core, I mean, there are different kinds of annuities, and that’s one of the big misperceptions for, particularly fee-only advisors, you don’t often and happen to use the products in the past. We have been such a commission-driven product and industry and insurance, but an annuity is basically a tax-deferred wrapper that you can invest in with the ability to annuities, meaning create a stream of income. That’s the fundamental thing that an annuity is. There are three, let’s call it three primary kinds of annuities. One is a variable annuity, and everybody’s kind of familiar and they’re probably the ones with the worst rap, where you invest in funds for during the accumulation point, which is fundamentally a great thing, tax-deferred accumulation. The historic problems come in the costs, and we’ll get to that but…so you’re investing in funds, tax-deferred, and then ultimately you probably want to turn it into an income stream when the client gets to retirement. That’s a variable annuity.

Then fixed indexed annuities or fixed annuities are the other side, which basically you’re getting an interest rate return, like a fixed return rather than a variable return through the market. So super safe. You’re going to think of it and compare it to like bonds and how they perform against bonds. And similarly, you might turn that into a stream of income. Or then you have income annuities, which is what a lot of people think about, SPIA, single premium immediate annuities, where you turn over your assets, your client’s assets, to the insurance company in exchange for a lifetime income stream. And those are kind of the three basic categories of annuities, but the fundamental use is tax-deferred accumulation and income generation, also, and through doing those things, risk management.

Meb: So set the stage a little bit. My parents’ generation, my dad was a lifetime aerospace guy, and I remember talking to him when I was younger, but the concept was you get a great job, you work hard, you get a pension, you get to put your feet up, go to Hawaii, whatever it is, when your retirement is secured. That, for the most part, is no longer the case, particularly in 2020. Your kids’ defined benefit is mostly gone and so many people are in charge of their own retirements outside of social security. And if you look at the statistics for 401ks, and IRAs, and everything else, a lot of people aren’t focused on retirement. Tell me about the general industry trends a little bit about why this is a fit, why this is a need in general for annuities. So we’ll look at the good aspects and then we’ll get into a lot more specifics of what to look for and what to avoid.

David: So the general trends like you’re talking about, so funding retirement. So if you think about funding retirement, it used to be easy. Either maybe you had a pension, like you’re talking about your father. Now, like you said, unless you’re a government employee, maybe a union employee, you probably don’t have a pension. So it’s really left upon the individual to fund their retirement. So annuities, oftentimes, David Blanchett at the Morningstar retirement research often refers to this as the A-word. I mean, academics love them, but people get afraid of the A-word because there’s been so much negative press relative to bad sales practices, and tactics, and stuff like that. But fundamentally, it’s a really good product because it’s like a personal pension. You’re going to fund it and then you’re going to turn it into that guaranteed income stream during retirement, which is a really important thing particularly today where life expectancy is continuing to expand, particularly for the wealthier, healthier set.

The Society of Actuaries says that today a 65-year-old couple, there’s a 49% chance that one of them will be alive at 95. So you’re looking at funding a 30-year retirement, basically on your own, minus social security and you have to do that in a world where interest rates are really low, historically low, and mired there for who knows how long. So the traditional investment approach to funding retirement used to be you allocate heavily to stocks and equities during accumulation, when you’ve got more time and ability to absorb market cycles, and then risk management meant moving from equities to bonds. Well, today, bonds’ fixed income can’t do the job of funding retirement that it once did. So you have all of these problems kind of coming together. You’ve got expanding life expectancies, you’ve got pensions going away, you’ve got interest rates really low, so how do you safely fund retirement income? And annuities are a great answer to that. And historically, I would have the same trouble that most people do, it’s a great idea, but they’re too expensive. And that gets through what we do at DPL, which is basically reduce the expense because we’re taking commissions out. When you take commissions out of a product, you change it completely.

Meb: I think the average fee that I’ve seen cited, and I don’t know how this includes the commission, but I think Morningstar says it’s around 2.25%. Does that sound ballpark correct?

David: It depends what you’re including, but Morningstar will tell you the average product cost, so none of the features, not including the investments is about 140 BPS. So about 140 basis points, when you add in the cost and the variable annuity of the funds, which are typically loaded with 12B1 fees, admin fees, they’re expensive funds. That takes you over 2%. If you add in an income rider or something like that, you can be like 3.5% fully loaded into a traditional commission product. When you take the commission out, the commission comes out of the basic product expense. You basically take the product cost down from 140 basis points to 20 to 25 basis points. So that’s where the product becomes, again, interesting. As I was talking about, like in a variable annuity, tax-deferred accumulation is a good thing. If it’s going to cost you 140 basis points to get it, it’s not such a good thing. Tax deferral’s not infinitely valuable, but at 20 basis points, 25 basis points, tax-deferred accumulation for high-income earners, that’s a good product.

Meb: Just give a little context for the listeners who’ve never been through this. Let’s say you’re a 30-year-old, nice and young, got $100 grand, so man, you’ve been saving. You want to put it to work in a variable annuity and just in general… And we’ll get to y’all’s model in a minute. And you can correct me. Like you hit the nail on the head, in my mind, there’s two main massive benefits. One is this tax deferral. So you put that $100 grand in at age 30. Let’s say you’re not going to take anything out till 60 or 70, because we’re all going to live to 100 now, and at that point, you can establish the percent you want to take out and it gets taxed as normal income on the gains and then the principal gets returned. Is that ballpark correct?

David: Yeah. I mean, you want to think about it a little bit that way, but I would say if you were looking at a young person, if you’re a young person, you have a young client, you really want to think about a bare-bones annuity. You don’t need to worry about the income riders or anything like that because you’re looking at 35, 40 years until you’re thinking about using them, so why pay for it? So let’s go to a stripped down, bare-bones annuity accumulate for those 35, 40 years and then start thinking about when you start getting closer to needing income, looking at rolling that product into something else that might be income-generating.

Meb: So, listeners, just to put this in context, remember, if you compound at 10% per year, 25 years, that $100 grand is going to be worth a million bucks. That million bucks, if you can compound 50 years, that $100 grand is $10 million bucks. So it’s non-trivial, granted, not many 20-year-olds run around with $100 grand, but just the second main benefit in my mind, so you have this huge tax benefit, and the second main benefit is people tend to think about retirement, I think behaviorally and mentally, different than they do with the rest of their investments. There’s their brokerage account, it’s fun, it’s Robin Hood, and then over here is my retirement, and putting it into something like an annuity, which in many cases you can auto-invest in or invest in every year, and it can be in a portfolio of 100% global stocks or whatever you want it to be in, I think gives it the time to align an investor’s true-time horizon, which should be decades, with actually how they’re going to behave. Does that seem accurate to you as the main sort of benefits?

David: Yeah. I mean, there’s loads of behavioral benefits for annuities depending on the phase of investing or retirement a client might be in or a person might be in. So during accumulation, it’s helpful through the tax deferral and it’s also a retirement account, so it’s not one you’re likely to touch. Then as you’re getting to retirement, downside protection features and annuities are great for sequence of returns risk. And then in retirement, that secure income has many behavioral benefits, one, and we’ve experienced this through the pandemic, particularly early on when the market was going nuts and mostly down, and the advisors we work with, they’re all telling their clients, “Hang on. Stay the course. Let’s ride this out.” Buy for those who have an annuity, it’s much easier to do that behaviorally because they know their income is secure. They’re not worried so much about the market going up and down and it being able to affect their retirement spending, and so behaviorally, that’s really helpful for clients.

Meb: All right. So we’ve covered the good stuff. So I imagine a lot of investors are scratching their head and say, “Okay. Why does everyone hate annuities? Why is Ken Fisher always ranting about them? Why are they the A-word?” And you’ve alluded to it a few times, but maybe walk us through the pitfalls and the problems of the conflicts of interest and the massive, massive, massive fees.

David: When you look at economists and you look at academics who study retirement, annuities are universally supported. Everybody loves annuities academically. The problem is when you get to the product…and I will tell you, I will say often the root of all evil when it comes to annuities are commissions. Commissions drive all the problems that everybody complains about. Number one, high costs, as I was talking about just a little bit earlier, when you take the commission out of the product, you’re dropping the cost 80%. That’s a huge driver of the cost of the product, is having the commission. That’s one big problem. Another big problem is bad behavior. You always read about it in trade pub, some annuity salesman who sold an 80-year-old woman a product with a 30-year surrender for a huge commission. You read about bad behavior of salesmen and that’s driven again by commission.

The other part of annuities that people don’t like, particularly advisors are surrender periods. So the money’s locked up for a period of time, usually seven years, sometimes as many as 10, 15 years. And that again is driven by commission because the insurance carrier needs to make sure they’ve got the funds long enough to recoup the commission that they paid out. So you have all of those problems with the product itself. And then for fiduciaries and fee-only advisors of which Ken Fisher is one, there’s the other problem of, because it’s commissioned, they can’t get paid. So it’s a hardcore fiduciary who says, “Yeah. Let me take a third of my client’s portfolio and put it into an annuity, take it out of my AUM and let them live off income from that. I can generate income through investing.”

Meb: So, I mean, there’s the classic…I mean, this is the most like 101 level of incentives controlling everything. So the reason most investors won’t just go buy the annuity themselves is they’re endlessly complicated. I mean, I’m a professional and I was looking through some of these annuity descriptions and I literally could not make heads and tails of what was what. Again, the basics of the ones are really simple, but others are not. Second, you have people in companies that are entirely sales-driven. I mean, and this isn’t just the annuity world, this is, I mean, half the financial planning world history of you describe the way they make money as production, and you go to Hawaii and go to the hotels and you see everyone that are the top salespeople. And in a world of the internet and transparency, much of it feels pretty yucky. And so, and then lastly, it’s even not…I don’t think a conflict problem, but it is a reality, is that advisors who advise on accounts, again, that put money in annuities, they traditionally will earn nothing from that. So this is where you guys come in, I assume. Is that a good lead into what you guys are up to at DPL?

David: Yeah. And that’s a really good segue.

Meb: Solve all of the world’s problems for us right now. Let’s hear it.

David: That’s right. Well, I don’t know about all the world’s problems, but hopefully, most of them as they relate to annuities and insurance generally. So at DPL, what we do… And I’ve basically spent my career in financial services being a disruptor. In the mid-’90s, I was the chief marketing officer at the first internet bank in the country. And the notion behind doing that was not the internet. It was let’s create consumer value and let’s do it through changing distribution. And distribution had always been, in banking, let’s build branches. And building buildings and filling it with people and systems is a really expensive way of selling a checking account or a CV. So we thought if we eliminate the branch and we go direct to consumer, we can provide much better value.

Meb: Can I pause you real quick? Because I know you were at E-Trade, right?

David: Correct. E-Trade and Telebank before that.

Meb: I had some fond, embarrassing memories of being at the very distinctive E-Trade branch in Downtown San Francisco when the internet bubble was going on. So I was either visiting or living there in 2000, 2001. I remember going into the branch to place trades, which the Meb of 2020 is horrified about, but just funny to look back on, as you were talking about branches and E-Trade, the world is similar but different now with Robin Hood and everyone can do it from home at this point, but okay, continue on.

David: That’s right. So anyhow, the big inefficiency in distribution in banking is the branch. In insurance, it’s the commission. So much like back in the day when Schwab really created a marketplace, created one source to be a marketplace for no-load mutual funds, basically, that’s what we’re doing at DPL. We’re working with carriers to eliminate the commissions, take out that expense and inefficiency in the product and create a marketplace of commission-free insurance products, which start with annuities, would include life insurance, long-term care, disability, all products that, you know, the typical financial plan or aspects of life a typical financial plan is going to address. So that kind of starts the chain of creating a value proposition for clients and advisors. We launched the company two and a half years ago. And prior to that, I’d spent a decade building a company called Jefferson National, which was the leader in providing no-load annuities for RIAs. But we launched DPL with 6 carriers and a dozen products back in early 2018. Today we’ve got 20 carriers, 45 products, starting to build a real marketplace of commission-free insurance. So we work with the carrier on the products and then we work with RIA firms to support them in a very strategic way to introduce insurance into their practice. And we work on a membership basis. So we’ve got RIA firms who join DPL as a member. In the two and a half years we’ve been doing that, we’ve got over a thousand firms who’ve joined.

Meb: Wow. Awesome. Congrats. And I imagine the RIAs listening, you guys don’t charge that much. Is the business model a little bit of the sort of membership fee and then also partnership with the underlying providers?

David: Yes, exactly. So we don’t charge very much. It’s a unique model. So in building it, there was nothing to point to, to say what’s a reasonable fee to charge. Most firms we work with will tell us we could charge quite a bit more, but that’s not been the goal. The goal was to build the network, having the network of advisors, the membership base is really what drives our ability to innovate and drive product creation with the carriers. So it’s one thing when I can kind of trade off my name and getting started and get a few carriers to build products, but it’s another thing when we can say, “Hey, we’ve got 1000 RIA firms with a collective $250 billion in AUM that we represent. And we’re looking for these kinds of products and this kind of pricing.” And so we’ve got a lot more power in doing that and that’ll just continue to grow as we continue to launch.

But what we do for our members is really, we kind of become their insurance department. So the typical RIA is not insurance-licensed because, you know, why would you be when the products have been commissioned all along? So we are the licensed agent. We work with our RIA members to educate them. We educate on products, we educate on usage, and we teach them when products are most effective and when they’re going to be most helpful to clients and we base all of that off academic research. Then we help implement. So when a client comes in or a client’s nearing retirement or you’re redoing the financial plan and you’re identifying an insurance need, you talk to one of our consultants, they’re going to talk about the client’s situation and then they’re going to give you a couple of product options. They’re going to say, “This one will do this and this one will do that.” And you’ll help determine the appropriate one for your client and then we’ll implement. We’ll be the agent of record, we’ll take care of all the paperwork, and then we’ll make sure you get a data feed into your portfolio management system so you can see the account. And if you want to illustrate it in your financial planning software, we can help you do that as well.

Meb: I imagine you’re incredibly popular with one cohort, which is independent RIAs and incredibly unpopular with the people that are still charging 8% commissions. So that’s a good Venn diagram to be in, by the way. There’s so much fat in that space, it’s astonishing. And you have one part of the world like the public funds where the trickle has become a flood and essentially the dam breaking on all these old school, high-fee funds, money going into the lower cost ETFs and such, but there’s so much that’s still as…trillions that hasn’t been disrupted. Talk to me a little bit about, and you can take this question in a few different ways, how the thousand or so RIAs are implementing this. Do you see any trends? Are most of them just saying, “Hey, I’m going to do variable annuities across my book,” or are they super specific? You referenced insurance, would love to hear you talk a little bit about that. But like, how are people using it in the last two years? Are there some surprises? What else?

David: So, I mean, in a lot of different ways. So when I started the company, the RIA insurance market was basically term-life and investment-only variable annuities, what we did at Jefferson National. So just super low cost, get your client out of an expensive product, move them into something cheap. That was basically the market in the RIA world. So as we launched DPL, that was kind of the first product sets people were interested in. They filled those kinds of products for us. As we’ve continued to educate and bring more products and carriers to market, now that’s shifted. The 1035 exchange into the low-cost product, that’s several products or solutions down the line. Right now what we see RIAs really using are products that generate income and specifically fixed products. So fixed index annuities are the most popular product category on our platform that RIAs use, and it’s typically making an allocation out of fixed income for some period of accumulation because the interest rates in those products are really attractive and then turning it into an income stream.

And the reason RIAs are doing that, one, as you know very well, the interest rate environment is horrible. It’s hard to find safe investments that can cover your fees and keep up with inflation, all of that kind of thing. So the annuity can provide a pretty attractive accumulation rate and then a really attractive payout rate. So, for example, a typical fixed index annuity that we might have on the platform, you can accumulate in a fixed account at 2.75% today. You can accumulate for however many years at a rate like that and then turn it into a 5%, 6%, 7% guaranteed lifetime income payout. And the advantage of those products, and which has been eye-opening for a lot of RIAs who haven’t been as familiar with annuities, is you’re not annuitizing to create that income.

And annuitizing means, as we talked about earlier, turning your money over to the carrier. It’s that irrevocable decision to give the carrier your money and turn it into an income stream. Very few people actually do that, it’s almost too big of a commitment. The way income typically gets generated is through a rider. And the advantage of that to the account holder, the client and the advisor is the account balance is always available until it’s been depleted. So if you change your mind, if you need the money, you can take it out. It’s still available. You haven’t annuitized. So that’s the most popular strategy today that we have. Variable annuities, people are getting there. They’re starting to get there, but because fixed income, I think, is such a challenge as an asset manager, that really makes the fixed annuity much more appealing.

Meb: It’s certainly going to create a lot of stress in the system. The conversations are happening, but you’re starting to see them with increased frequency from advisors and others when you have the 10-year sub-1% is what do you do, and forget about the rest of the world where sovereigns are trading at 0% and negative, I think many advisors are also woefully unprepared for a potential world in the U.S. where that could happen too. I was joking on Barron’s about a month ago where they did a bunch of surveys and polls and they were asking where they thought U.S. interest rates would move to, and they didn’t even have negative as an option, and I said, “Well, it may not be probable, but it is certainly possible.” And that actually makes me even more bullish that it actually happens at some point.

David: One of the things that we talk about is what’s the effect of that for the client? And you see, I liken it to my waistline, which gradually increases, being that you don’t get overweight overnight. What you see happening to client portfolios is they become more and more allocated to riskier investments, whether that’s heavier into equities or income-generating products that have more risks than traditional bonds or treasuries. And there’s a terrific set of charts that we’ve got from the Callan Institute that they looked at, if you were looking to generate a 7.5% return, 30 years ago, you could do that being 75% invested in cash, imagine that, 75% invested in cash, 25% in U.S. treasuries to generate 7.5%. Fast forward 15 years, so 15 years ago, you’d have to be 50% in equities and 50% in fixed income. In 2019, if you could even get to 7.5% return, you’d be 96% in equities and 4% in fixed income. So the point being, I don’t know that anyone’s shooting for a 7.5% return right now or expecting a 7.5% return, but basically, in order to get the same amount of return, there’s more risk in the portfolio, and that gets to be a particular problem when somebody gets in or near retirement.

Meb: Well, to depress you even more, it’s actually, I think worse than that, because most pension funds still have that assumption ballpark. And if you look at survey after survey, when they ask individuals, it’s always around 10%, and including last year at Schroders, the U.S. had the highest response rate in the world for equities, which was 15%, and that’s just not going to happen. There are two other problems I foresee with what people are going to do about the future in the traditional U.S. stock bond. One is as bonds go negative, I don’t think that it’s a guarantee that bonds will hedge a down…so you have no more income, so that’s no question, but people will assume and still make the allocation that bonds will always hedge a U.S. stock decline. And you can’t count on that. I mean, the bond-stock correlation has varied over the years. And if you actually look at foreign markets during this past 2020, many of the negative-yielding sovereigns didn’t help in February and March. And so you create this just really challenging problem. And if you believe us, stocks are overvalued too, so you have sort of a dual headache anyway. It could be problematic.

David: Exactly. So where do you find safety for those people who are in retirement, near retirement, who like you were talking about earlier, now change behaviorally? Once people get to retirement and near retirement, they’re a lot more concerned about their income and preservation of what they’ve accumulated than trying to accumulate. One of the things we do is surveys, we survey our members. We got over 200 RIAs responding to a survey earlier this year and said, “What do your clients value more in retirement, predictable income or asset growth?” And overwhelmingly, more than 80% of them saying predictable income. So where do you find predictable income now when you’re saying the investment markets are challenging in every way? You have to look to annuities. I mean, annuities are a product designed specifically to do that, create that efficient, predictable lifetime income.

Meb: So you guys have a great website. You can register for free, play around, a lot of videos from Wade and others, a lot of research. You guys have a nice focus on education. What are some other areas, if there’s anything that we haven’t talked about, that is something that you guys focus on or that, even on the stuff we have talked about, that is particularly interesting that we’ve kind of glossed over or avoided? Anything come to mind?

David: Not product-related, but what I’ll tell you like practice-related, business-related. I think some of the interesting things are, and the real reason that firms join is for enhancing their business. So the annuity market, for as maligned as annuities are, the annuity market’s a $4.5 trillion market. It’s bigger than the entire RIA market. It’s massive. So whether you know it or not, your clients probably own annuities. And that represents an opportunity for AUM growth and consolidation of relationship. So when we look at annuities because our annuities are so much better priced, so much cheaper than what your client probably own, in most cases, we can roll them over into a new commission-free annuity, saving clients on average $3,500 a year in fees, bringing the assets under management, eliminating a separate advisor relationship if that advisor still is in touch with them, but that’s one area of growth.

Meb: How does that work? So let’s say I’m an advisor, I listen to this podcast, say, “Meb, David, you guys sound brilliant. I totally have all these clients who probably have these garbage annuities,” what do they do? They ring you guys, you put it in like a software optimizer or do you have a consulting team? How does it work?

David: Yeah, both of those things. So we invest heavily in technology. So we’ve got an annuity comparison calculator that is an incredibly complex tool that can literally take any annuity ever sold and model it, and then compare it against the annuities that we have. And then we’ve got a team of consultants who will work with the advisor. So oftentimes the client bought the annuity, they may not even know why they bought it, for what purpose, what features or benefits are in it. So we’re going to take a look at it. We can pretty much tell the advisor right away what the product is designed to do and then we want to check and say, “Is that still the goal? What is the goal for this client? Do they still need guaranteed income?” Maybe they’ve got plenty of rental properties or who knows what to generate income.

What are we looking to do for the client? We can punch that into our calculator and find the most efficient products to do that, which is kind of a reverse approach from most insurance. People are trying to sell you as much coverage as they can sell you. We’re going to try to tell you what’s most efficient for the client, meaning what will take the fewest amount of dollars to generate the outcome they need. So we do that through technology as well as our consulting team. And that’s accessible through our site. We’re also working on partnerships with lots of other platforms, RIA platforms, so it would be available. Those tools would be available in many desktop systems, portfolio management systems. But basically, yeah, if you’re that advisor and you’ve got a bunch of clients with annuities, you can give us a ring, talk to our consultants and they can lead you through the process. We had a firm the other day, as a matter of fact, who had questioned whether or not they’ve got clients with annuities. They sent out an email to their client base asking if they had any annuities they’d like to have reviewed. They got over 30% response of their client who had annuities to review. So we wound up with 90 annuities coming in for us to take a look at.

Meb: And I feel like the way that people end up with all those annuities is they have an advisor which they trust, but they also got a buddy, or a cousin, or an uncle who sells them some crap annuity and they just put it in a total different bucket. Most of them don’t even put it in like, “Here’s my financial advisory bucket, this is just a thing that I bought that someone told me to buy, now I have it. Now I don’t know what to do with it.” I talk to a lot of people like that. What’s the typical, if you had to say, demographic of someone who’s buying annuities? Is it someone who’s like 40, saving for retirement? Are people doing it for their kids? Is it…what?

David: I mean, typical 50 to 60-year-old, sometimes a little older, but 50 to 60-year-old is kind of the sweet spot. And that’s like, if you were using annuities productively in your practice, that’s probably when you’re going to start thinking about. Any earlier than 50, that’s what we were talking about previously. You want to just to strip down low costs for a high-income earner who needs it for taxes. Particularly if they live out in California, they want to defer some income taxes, you might do that, but the sweet spot is starting to approach retirement. Then you’re going to have…if you start thinking about annuities then, you’re going to have the most product options to meet your clients’ needs the best.

Meb: We did an old podcast with a fella named Paul Merriman. And I don’t know if you know Paul, but he used to run an RIA in Seattle by the same name. And he does a fun thing for his grandchildren where when they were born, he would put $10 grand into a variable annuity. But because he doesn’t trust them, not because they’re just kids, but because people are people, wraps it into a trust so that they can’t touch it until they’re 50 I think. So that $10 grand, theoretically, if it’s, again, all in equities, becomes a million dollars. And it’s sort of this magical aha moment for people, I feel like, to think about securing a retirement for not that much money. I mean, $10 grand is a lot of money, but relative to a million dollars later, what a cool idea. I mean, do you hear advisors or people doing that for young people? Is that a thing that’s widespread? I don’t even know.

David: I wouldn’t say widespread, but I’ve definitely heard that. And it is kind of a, like you said, a very cool way of effectively providing retirement for a relatively modest amount of money. I mean, without having to go through trusts and planning in that regard, just buying a packaged product, that again, the owner of the account can’t touch without significant penalty prior to 59 and a half.

Meb: Interesting. You alluded briefly to insurance. Is that a small part of your business thus far? And what are you guys focusing on there too?

David: So when I launched the firm, the goal was let’s be able to check the box for each product category an advisor is going to address during a financial plan, and that is life insurance, long-term care, disability and annuities, guaranteed income, in particular. So we launched with some life insurance and annuities and over the course of the last couple of years, maybe two months ago, we finally brought disability to market and earlier this summer we brought a long-term care product to market. But we wanted to do that for many reasons, but primarily because we want advisors to be able to serve those client needs within their practice, because it doesn’t make sense, if you’re doing financial planning and you’re effectively writing a prescription for those products to then send your client away to somebody else to get them fulfilled. That doesn’t make sense on all kinds of levels.

You run business risk of sending your client to an insurance agent who is, by the way, becoming more and more competitive with you every day. A typical New York Life agent now is a CFP, not just a life insurance salesman. They want to manage the whole relationship. And you make sure that when you do it, handle it in-house, whether you’re using somebody like us, that they get the right amount of coverage and that the money is not coming out of your practice. That’s what we really wanted to solve and that introduction of the disability product through principal a couple of months ago kind of finally checked all those boxes, but we continue to bring more and more products to market because in life insurance…and I mean, the reason RIAs have been historically just term life users because it’s by far the cheapest way to get that protection and that coverage. And term life wasn’t even something we were going to address in this business because the compensation built into term life is just not that much. You really don’t change the pricing all that much.

But permanent life insurance is actually a terrific product, again, when you reprice it. Structurally, you can invest in a variable universal life, you can invest in funds, accumulate tax-free and take assets out tax-free from the products. That’s, again, a great structure while providing life insurance. The problem again has been commissions. In a permanent life product, the commission is typically 60% to 80%, sometimes more than 100% of the first year of premium. Meaning if you’re putting in $10,000 into a permanent life policy, $8,000 of that probably goes to the agent who sold it, $2000 actually goes into the policy to provide the coverage for the individual. When you eliminate that commission, that becomes an incredibly powerful product because all $10,000 goes to work in the policy rather than being paid out to the agent. So permanent life is something that we’ve definitely seen a lot more interest in with some education and repricing of the products.

Meb: And on the flip side, I don’t know how you can be listening to this and particularly be a young person in this industry that’s commission-based and think you have any shot at being a future-proof job. I was smiling as you were talking because you clearly must be doing God’s work because there’s a beautiful Louisiana sunrise going on behind you, that was giving David…if you’re watching this on YouTube, which none of you do, by the way, but if you were, you can see this beautiful halo behind David. You guys are currently structured, to my knowledge, just B2B. You partner with RIAs, there’s no sort of direct to consumer offering, correct?

David: We get a little direct to consumer from effectively referrals from RIAs. So for those who are planners and aren’t investment managers who provide clients with financial plans and they’ll refer them for their insurance needs, you know, consumers to us, and that’s been a really good thing, but yeah, eventually the goal is we’d like to be direct to consumer.

Meb: I got some ideas for you later on that. We’ll take that offline. As you look to the horizon, what other ideas are you guys kicking around? I mean, as you mentioned, a multi-trillion dollar industry, is it simply land and expand, everywhere you can? Is it to build out a sales team? Is it onboard new partners? What?

David: It’s all of those things. In the startup business where you’re building it out, you’re growing in all of those different areas. But when I look at, you know, kind of being methodical about serving the RIA market, it started with products. You’ve got to have products. If you don’t have the products, you don’t have a marketplace. You don’t have a business without the products. We just started working with carriers, bringing products to market, again, getting them repriced, helping carriers understand how to serve a fee-based advisor or a fee-only advisor because they’re used to paying commissions, not allowing fees to be pulled. So we’ve had lots of ongoing work to do there and we’re making tremendous progress, like I said, 20 carriers, 45, 50 products. So we continue to bring more to market. That will always be a focus. The other part is technology. So it’s one thing if you’ve got the products and they’re kind of held away and you can’t really see them, maybe you get an account balance brought into with a data feed into your portfolio management system, but it’s not really part of your workflow. It’s not part of your system. So where we’ve been focused is in bringing our tools onto platforms. So a month and a half ago, we announced the partnership with SS&C Advent for their Black Diamond platform where they’re introducing the Advent Insurance Marketplace powered by DPL. So we will actually have our tools and capabilities built into Black Diamond. So insurance and annuities will be represented within your portfolio and you will have the tools to do product discovery and comparisons in the tools that we’ve created. That’s a big evolution. If ultimately you want to serve the RIA marketplace, you’ve got to basically make it work within the practice, not just provide the products, but provide all of the things from the products, the technology, to the licensing, and all of the support that’s necessary.

Meb: So for the non-advisor individuals out there who are listening to this, what’s your advice to them? I guess the first part would be just find an advisor to partner with, but is there anything they can do as far as like, look, or, “All right. I’m not going to get an advisor. I’m allergic to them,” whatever. Are there any resources, are there any guidelines as far as getting smart about annuities or places to go to at least not jump on a massive landmine?

David: Well, we can definitely help. So I mean, go to DPL FP, dplfinancialpartners.com. Like you were saying, our website, you can register for free. We’ve got tons of content around annuities and thinking about annuities and how you might use them. Our consultants are happy to help you do product comparisons, help you find the right product for what you’re concerned about or looking for. That’s basically what we do all day but usually through an advisor, but we’re happy to talk to consumers directly.

Meb: And what do they do though if they want to go buy one? Do they just have to go direct to the sort of issuer or something?

David: No. We do it.

Meb: Oh, really?

David: Yeah. So we’re the agent. So that’s the same way in working through RIAs, again, because most RIAs aren’t insurance-licensed, we worked with the RIA to decide on the product and then ultimately we make the recommendation. We’re the licensed agent, we issue the policy. Then we add almost very similar to your custodial account. Your client actually owns the custody account at Schwab or wherever. The advisor is added through a limited power of attorney to be able to manage the assets. We’ve basically taken that same model to insurance. So we’re the agent. We will open up the account and then we’ll add the advisor through a limited power of attorney to be able to manage the policy. So very similar. And so for the consumer, they can come to us directly, we’ll write the policy for them, help them find a good one rather than an expensive one.

Meb: What percent are kind of garbage? Garbage may be a strong word. Let me reframe the question. What percent do you think are acceptable that you would put your relative or children in?

David: Again, I’ll go to the commission’s the root of all evil when it comes to annuities, because you’re talking about the complexity of products. Commission’s also the reason for complexity. I mean these products effectively should be commodities, basically attach deferred wrapper with the ability to generate income. It should be a commodity. You’re just looking at price. What does it cost? What are they paying? What are they getting? Because the structure is a commodity. So the problem for carriers is in order to sell product, they’ve got to create all kinds of bells and whistles to try to differentiate and try to create a sales story, so a lot of the commission-based products are, one, all of that expense that we talked about, complexity that we’ve talked about. So, to me, loads of those products are, I won’t go so far as to say garbage, but they are difficult products. It’s hard to get the benefit out of them because of the expense and the complexity and all the features. So looking at… And always a commission-free product is going to be a better product than the commissioned one. So if you’ve got the same product from the same carrier, one’s commission-based, one’s commission-free, the commission-free product is always better. So, I mean, I think that’s a pretty simple gauge. If you’re interested in annuity, you should always ask your advisor, “Can I have a commission-free product?” Wirehouse advisors, broker-dealer advisors can all find commission-free product. And I think that’s a general good guide. I mean, just like mutual funds. You want a load mutual fund or you want a no-load mutual fund, it’s a no brainer.

Meb: You slap a 7% fee on everything Vanguard offers and I think Bogle probably would agree, it is a steaming pile of poo too, so…

David: That’s exactly right.

Meb: Amazing how that works with commissions. David, this has been great. It’s super informative. I’ve actually learned a ton today. As you look back on your career, we always ask people, what’s been your most memorable investment? It could be good, it could be bad, but anything that’s seared into your brain. I have about 10 that I could tell you from my E-Trade headquarters in San Fran Market Street, but anything coming to mind?

David: I can give you the one I missed. I mean, I can give you a few of those, but number one was AOL. So I grew up in Northern Virginia, one of my best and oldest buddy’s father founded AOL. He gave me a call when I had been in the work world for, I don’t know, a year and said, “Hey, my dad’s company is going public and they’ve got this friends and family offering. If you want to get in on this IPO, it’s going out at $10 a share. There’s huge amount of institutional investors getting in. They think it’s going to pop to like $20 a share within a couple of weeks. It could be a really great opportunity.” I had about 1,500 bucks to my name at the time and I was thinking, “What’s the big deal if I put 1500 bucks in?” But it would have been a very big deal. And I put 1,500 bucks into AOL at its IPO.

But back in the internet days, all the internet companies were all talking to one another, trying to figure out how we could work together, “At least let me throw some ads up on your site and I’ll give you some of my PE money and you can put some ads on my site and you can give me some of your PE money so it looks like at least we’re making revenue.” But I can remember talking to eBay and being at eBay’s headquarters and thinking, “What a dumb idea this is,” and like how wrong you were about that. But, at the time, you’ve got pictures loading up over dial-up, taken on some crappy camera, of some piece of junk somebody’s selling, and then somebody is supposed to bid on this and send a check cross country on the promise that this person’s going to send this item to them. I thought, “This is ridiculous. Nobody’s ever going to do this.” How wrong I was.

Meb: It’s funny you mentioned those two because there’s the very modern equivalent which everyone can relate to as well, which are the two big ones, I mean, Uber and Airbnb. I mean, I think Airbnb, by the time this publishes, will have gone public. But same thing, Uber, “No way I’m getting in some stranger’s car,” and Airbnb, “No way I’m saying in some stranger’s house or let someone stay in my house.” And I think the framework that I heard from an angel…and I can’t remember who this was, so I apologize, but said basically, “The best way to think about startup and angel investing is not all the reasons why it won’t work, but if it did work, what if it did work, what could this be? And you can kind of see obviously from your examples as well as the more recent ones, the result is $100 billion plus company. So what if DPL does disrupt the entire annuity space? Awesome. This has been great. Where do people go, if they want to find out more about you guys, what you’re up to, onboard, all that good stuff?

David: dplfp.com. So David Peter Lau Financial Partners, dplfp.com. That’s the best place to find us.

Meb: And I forgot to ask, last question, while we’re on the topic of starter books, how are you guys doing this? Are you bootstrapping, self-funding, do you partner with some VC money? How are you building it?

David: I bootstrapped it for a while, then raised some private investment through a company called Eldridge Industries owned by Todd Boehly who’s a big investor in the Los Angeles Dodgers, one of the owners there. And we’re currently actually very close to closing a Series B to further expand what we’re doing, so…

Meb: Congratulations.

David: Thanks. It’s been really good. We’ve got almost 50 employees now, and this next round of capital will take us through hiring the next 20, 30 people, which will be terrific. But one of the things, when you do this kind of thing, raising money, you’re talking about angel investors and that optimism, it’s interesting as an entrepreneur, what you go through. You get the angels and the VCs who are generally optimists. They’re the ones who are seeing the vision, they’re exciting, and then you get to the stage of taking PE money, and now those guys are the ones seeing all the risks. What are all the downsides? How do I protect myself, blah, blah, blah? So one of my old jokes is if you’re at a cocktail party, you got VC people and PE people, you want to talk to the VC people. Much more interesting, much more optimistic, happier people in general.

Meb: Yeah. The PE tends to focus on cash. And speaking of, when I was thinking about the risks earlier, the PE asset class has been the one that many institutions are hoping to be the savior were equities, bonds, not so much, but PE. David, this has been a blast. I’ve had so much fun. Thanks for joining us today.

David: All right. Appreciate it, Meb. Thanks for having me on. Enjoyed it.

Meb: Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us an email at feedback@themebfabershow.com. We love to read the reviews. Please review us on iTunes and subscribe to the show anywhere good podcasts are found. My current favorite is Breaker. Thanks for listening, friends, and good investing.