Morningstar - Q2 2020 - 86

Investors

School Reform
Advisor Tony Isola wants to bring low
fees to teacher retirement plans.

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Charles Keenan

Tony Isola is on a mission to upend the fee-heavy
market for teacher retirement plans. Throughout his career, the Certified Financial Planner has
extricated teachers from expensive financial
products in their 403(b) plans, which are
tax-deferred retirement vehicles used by public
schools and other tax-exempt organizations.
Typically, these plans are rife with lousy deals for
investors, with annuities contracts and mutual
funds with high loads. These products significantly
erode the long-term returns of teachers and
nonprofit workers.
Isola, also head of the educator/403(b)
division at New York-based Ritholtz Wealth
Management, sees a much better way
to help these investors by providing them with
a simple mix of low-cost, indexed mutual
funds. As part of that effort, he collaborates
with Vanguard Group to make its funds
more accessible to teachers. One goal of the
alliance is to find the best way to get teachers'
attention to make the switch.
"We are attempting to grow this into a grassroots
movement," he says. "Vanguard helps us
bring huge credibility and resources to what we
are trying to do. Like Amazon, we want volume,
and we know this could work."
It's a big market. 403(b) plans held about $1.1
trillion in assets at the end of the fourth
quarter, according to the Investment Company
Institute. There were about 3.3 million K-12
teachers nationwide as of 2018, the most recent
numbers published by the U.S. Bureau of

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Morningstar Q2 2020

Labor Statistics. With Vanguard's brand name and
scale, Isola sees a big opportunity.
Yet it's also a tough market to infiltrate, resembling
a financial backwater of sorts. While 403(b)s
are similar to private-sector 401(k) plans, they do
not fall under regulation of the Employee
Retirement Income Security Act, which says that
401(k) providers have a fiduciary duty to put
participants' interests first.
Not so for public school teachers. The 403(b)
world is dominated by commission-based
salespeople, who Isola says descend on school
administrators and prey on the financial
naivete of teachers, especially young teachers just
starting their careers. Often the annuities
contracts within the plans come with annual
expenses of 2% or more of assets and surrender
clauses of 5% or more. Over a long period,
these high annual fees can cost teachers hundreds
of thousands of dollars in retirement savings.

He first taught in Queens in New York City;
then in 1998, he took a teaching position in Stony
Brook, N.Y., a suburb on Long Island. Word
got around to the staff about Isola's Wall Street
background, and teachers approached him
with questions about their 403(b)s, which were full
of high-cost investments with unnecessary
tax-deferred structures. "What is this?" Isola
would say to his colleagues. "Why did you do this?"
What he found was that K-12 schools everywhere
had been infiltrated by so-called 403(b) experts,
who were giving out horrendous financial
advice. He advised people to just invest in index
funds. After a while, teachers were coming
to him with all sorts of financial questions, on life
insurance, 529 college-savings plans, and
budgeting techniques.
Isola's wife, Dina, encouraged him to pursue
financial advising as a business. He resisted
at first, not wanting to officially return to
the financial world. But after she showed him
some literature on how much money salespeople were making off of fee-rich products in
403(b)s, he changed his mind.
Isola became a Registered Investment Advisor
in 2003. Dina Isola left her job in communications
for mutual fund company J&W Seligman
to handle the marketing and operations of their
new business.

Isola, 55, had never planned to be a financial
advisor. After graduating from college with
a bachelor's degree in economics, he worked on
Wall Street trading currencies in the late
1980s and early 1990s. His days were chaotic, with
lots of yelling and screaming from the start.
When trades went bad, it ate at him, and he quit
the profession in 1992.

Over time, the Isolas amassed assets from
teachers and others, working out of a loft above
their garage. They used Morningstar for its
portfolio management and research tools, until
they moved the practice in 2015 under the
umbrella of Ritholtz, freeing up the pair to focus on
customers and marketing. They handed off
operations and trading to others in-house. They
still work from home. While teachers still represent
the lion's share of clients, they account for
only 30% of overall assets under management,
which ran about $90 million in March, including
some high-net-worth households.

Motivated to make a difference in people's lives,
he enrolled in a master's degree program in
education, moved back into his childhood bedroom,
and took a job at a sporting goods store.

Clients get a basic approach of buy-and-hold
market exposure. Isola doesn't try to time
the markets, but rather has clients make regular
contributions that increase over time, with

The party has to stop, Isola says. "It's a social issue.
We have an opportunity to change an industry."
Out of Finance, Then Back In



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