The Cost of Investing

On this episode of A Wiser Retirement Podcast, Casey Smith, Matthews Barnett, CFP®, ChFC®, CLU® and Brad Lyons, CFP® talk about the cost of investing. A lot of people don’t want to talk about fees. Many people say that their investment portfolio is free, that they don’t care, or that they just don’t understand it. It comes down to two things: the fee you pay for the advice and the fee you pay for the product. Understanding how much you are paying for investment advice and portfolios is important.

- Click here to download one of our free guides that covers financial planning topics like retirement, investing, taxes, divorce, and more!

Connect With Wiser Wealth:
- Our Website
- Schedule a Free Consultation (Learn More About Wiser)
- YouTube
- Facebook
- LinkedIn
- Instagram
- Twitter
- Podcast
- Blog

This podcast was produced by Wiser Wealth Management. Thanks for listening!

Transcript

Hey, before we get started, we want to talk to you a little bit about our theme for this quarter: growing and protecting your portfolio. We are excited about various topics centered around this, but it really comes down to three concepts that will help you grow and protect your portfolio. You can find a pdf on our website about this. Simply go to wiserinvestor.com and scroll down to the bottom. Enter your email address and you'll get the pdf titled, "Three Ways to Grow and Protect your Portfolio." Thanks for listening!

Welcome to a Wiser Retirement podcast, where we cover financial topics such as retirement planning, tax planning, portfolio management, insurance and estate planning so you too can have a wiser retirement. I am your host Casey Smith guiding you to financial success, are my co-hosts Brad Lyons and Matthews Barnett. Hi Casey. How's it going? It's going good. We are going to talk about the cost of investing today and we talk about this internally but for a long time I was afraid to really talk about fees. I don't know. They may not think it's not worth it.

That time passed many years ago, as well, that these are our fees. These are what the products cost that we use and this is why we're worth it. I think a lot of people are afraid to talk about their fees and honestly if you're at a large financial firm, like these big banks, these big brokerage houses, I probably would be embarrassed by my fees because they're ridiculously expensive. Especially when they get into some of their products, but there's a lot of a lot of people that think their investment portfolio is free.

They don't have to pay anything at all. Some people just don't know and they just like the person giving them advice. So yeah, I like that person, I will pay their fee, regardless of 
what it is. OR they don't fully understand it even when they're told (which that's in the industry's fault quite honestly).

But it comes down to 2 things: there's the fee that you pay for the advice and then there's the fee that you pay for the product that you're sold or is being used in your strategy. So we have a fee schedule that ranges from a 0.50% to 1.5% annually at our firm.

Obviously, the smaller amount pays the higher fee and the larger amount pays the smaller fee.

Then once you cross over a certain threshold, it actually just converts into a flat fee. You pay the same flat fee every single month. What I always tell people is like it's 75% really for financial planning and our knowledge of how to handle planning situations throughout your life.

And then about 25% of it is for the asset management part because that's about 25%

of what we do here is manage money, where 75% of what we do is financial planning. Financial planning should always come first before you have any type of investment strategy. Then we send out quarterly statements and in those quarterly statements, there's an invoice and that invoice says our fees are this. And you know what? That's sometimes the biggest hurdle for our newest clients is that they get that invoice and they're like, I don't know why? I've never had to pay this before? Oh yeah you did, you were very transparent. You were paying twice that or three times that before and they go, "Oh yeah! That makes sense now." So understanding how much you're paying for investment advice and for the portfolios is very important. So I want to talk through that today.

So let's do the math. Brad, you get the math here.

Let's talk about if we had $100,000 invested  over different time periods and different fee levels. I'm actually looking at a website from the U.S. securities and exchange commission at investor.gov. So this is
an article that the government seems to think is important and wants all investors to know so they can make their own informed decision,  as Casey was sharing with us here. And the idea here is that if an investor had taken a $100,000, put it into investment, left it for 20 years, had earned four percent compounded annually over those 20 years, what would be the ending balance of that investment at different fee levels be? So you can actually see on this website at investor.gov, the impact of fees on a real investment ,with real returns, over real periods of time. So over a 20-year period where we have an annual of a 4% return on a $100,000 investment that has a 0.25% annual fee or, has a 0.5% annual fee or a 1% annual fee. So you have a quarter of a percent, a half a percent, one percent all on the same investment for the same period with the same rate of return. As you would imagine, the one that has the highest fee, the 1.0% annual fee has the lowest balance of the others over the 20-year period. The $100,000 investment over 20 years that earned 4%, but paid a 1% annual fee has an ending balance of $180,000. This compared to the one that the investor who only paid a 0.25% for that same time period for the same amount over this with the same return, they have a balance of just under $210,000. So the difference between the 0.25% fee over 20 years or 1.0% fee over 20 years in this example is $30,000 of lost earnings. That's the cost of investing. That's the difference between choosing a low-cost investment over a higher cost investment with everything else being the same. It's worth it to take the time in the first year or even before the investment to do that due diligence and if you have the capability as an investor, then by all means you should.

If you find that daunting or difficult, then you should hire a financial professional to take a look at these investments for you on your behalf and help you choose which one is the most appropriate. Again, it's all things being equal except for the fee. Choose the one with the lower fee because that fee that's being pulled out of the investment of returns, compounded over 20 years begins to add up and that becomes the opportunity cost loss because it's not just that you didn't earn it, it's that when it was not in the investment it had been pulled out of the investment as a fee. When it was not in the investment, it was not earning a return of its own so you have compounding effect there as well. Moving on, there's different types of fees to look at as well.

So there's transaction fees, which used to be pretty common, which now are almost non-existent, at least at the big three firms. So this is when you place a trade and you pay a fee for it. So it could be a commission. We talked last episode about A share mutual funds. You're losing 4.25+% on the initial transaction. It could also be a markup. That's when the dealer sells directly securities that it owns directly to you. You would see that on the on the trade confirmation.

It could be sales loads. So those are 12b1 fees on the front end of mutual funds. It also could be surrender charges, which are early withdrawals from annuities can sometimes carry hefty fees. We see a lot of that and that's and that's really one of the saddest fees. It is! Don't even get me started on those (laughing). No it's just sad. The look on people's faces when they come in and you have to share that information with them.

Yeah, if we take the money out of this annuity, it's going to have a surrender charge of x percent and the look on their face is just the worst in the world. I've had three meetings in a row with people with annuities that they had recently purchased. They purchased them, but really you don't buy annuities, you get sold annuities. So they get
sold annuities and they have no idea what it is. It makes me angry. It actually makes me want to hire like a securities attorney, just to keep on staff, and every time we get one, we just go after the advisor. Just the principle of the thing makes me angry because it's never sold to 
people like you and me. Well not advisors obviously. We would never buy an annuity. We know better, but it's sold to people who don't know the difference. And they're sold by playing on their fears.

Anyway, I don't want to go down that track but you want to avoid annuities altogether.

I had something on my LinkedIn recently where I posted a negative comment about an annuity, and I was amazed about 
how many advisors commented positively "oh i think these annuities are great. I bought them for all my clients." I'm like "I hope your clients reading this post because they might have some hard questions for you afterwards."

Next on types of fees is on-going fees. So you can
have transactional fees but we don't have transactional fees here at our firm. Those fees are covered by TD Ameritrade.

Most everything is transaction fee free or commissions. A lot of these firms especially Fidelity, Vanguard, Schwab and TD here. We're not charging commissions when you're making those transaction fees or commissions on the sale. There are still some wire house and broker dealers that are charging, not the hefty commissions they used to when they sold various funds or stocks. But there's still some commissions within that. So we have ongoing fees as well which include investment advisory fees. Technically that's what our fees are.  We're charging investment advisory fees. We often call that financial planning fees. Annual operating expenses - so mutual funds exchange traded funds. They have operating fees that they charge. Those are usually easy to find. You can just almost type in the ticker in Google and it would be a MorningStar report that will show you what that fund fee is. Better be less than 0.25%.

In my mind, it's amazing how many funds charge way more than that. 401k fees - so these are expenses in operating and administering a 401k plan that often get passed to the participants. I'm seeing a movement where companies are starting to cover this fee now which is the right thing to do, but there's still a lot of especially small business plans who carry the load of the cost of the plan, which can be expensive. And there's not much you can do about that unless change jobs or lobby management for some changes. Then they have the annual variable annuity fees which I'll try to stay away from that topic. You know there could also be additional fees related to account transfers, account inactivity, wire transfer fees, etc. Those are usually fairly small fees in the scheme of things. What you're going to be looking for is, where it says advisory fees. Then look at the fund, the investment fees and/or the fund fees and you can add those together to come up with your total cost. Well advisory fees are becoming pretty standard across the board in the breakdown of them, but like you mentioned, it's those other fees like those expense ratios. And we've discussed it in previous podcasts, where on top of that, let's say 1% fee, there could be 0.5% or up to 1% in expense ratios that the funds are using. So you could be paying over 2% and not even realize it. Yeah, these annual operating expenses that we talked about, just in that previous example that I shared, they may seem small and they're presented in such a way like point 0.25% or 0.5%. And that seems like a small number but not when you're investing hundreds of thousands of dollars over long periods of time. These mutual fund companies or these product manufacturers, 
when they're investing hundreds and hundreds and hundreds of millions of dollars, charging these small ratios, they're making tons of money. that's a huge amount of money that's coming through these fun companies. That was my whole, I want to call it my monologue, but it was a rant about ESG versus the S&P 500.  Large Cap ESG fund will cost you five times what the S&P 500 does, and yet the ESG ranking is almost the same. So it's a great way to be able to charge 26 million more dollars than what BlackRock can charge for having an ESG fund that performs exactly like the S&P 500. And it's a game. All to have the ESG label. So that's again, an example of the standard I think is the core ETF. So you got to tell me that this fund's got to beat the core ETF to make it worth paying that extra premium. Which in some cases the ETF is just better. So the S&P 500, IVV, VOO, SPY, those cost around three basis points or point 0.031% annually. So imagine a fund that charges 1.15% which is fairly common at some of these bigger firms. Think about that. That means that fund has to beat the S&P by 1% every single year in order to keep up with it. And then we'll have an active versus passive management. We'll have active versus passive management discussion but the bottom line is that it's just hard for them to do that over the long term. It is that fee is actually 
like the wind in your face. More like a pilot trying to fly into the wind. It's like a boat trying to go upstream in a river. Constantly fighting it day after day, after day, after day, after day. 

We should take just a minute and kind of define some of what these fees are that you would actually see. You would see a management fee, you would see an operating expense, you might see transfer agency fee, 12 b1 fees, etc. 

Why do they call it 12b1 fees? And that's exactly right Casey, they are there shaking his head and said like this is crazy! And the reason they do it is so people say, "I don't even know what that is?" Right! What a 12b1 fee is listeners, is a sales charge to the person who sold you that fund. They receive that as an ongoing stream of revenue from your investment. So they just call it what it is. Well they're too embarrassed to call it that, they want to try to push it under the rug, back when you could do that in the industry and somewhat get away with it. A standard 12b1 fee is 25 basis points or 0.25%. Our whole
portfolio is a third of that, you know (Laughing).

Hey thanks for listening to today's podcast. I did want to kind of break in here halfway through and talk a little bit about hourly financial planning. This is a concept that we helped launch just a few years ago at our firm. So many firms out there have minimums 3, 5, 10 million dollars
to get access to true wealth management. And one of the things that we have been working on is getting wealth advice accessible to anyone out there who's willing to pay for that and through the hourly planning process. It's not hourly like you think your attorney would do hourly. It's really more like we figure out how many hours a project takes and then we simply quote you a flat fee for that time. We work off that flat fee for the duration of the project so we help I'd say probably anywhere from 3 to 6 families a week through this hourly planning process. And so many times we're giving second opinions, we're looking over someone's shoulder who's doing it themselves. Or we start off working that way and over the years, trust develops between our firm and the client and then we are asked to then manage assets going forward. So as we talk about fees today and we talk about different types of fees. One of the things I wanted to point out to you is that we have hourly services available or flat fee services available, where you don't have to turn over all of your assets for management if that's not what your goal is. So if that's something you're interested in, I encourage you go to wiserinvestor.com and you can simply schedule a consultation with myself, Brad or Matthews and we can talk through more about that process. Thanks for listening so far and have a great day!

Moving on, there's some questions you can ask the SEC has great guidelines on that by the way, if you want to see this list but what are all the questions to ask an advisor might be or an existing advisor what are all the fees related to this account that I will be charged directly or indirectly. I think that kind of encompasses it all it really does especially the indirectly yes, because a lot of times advisors go "oh you're only paying me x" because if you ask the question how do you get paid that doesn't cover where all the fees, could be how what fees am I paying being charged directly or indirectly do you have a schedule that lists all the fees that will be charged for investments and maintenance of this account. That is, that is a disclosure that we give every single prospect where they meet with us virtually or in our office that is not required by other firms, it's required as fiduciaries in our in our business but is not required by others what fees will I pay to purchase hold and sell this investment will those fees appear clearly on my account statement or my confirmation if not how well i know about them. How can I reduce or eliminate some of the fees I pay, for example can I buy the investment directly without paying an investment professional can I lower fees if I open a different type of account? So at larger firms, there's a lot there's a lot of legacy accounts there's a lot of different types of accounts I know at one firm there's at least three different types depending on what investment products will be available to you so there's no reason to be in the Cadillac if you needed the ford, right and so you have to kind of get an idea of which one's best for you. Suitability is the guideline that most firms operate under so you have to use the word the phrase, which one is best suitable for me in a firm like mine or ours who would say "Is this in my best interest?" which our disclosures tell you that we have to work in your best interest as a fiduciary advisor versus selling you a product we don't sell anything here at this firm. 

Do I have to keep a minimum account balance to avoid certain fees? Some firms do have minimums I don't think most a lot of firms have moved away from that or they'll tell you that you if you fall in below or they should. Here's a good one to ask if you have, if you look inside your portfolio and you see a bunch of mutual funds how do the fees and expenses of the product compare to other products that can help me meet my objective? And this is where it takes a true investment professional not just an investment salesperson to review the different products and compare them side by side to see if there is a product out there that is of similar nature and similar content with similar objectives at a different fee that they could offer to you. Another one too is you have mutual funds and that's just all that's offered does the product have more than one share class, mutual funds do if so fees compared across share classes, or how do the fees compare cost across share classes what is the overall lowest cost share available and how do I qualify for that share class? So that's something that you actually do here Brad, we inherit mutual funds all the time and because of the low cost basis it's not advantageous to sell it and so we have to hold it and kind of work it in and build around it but you'll call, well we'll call directly to the fun company and ask if there's a lower share class but it's interesting it's a lot of times there is yes, quite often there's a lower cost share class one that does not have the 12b1 for example right and so we're able to transfer into that where it just came from the firm where they probably could have gotten the same thing maybe yeah obviously 12b1 is probably that environment but but then again it's the suitability factor versus the fiduciary. That's true it's a suitable form that wasn't there in their best interest but they don't have to operate that's right in the best interest so yeah, another thing to ask an advisor and and don't be ashamed to ask this, is how do you get paid do you get paid by means other than commission for instance... for example like the amount of assets you manage if how you know if yes then how and then do you have a choice on or do I have a choice on how I pay you? I've been asked this a few times we do have a few clients that don't want money deducted from their account and they write checks directly every single quarter for our services, it's very rare but yeah I think that the question of what are all the fees related to this account that I will be charged directly or indirectly, if I had to answer that question that would cover everything that we charge I think that would be the same for anybody in our in our industry and by asking these questions to your financial advisor what you're really doing is you're clearing the air okay, you're setting a level of of expectation between each individual that you can communicate on a high level relative to your account and so your expectations then should be met if you've done this and then all of a sudden there's an aha there's a gotcha, I gotcha then clearly expectations haven't been met and it may be time to reevaluate that relationship. So we have this and I'll touch on here briefly is you want the lowest costs going forward but there is an advantage to having professional advice specifically vanguard talks about this advisor says alpha, alpha meaning you know making a difference right so Vanguard says that having a financial advisor typically adds about three percent rate of return to your portfolio every single year but it's not always from investment out performance a lot of times it's behavior coaching and so we have crises like 2020 Covid, the financial crisis all the things that popped up in the middle human nature sets in and we don't want to have that pain, we don't want to see losses right especially here in America we're not used to losing right, we're all winners and if you're not a winner they give you a pill ( Laughing), so you get a trophy, you get a yeah yeah get a trophy anyway that's right. So the the thing is when human nature kicks in and it's fight or flight and we decide to flight and we sell our portfolio in the worst possible time, we typically won't buy back the portfolio until the market's nearing the high again because that's when we feel better or we feel like we're missing out or we have missed out we got to participate and that move right there destroys wealth, it destroys portfolios we have to be able to get through some of the worst of times but keep our portfolio intact which is why we always talk about diversification adding short-term bonds to portfolios to help with volatility so you can sleep better at night there's a lot of different ways that you can handle that volatility going through but when we had the crisis and and the covet sell-off in early 2020 you and Matthews are out there working hard on portfolios and monitoring and and doing the research, I just became a camp counselor and I went from one call to the next call to the next call going, "Hey nope, this is what we're good this is the action plan" and we had an action plan that was to rebalance our portfolios sell our bonds for gains and buy more shares of stock when the stocks were low and no we're not going to time it perfectly no no one ever would it's no different than going to Vegas as far as timing tops and bottoms, but we had an action plan we did that action plan. Yes, we executed on that plan when when it got to the point where the targets and the portfolios and the weightings in the portfolio you know became over overweight equities or overweight bonds we made the decision. By having that sort of plan as you talked about it allowed us to execute on it and to move forward whether to keep continuously questioning is this right, is this right, is this right, is this right, we had a plan we executed on it we moved forward and all the portfolios benefited from it. You know I think I've heard that Warren Buffett okay, famous investor the oracle of Omaha etc. He summed it all up by saying the way to make money in the stock market is to be invested at the bottom, okay by staying invested at the bottom you get the full gain coming out of the bottom, right, if you miss the bottom that means that you've sold and the chance of you getting in at the bottom are almost zero okay so you're gonna miss some of that return stream if you're out. So really a job of a financial advisor is to construct a proper portfolio, give you behavioral coaching how you should be reacting to whatever's happening good and bad right there's people who want to change their investments to all stock when the stock market's doing really well and they want to change it to majority bonds when it's doing really bad, that's the same thing as buying and selling at the wrong time so it's developing that portfolio coaching the behavior on that portfolio and then also there's just wealth management there's all the things that I get attached to all this you know the life insurance if you check out early can we protect your family and your spouse's retirement long-term care in case we have big expenses, doing estate planning something happens to you what's legal documents we have in place to pass on assets efficiently you think about health insurance now, has become a big issue is being able to connect them or advise them on the health insurance side and then the overall just classic retirement plan. Do I have enough? or how much can I spend? Those are all things that kind of fall under the wealth management bucket ,right, and and then you know they don't they have these three points but I think the fourth one is just always being there being available for questions and strategy talks about "Hey, how do I get through this or how do I handle this?" that's what you paid an advisor for. Unfortunately in our industry we kind of defaulted to product sales and that we sell a product we have to sell keep selling products to hit our quota and so we end up with 3,500 clients and we don't really know our people, we don't really know clients, we keep our groups limited to about 150 per team here and that's so we actually know our people we know the people and what our job is and how we can best guide them and so I think the future of our industry ought to be a lot of micro-firms like ours as opposed to these big large firms that have thousands of clients and they don't know who you are. Right, you know and by keeping the teams servicing a certain number of clients allows that team to fully understand that client group that individual even. That that has the portfolio and has the circumstance, the real value in a financial advisor firm like ours is in the planning, making those decisions that will play out in a positive effect over long periods of time is where the real value is, so we maintain diversified portfolios that meet the objectives but in the planning is where we're really providing the best value for the client you know and that's where we're earning our three percent you know because our withdrawal strategies, our asset location strategies, right our Roth conversion strategies you know are designed to have a long-term positive valuation in a client's overall net worth and and that's where I think that really the the value of the three percent. And what's interesting this is unique to firms such as ours there's there's many of us around we're just harder to find our name's not going to be on the on the stadium downtown right so but we're out there google searches are we're all learning how to show up and say "Hey we're here" but financial planning is is something that everyone says that they do but if you do a financial plan and it's done in 20 minutes that's not a financial plan and that's what it is at most firms they sit down oh yeah, okay yeah I typed in all these numbers yeah you'll be fine you just did a basic very over the top view plan going, okay yeah you have enough assets to live on x amount but there's so much more to it than that typically a good financial plan is going to be five or six hours of our man time doing the research and the data to build that plan and that's that's where the value comes in and then understanding what's happening with the government and changes that affects those plans and then being proactive and calling up and saying hey you need to do this because this just happened that's what a planning firm does versus a investment sales firm that I think people are used to and think that we're all just like that and that's not the case. That's not the case at all, right so well hopefully this this helps you understand a little bit about fee structure and what questions you should be asking and if you need to dive deep and want further analysis uh we're we're easily able to do that because you know this is our language we understand how how it works and we can help you calculate what your fees are, and if you think that there's value there or not I think it's a good topic I think this is something that as a listener I hope that you can take away from it and immediately dive into your portfolios review your fee structure and begin asking your advisor some of these questions that we just talked about in order for you to have a wiser retirement. Thanks guys talk to you later! 

Thanks for listening to a Wiser Retirement Podcast, we hope you enjoyed today's episode make sure to Subscribe wherever you're listening that way you don't miss any new episodes! We would also appreciate if you could leave a rating and review. If you have any questions about anything that was discussed today head to wiserinvestor.com and reach out we would love to hear from you! This episode was produced and edited by Lilton Moore.