In last month’s Advisor Survey, we found evidence of a large and fairly obvious split in our business: the decision every advisor makes between taking the steps and licenses required to sell securities or not. Out of nearly 900 respondents, an even 50 percent said they have securities licensing; 78 percent of those who do not stated that they also do not plan on becoming licensed in the future. It’s an issue which came to prominence during the height of the SEC 151A debate and is still a challenging personal and professional choice.
To illustrate the divide, we interviewed two top advisors who are the polar opposite of each other. On the West Coast, Sacramento, Calif.-based advisor Jerry Tokunaga has created a thriving, profitable business based entirely on indexed annuities and says he has little interest in securities licensing. On the East Coast, Paramus, N.J.’s Richard Dragotta holds more than a half-dozen licenses and says his comprehensive credentials allow him to offer a much wider swath of financial planning products to his clients. Let the debate begin.
Senior Market Advisor: Tell us about yourself.
Jerry Tokunaga: I’m a California native, a graduate of UCLA in business. I started as a banker with Security Pacific National in Los Angeles, which was eventually bought up by Bank of America.
I got the golden parachute after 18 years in the banking industry, and I was interested in doing something different. I had very good knowledge about how money works. But I learned that the hard way. My mom got a lot of money from my dad’s insurance settlement when he passed away in 1986, and I acted as her informal stockbroker at the time, right as the market crashed in the late ’80s. I lost a portion of the investment … and even she told me to get out of that business.
It was a real turning point for me. So I established myself as an independent advisor seven years ago, working mostly in indexed annuites. My motto still is “I don’t believe that anyone has the right to lose anyone else’s money.” Several years ago, I started getting a lot of business from a regional law firm with offices in California, Arizona and Texas. Since I had no connections in Texas, I teamed up with Ryan Wheless, who’s based in Houston, and is securities licensed. He can handle that end of the business when clients have investment needs, though I haven’t chosen to take that path.
SMA: Why have you made the decision not to pursue your securities licenses?
JT: I don’t want the risk and I don’t want the headache. As it is now, I never have to apologize to my clients. The only way an indexed annuity loses money is if the client withdraws money.
If your lifestyle changes, you know you’re covered. Is the alternative worth the risk? Or would you like to have an investment with 100 percent security? These are the propositions I can make to my clients. What’s intriguing is that … well, some people say that these products are boring, yes, but if safe is boring, then boring is the new sexy.
What we practice is safe money. Ninety-five percent of my clients have no intention of ever taking more than the RMD out of their annuities, they cannot outlive the money and they’ll never run out of income.
SMA: What was your average client’s reaction to the recent financial meltdown?
JT: After the market crashed, people are much more skeptical and everyone’s become much more risk averse. But they’re still confused. They don’t know that there are four types of annuities, so they’ve just heard about the bad ones. My job is education. A lot of my clients are in the 70- to 80-year-old range, and many of them have been hoodwinked in the past; they want to invest in something with no downside. When it comes to playing the market, you have to consider your threshold of pain.
One of my new clients had a million dollars in the market, and he only had $650,000 left–before I could help him. People are frozen by so much conflicting information. My job is to try to resolve those issues and bring clarity.
SMA: Would you consider obtaining your securites license at some point?
JT: If new legislation like 151A were to pass, then I’d have to change the way I do business, but in the meantime, I haven’t taken that step, for a variety of reasons. I’m mostly not interested in all the compliance components of the securities licenses, which mean I’d have to have all of the items in my seminars or my communications with my clients screened by someone else. My business partner Ryan
Wheless spends $8,000 a year on compliance oversight alone. But I can see that there will probably be another issue like 151A and that will force us to get our Series 65 licensing.
Up in Sacramento, I can feel some of that pressure and I think I know where it’s coming from: the stockbrokers, who don’t like guys like me taking $10 million a year in investable assets from their clients.
SMA: What approach do you use with your prospects?
JT: My technique is pretty simple. I tell them, “I don’t want you to just believe anything I tell you. You have to see it for yourself.” They’re coming to us for unbiased advice and I want to give that to them. Nearly all of my referrals come from CPAs and attorneys, and that’s where most of my business takes place, right there in the CPAs’ own offices.
First, if the prospect has market investments, I show them some clippings from The Wall Street Journal, and then we look at Investor’s Business Daily and I show them how their mutual funds are doing and how they’re rated. I’ve been given the blessing to show the prospect the CPA’s actual statements and see what kind of return they’re getting on their annuities. Finally, I show them the $400,000 of indexed annuities I own and how they’ve made slow but steady money over the years. Actually, I recently made 16 percent, and some of my clients have had returns in the range of 27 percent.
I even show them my wife’s annuities. And that’s about it. I just use a pad of paper to show them the math. People say, “I’ve been referred to you by my own attorney, and I want what he and you have. Let’s do this right now.” My closing ratio is nearly 100 percent a year, with two out of four appointments closing on that first appointment.
SMA: How do you make sure that what you’re doing is always in the best interest of the client, without suitability oversight from an outside source?