How to Ensure the Value Proposition You Receive is Well Above the Fee You Pay to a Financial Advisor

Welcome to EWA’s FinLit podcast. EWA is a fee -only RIA based at Pittsburgh, Pennsylvania. We hope all listeners of this podcast will benefit as we deep dive into complex financial topics that we will make simplified for you.

And we hope that this really serves as a catalyst so that you can make the best financial planning decisions for your family and also save time. Welcome everybody. On today’s FinLit by EWA podcast, Jameson Smith and I are going to be talking about fees in the wealth management and financial planning industry.

So, really excited about this episode. I think awareness is everything. As our goal here is financial literacy. I found a lot of clients could really benefit from using a financial advisor. However, there are a lot of people out there that get taken advantage of from the financial perspective.

From the financial services industry and from specific financial advisors. So, there’s really good people out there and there’s some bad apples. So, the purpose of this episode is to educate on the options what clients can look out for and just have a general education on making sure they choose the right advisor to guide their family’s financial security in the future.

So, before we get started, Jameson, just give us a quick background because this has been an evolving landscape. I was using knowledge of like, you know, in traveling world. Travel agents decades ago used to be how you did everything and now that industry has shrunk dramatically.

I want to say probably by more than 90% where a lot of stuff can just be done simply online through credit card points, etc. So, the fees in financial planning have drastically changed. So, give us the landscape of what it looked like, you know, 50 years ago and what it looks like today.

Yeah. First, I want to say at the beginning, super excited to talk about this. I think there’s just not very much transparency in the industry in general. So, understanding how fees are structured, what you’re paying for is really important and to make sure that you’re getting value for the fee.

Absolutely. Yeah, taking a look back, I think it’s helpful to understand kind of how this is evolved. So if you think like, I think mutual funds first came around in like the 1920s or 1930s, like 100 years ago.

And so there were like mutual fund brokers, stock brokers, insurance brokers. And if you think about it, you couldn’t get on the internet and go on, you know, Fidelity or Robinhood or whatever and place a trade.

You had to like, I had to call you as the stock broker and say place this trade for me. And then you got paid a commission for doing that trade. So that’s basically how it started, whether you’re buying insurance, buying a stock by mutual fund, you called the broker, they bought, they purchased it for you and they got paid a commission.

In the 1970s, the CFP exam was created and that shifted a little bit more of the industry towards planning, giving advice, not just selling a product. And then what really was the big shift is the internet in the 1990s.

I mean, as the internet disrupted a lot of industries, it just made information so much more available. Now we can go on our iPhones and Google what’s a Roth IRA, and you’ll have the answer there pretty quickly.

But people were able to self -educate, get more available, more advice, and it just basically improved, increased the client expectation of what they want from an advisor because if they can go get a lot of the info online, it kind of just creates credibility for advisors because you get fact -checked very quickly.

So that was a big shift over the industry, and then probably the last, I don’t know, 20 to 30 years, there’s been a shift towards RIAs, which is what we are, we’ll talk about in a second. And that’s more so giving holistic advice rather than just investment management.

And the other big shift too was ETFs and passive investments became more popular in the early 2000s. And this, you’ll hear like buzzwords of fee compression, and that’s really what started that was ETFs and passive investments, they’re a lot cheaper versus buying a mutual fund and paying a 1% fee.

And so yeah, so all of that kind of came into play over the last 20 years, there’s been a big shift in fees. And I think the big issue now is it’s hard to understand all the fees you’re paying, especially as a consumer, a client.

Unfortunately, it’s not always transparent. I was actually meeting with a new client last week, and they had worked with an advisor for like probably like 40 years. And they said, hey, how are you compensating?

I gave him a really direct answer on charge of asset management fee, et cetera, et cetera. And they said, we’ve worked with our advisor for 40 years, and he is never able to directly answer that question.

And so that just like a light bulb went off. I was like, that’s pretty crazy that like statistically majority of the industry doesn’t have to act in the client’s best interest. So yeah, all of that was a long, long explanation of a background and kind of where we are in a landscape now of…

transparency, information available, and compression of fees, and more so paying for advice versus just a product. No question. So if someone, there’s the stockbroker days, there’s the insurance commission days, and those are still out there, but they’re far and few in between.

Most just as competition really is good for industries is it makes the common denominator, all ships have to rise type of analogy. So let’s talk about the landscape today, and thanks so much for giving that background.

So right now, the industry isn’t limited to these four, but these are the four most common that we see. So there are essentially commission salesmen that can call themselves financial advisors because they pass a test after studying for two weeks and don’t even need a college degree.

So these are very common in… big insurance broker dealers. These are very common in a lot of life insurance companies. Would not be common in like wire houses because wire houses, most of the time, they’re gonna vet you out.

They want you to have some experience. They want you to have a personal network that’s pretty rich. And so commission salesmen would look like this. Someone is licensed to sell life insurance and someone is licensed to sell mutual funds through what’s called a series six and 63.

Now there’s one other test you need to pass, but these are pretty simple tests that someone without a college degree could pass within a couple weeks, right? So how the relationships would work with a commission salesman.

And I’m gonna give you a good example and a bad example. So a bad example, which would I would say, unfortunately, would be the regular, if you’re working with a commission salesman, is they meet with you.

They’re the best connectors. You’re gonna probably feel pretty good after meeting with someone that’s bad. They’re gonna ask you really good questions. And then they’re gonna come back and after you to share your life story and life aspirations and 20 different goals which could involve paying off credit card debt, paying off student loans, they’re probably coming back and pushing one or two products very hard.

And those products may be like a whole life insurance program saying this is gonna fix all your life’s problems. And where that industry really gets a black eye is these commission salesmen are really getting in front of usually like the lower middle class.

And those type of products are typically never appropriate for the lower middle class. Now, advisors in RA’s or in wire houses who typically work at a high net worth, those kind of products are appropriate for a state planning tax vision, the acceptors.

That’s where the industry is kind of has a black eye and where it was reversed. I think a lot of financial literacy can help fix these problems. That advisor would also show up and probably sell some type of mutual fund that has a really high upfront commission, what we call an A share.

So usually, I’m not sure. It’s like a 5 .75% upfront commission and then an internal cost that let’s just say is like one to one and a half percent So the client ever if the client puts a hundred bucks five dollars and seventy five cents goes into commission Every year they’re gonna pay an expensive cost and the reason for that is that fund has to pay the manager of the fund It has to pay it did a kickback goes back to the advice that sold it So they get paid ongoing usually what’s called a 12 me one fee of 25 basis points point two five percent And then also there’s revenue sharing to the company so if the advisors with a big broker dealer that company’s probably getting action of that as well So everyone’s getting paid the clients really getting hurt So that’s a bad example Okay, I just chime in one thing there that and that makes sense a hundred years ago when you have a skill that you can I can call You and you can place the trade now I could go on fidelity and just do that myself So that kind of eliminates the need for the need for that.

Yeah, absolutely and now someone in realistically someone in that lower middle class probably needs a a term life insurance policy. If you know, middle class family of three or four kids, they probably need a couple million dollars of term life insurance, which would cost, you know, maybe a hundred bucks a month.

They can get that on the internet pretty quickly. A lot of times now without even giving a blood draw. Secondly, they could go on, you know, a big reputable custodian like Fidelity Vanguard, Charles Schwab, and there’s many out there, and invest in like an S &P 500, you know, an international fund and maybe an emerging market fund.

Just, I’m just giving examples or like a total market index to cover bid and small cap with no upfront fees. So that’s the bad example. Now the good example of a commission salesman, because I have met very good people and that’s where both of you and I got our start is I’m at a big insurance broker dealer.

Now it’s on the advisor to navigate, you know, the paradoxes with the company and the conflicts of interest because, you know, my job was to always operate in the best interest of my clients, no matter how hard it was just to do that and commit to that.

And now we’re grateful that we’ve left and illegally have formalized that we’re legally required to operate the best interest for clients. But where this could look good is if you have a good financial advisor that’s part of this environment that is a certified financial planner or that has a high level of knowledge, they understand what your family needs.

And so, you know, they sell the term life insurance policy for you. It’s the price isn’t gonna change whether you’re getting it online or getting it through them. Now that that that advisor gets a commission and so they get compensated for their time, you know, you probably need some other products like disability insurance.

And then from an investment portfolio, they understand there’s, there are structures of mutual funds or ETFs that they can put you in that you avoid that sales charge. And you just, the internal expenses are there but you get the account high enough that then you can transition to what’s called a RAP program.

And RAP programs aren’t appropriate for everyone but I would advise if you are asking your advisor to be a quarterback to oversee your financial plans. planning, not just one time with a product sale replacement, but your life as it evolves will require many meetings, many questions, many calibrations.

Then you want to be on the same side of the table. So you don’t want to give your advice to this big commission and then run away. You want them to compensate slowly and really grow with you and for it to be fair.

So there are good examples of a commission salesman. I would say if you find a really good one, refer them to all of your friends if you’re a Henry, so high income earner, not rich yet, that analogy.

Or if you’re a lower middle class, like if you find a good one that has your best interest, you should be referring because generally good advisors aren’t available for people that don’t have half a million or a million or a couple million dollars.

So if you find a good one, let’s just say statistically, let’s just imagine those 10% amount there. You should be referring all your friends to that person because that kind of education, that kind of service that commission salesman’s gonna provide is gonna be unreachable.

to most, which is awesome. So I’m gonna go on to the second one in a second. Do you have anything to add to the purely commissioned salesman? Yeah, I think there’s good and bad of all of these. Main thing is just like, if you’re strictly, I don’t know, my opinion of the industry, if you’re strictly gonna sell insurance and get paid on insurance, stay in your lane and sell insurance and get paid insurance and don’t try to give advice on stuff you’re not qualified to give.

So that would be the big, I guess caveat is, yeah, there are very good commissionable people, just make sure they’re knowledgeable and they fit your specific situation. For sure. And there are people that sell life insurance that are some of the best financial planners on the planet that exist out there.

Cause I know some of them, friends with some of them and they also do good financial planning. So there’s, this isn’t a one size fits all, I think with any kind of industry, there’s gonna be good apples and bad apples.

So that brings us to the next one. And this is the, so this is a hybrid and this is the environment, whether I liked it or not, this is the environment, the commission salesman, and then our last example is someone that just has licensed to do the commissions.

So we were at our last firm was a hybrid. We were fiduciaries where we could offer wrap accounts. So there’s no commissions, no fees to get in, no fees to make trades, no fees to get out. It was just a flat fee.

And so if you looked at my book, a business prior to establishing EWA as an RAA, like 90% plus of the business was that. Even though I was a hybrid, like I could do commissions or that, I just chose not to, to do commissions.

And I got flack for that because that’s how, typically a big insurance company gets paid from the young advisors is taking what’s called a grid rate and taking the majority of the revenue. When those commissions come in, they pay you some of it, maybe half of it, they keep half of it.

So I did get a lot of flack because there’s just not as much money upfront for them if you’re a fiduciary with the type of clientele I was a client, which were young people at first saving for high amounts for the future.

So we took the, you know, we’re not gonna get paid now. We’re gonna grow with these people approach. And that really worked out for the… relationship between us and our clients. It did create a lot of friction with our prior company though.

So when you have a hybrid option, which I would say is really the majority of advisors that are out there, wire houses typically have a hybrid option. Insurance broker dealers typically have a higher, and these companies have the most amount of money.

So they recruit thousands of new people. Most insurance broker dealers, I mean, they have between like 2 ,000 to 10 ,000 advisors in their field force and that’s per company. So I mean, that’s incredible, just the mere power.

That’s why it’s really hard to change and the industry hasn’t just like what we think is obvious. Like everyone should be a fiduciary. There’s so much money behind keeping the industry where it’s profitable to companies.

It’s gonna, it’s a slowly evolving change, but the more transparent, the more literacy, the more information that gets out there, it’s forcing slow change, which I think is the best thing for the industry.

So with that being said, you know, a hybrid advisor can do both. they should disclose that they can do both and make it clearly what’s in your best interest. We disclose that we could do both, but again, 90% plus of our clients were in that RAP program where we’re operating as a fiduciary.

And then one small thing about, there’s two different, and we’re financial planners, there’s different regulators. So what we’re talking about right now is from an investment side. If you’re at a broker deal, you’re regulated by FINRA.

If you’re an RA, you’re registered by the SEC, Securities and Exchange Commission, but there’s a whole separate aspect of this. If you’re just selling fixed insurance products, that’s a totally separate, you’re governed by the state, the insurance commissioner of the state in which you’re selling products.

And if you get licensed in every state, you’re governed by each state. So where things get a little bit muddy is if you’re selling insurance products that also have investments with them, then they fall into multiple categories.

So that’s where a hybrid can come into play, and that’s why some people, some advisors have trouble leaving those hybrid environments as they have maybe half and half, like half their clients and the commissionals products from 30 years ago and half their clients and the fiduciary, the RAP accounts or the advisory accounts.

And so it’s sometimes it’s hard to unravel the messes of what the industry was 30, 40 years ago. So anything to add to that before I go to the third option? No. Okay, so the third option is like a purely, think about an attorney that you pay hourly.

There are financial planners like this. So we would refer to this as like a fee only person that charges a flat, like not a percentage, but like a flat $100 a month, or sometimes $1 ,000 a month, maybe it’s $10 ,000 a month if the person’s doing a ton for you, or sometimes it’s just a flat fee to do a financial plan for you.

So these can be really good in certain situations. Like if you’re a do -it -yourselfer who, you have the basics down, you have your insurance is covered, you’ll love it. investments, you love managing and you doesn’t really enjoy spending your time, but not necessarily your time is worth spending the time, but you just enjoy doing the plan yourself and things get really complex for a certain need.

Like you need to set up like an irrevocable trust. It may make sense to hire a hourly fee only planner to engage that person maybe for 20 hours and pay five or 10 grand just to cover that one thing. So that’s why I would say that’s appropriate where we see a most and so fee only planners I want to say do have a huge benefit to certain clientele where I think if someone is just starting a financial plan, they hold a fee only planner.

Here’s what’s going to happen. Let’s say, you know, I’m the fee only planner and you know, you’re coming to me for financial advice. Um, first of all, there is a conflict of interest because naturally the more hours I as an attorney or as a fee only financial advisor, the more hours I get, the better for me.

Right. So you’re going to wonder if you come to me, you’re going to kind of like, I only want you to work on this and this and this and you don’t know what you don’t know. Right. So you may need this, this financial plan, a lot of things, but then if you’re worried about the bill you’re going to get, that can really stop the momentum of a good financial plan.

And then secondly, I’m going to come to you with this huge like recommendation list. Here’s what you need to do for all this. That’s great. But most people with the majority of the population, we’ve found the busy people like physicians, executives, et cetera, they don’t have the time to implement and monitor that.

So there’s been so many times where clients have engaged a fee only planner, have this big book, let’s say from two years ago that they were given, they said, this was great. This was amazing. I said, awesome.

How much of it’s implemented? And they give me a blank stare and none of it’s been implemented. They had this great conversation, all these great recommendations, and then nothing was implemented. So I would strongly advocate that the biggest value of a financial advisor can ever provide is not just giving the advice, but making sure of the advice that the client agrees upon.

Because a lot of times in financial planning, there’s different options and you can get to the same place. You could buy term life, invest the difference. You could buy a whole life. You could do a revocable, irrevocable trust.

You could fund your kids, kids college through taxable accounts or flexibility or five, though you can get there multiple ways, actually educating and then taking the next step and following through and implementing it is the greatest value proposition advisor can get.

And I would say the second greatest then is doing it for the client, like taking the time off the plate. And if you’re a fee only, that’s going to be really uncomfortable. You know, my attorney loved the death, the amazing, but you’re always wondering how many hours is this thing going to take that I just asked the attorney for.

So that’s where the fee only hourly purse option, option number three can be amazing. I think for the majority, we’ve seen it just not work. We’ve seen it work. from like advice, we have not seen the implementation work effectively with that.

And there’s many examples where it has just in what we’ve seen, which is obviously bias because clients are coming to us after that experience. A lot of times the busier you are as a professional, the less appropriate this is.

If you have much time and you’re interested in doing it, then this could be really appropriate. So that’s the third option. Any additional thoughts on that before we go to the fourth option, which is RIA, which is what we are today?

Any odd? Yeah, I would say that just the big, there’s conflicts in every model. Like just absolutely. The big one for there is they want to take more time and then the implementation. If we were to think about if your advisor is doing very detailed planning, you own a business or even for a physician, like a lot of the work that we do, if we were to bill hourly, especially with like how much time our team, even not even the advisor in the meeting, just like the team on the back end that’s doing a lot of the implementation, probably would be.

astronomically more than the assets that are management fee. No question. Situation specific, but I think that’s a good segue then into why the RA model, fee only, fee for planning assets and management, but.

Absolutely. So let’s talk about the RA. Now this is what we are, this is what we’re biased. So we’re a fee only RA, which means we don’t take commissions. We’re legally not allowed to take commissions.

We actually dropped our licenses that allow us to take commissions when we left our prior broker dealer. So further than that, we also sponsor a RA program. So if a custodian that we work with, like Fidelity and Charles Schwab tries to charge, which not tries, when they do charge like stock commissions or mutual fund, we cover all of those for our clients.

So when we say a client pays us a flat fee, let’s just say 1%, that’s it, right? The commissions, the in commissions, out, that’s it. Well, I shouldn’t say that’s it. They also pay the soft cost, which they wouldn’t any model of any fund, whether they’re doing it themselves, whether they’re working with the commission, which is the soft cost are, what is the cost of the ETF itself?

Could be 10 basis points. So another 0 .1% could be a mutual fund that we have an institutional share class for that could be 30 basis points, just an example. So, but as an RA, so let’s talk about the good is we’re legally required to hold our clients best interests.

The bad is that paying 1% to manage a portfolio, just to manage the investments, I would say is not worth it. The value proposition is not worth it. So you have to find an RA that does a fee only where the conflicts are low, but provides a value proposition that goes so much more above just the investment management.

So investment management is just table stakes, but this team would be involved with every decision that you have available around the clock without forcing you to pay hourly for any advice that you have, any big life, my opinion is that the best is to have a company I just have some examples I listed out.

So if a, and the other thing too is not every RE is run the same. Because a lot of people we’ve seen have messy practices where basically the rich clients are subsidizing the less, you know, the smaller accounts where the firm hasn’t done it properly.

Imagine like you were going to get a car and the car was $50 ,000. And then I went to get the same car and they offered it to me brand new for $25 ,000. Like you’d be pretty upset, right? I mean, that’s not fair.

Well, unfortunately in the investment management standpoint that happens, we see that happen all the time. A $10 million account maybe in the same level of service paying $50 ,000 a year to get this amazing plan but then the million dollar account who’s really needy could begin the same amount of service, same amount of time, et cetera.

So I would advise, you know, you should really be asking your advisor. What do you have an account minimum? That’s a good thing because it means when you become a client You’ll be prioritized and your money your fees won’t be subsidizing an account much smaller than yours Do you have an account minimum?

Do you work in a niche like who do you work with? So we work with executives, physicians, retirees, business owners So we have expertise on our team to address all of those and that means we’re able to scale our time We’re able to get answers done quickly so we’re not you know researching 10 hours for one client on one topic We see the questions 90% of the questions we get we’ve seen before and we’ve created resources and videos to scale our time to address those things If I was a fee only advisor as a one -man chop, I would have to individually go look at everyone But now when a new client we’re very efficient.

So That’s why we’re able to do everything I’m able to list out. So the first thing that I think a financial advisor regardless of the a The fee model you have should do is income tax planning so claiming deductions credits Making sure you’re getting you know in the right accounts Roth’s 529s tax deferral tax bracket arbitrage So, you know just if you’re retired making sure you’re taking the right amount from a your social security your pension You’re irate it to climb those you know up to the 24% bracket and then avoiding Going into the higher Medicare brackets the higher tax brackets by coming out with Roth IRAs having tax loss harvesting done So those are all again table stakes, but take a lot of time So for an hourly advisor to do all of that it just you know, you’d pay probably five to ten times what you’d pay a Percentage person that has a team and the technology invested to automate a lot of these processes Investment planning benefits, you know, you should have an advisor picking low -cost investments Acid allocating for you maximizing returns lowering risk Investment selection rebalancing diversification making sure your behaviors on track tax loss harvesting through direct indexing This person would be doing your estate tax planning.

So making sure if you pass with more than than a certain amount of money, you don’t pay 40% of it to the government. State estate tax savings, making sure probates address them, retirement, maximizing social security, maximizing Medicare, managing a sequence of return risk, and then actually like the delegation, so just making sure your time’s being respected.

And then I would say less than 10% of clients, so we see a lot of people have done that. They’ve done an amazing job accumulating assets, and a lot of people have done a very poor job where we find the sweet spot of financial planning is people that live presently today, their best lives, will also secure in the future, and then also give themselves permission to spend along the way, and permission to spend their time along the way, not think that they’re essentially just like, you know, like, you know, like, you know, like, you have to be married to their work all the time because they’re so afraid of reaching their goals.

Cause a lot of financial advisors use scarcity tactics and say you have to work earn, earn, earn, earn. Reality is like a good financial advisor should be saying, live your best life today, also secure the future.

And having tough conversations and managing the tension that needs to be in place to make sure, cause you only get one life and you can never get it back. The good financial plan is not over accumulating assets and a good financial plan is not under accumulating assets.

A good financial plan is in that sweet spot done. And that, in my opinion, is absolutely priceless and less than 10% of the population has a financial plan that addresses that. A lot of people are over accumulating assets and are miserable at their jobs.

A good financial plan would get them happy today, balance today, balance for the future. And that’s where a financial advisor, regardless of what structure you choose, how you should choose a good advisor to guide your family’s future.

Okay, so that’s an RIA. There’s lots of discussions we can have about that James, but what else do you have about the RIA? Cause I know again, we’re biased, this is who we are. What else do you have to add about the benefits or potential downfalls?

I’d say two things to add. One, exactly rewind what you said at the beginning, like if you’re paying a fee for investment management and that’s it, they’re giving you no advice and they’re charging you what somebody would charge you to give you advice.

Like that’s a horrible value proposition. It’s so, yeah, if you have, if you’re high net worth, yes, you should have like, I 100% am convicted somebody should manage money for you because there’s a lot of mistakes that could be made, but it is so easy to go passively invest in ETFs or now with like, robo advising.

Like you could get probably the, a very, you’ll get 90 to 95% of the way there on your own. And so it’s like, make sure that the fee is well worth, the advice, the decision affirmation, saving your time.

The financial plan. Yeah. And then the second thing that you said, I think the conflict that arises that I’ve seen a lot is the over accumulation. If you’re charging assets under management fee, Well, that advisor wants you to have as much money as possible under their management because they’re collecting more fees.

That’s why the name of our firm is Equilibrium Wealth Advisors to create that equilibrium so that, exactly what you said, it’s a total failure if someone over accumulates and they’re not spending anything.

That’s really the big conflict that can arise with assets under management. If you have a good planner, a good advisor, that would never come into play. I’m glad you brought that up. Other conflicts would basically be like if your advisor is telling you to over accumulate and not buy the vacation house that’s really important to you or to travel, or if your advisor is saying you can’t afford to spend that in retirement and all your money is just sitting there, something’s wrong.

You should be actively taking the money out. That’s like you literally just want to pass everything to your kids or a charity or something. How well is your money matching your goals? How well is your money matching, supporting your life by design?

I feel like a planner, if you’re evaluating like a… a real estate deal where no financial advisor is going to like most financial advice wouldn’t take commission or get paid for a real estate deal.

That’s a good setup. Now, if you’re going to an RA for a real estate deal, that firm better have your best interest in hearts because you know, if you do that real estate deal, let’s say you put a million dollars into like this multi unit, that’s a million dollars.

They could be investing, charging that fee that they’re not getting and that’s not that way. So that’s an inherent conflict of an RA is to generally favor money that can be managed and to dismiss anything that couldn’t be managed.

So that’s just a natural bias that could be present in a firm like ours. Where we’re telling you invest everything in the stock market, never consider real estate, never consider private equity, never consider Bitcoin because a lot of those things we do not like, not because of the reason I just said because of other issues, but I just wanted to point out those, those inherit conflicts, right?

Um, so where a really good relationship can work is where, you know, you as the client is paying as little as possible. If, if, if an RA is doing all those things for you and charging 1% on a million dollars, so you’re paying them $10 ,000 a year and they’re doing everything I listed out there versus you going to a fee only person and then doing that all without, you know, if the only person probably is a one man chop, maybe not, they’re not going to have the technology to scale all this.

So the time it’s going to take to do all that stuff is probably I would estimate to be 30 or 40 ,000 a year. So you’d end up paying three or four times. So where I would say if you have a high income, low time, need to develop a whole financial plan, that’s where you really, an RA would make sense.

If you’re a totally like a do it yourself or, and you have specific, very like sniper shot like specific things you want to address and a fee only person could be great where you don’t want to hand the money over to an RA.

I would say we are not a good fit whatsoever. And then in any of these, you just need to make sure that you have someone that’s willing to quarterback and give you un -conflicted, unbiased advice that’s in your best interest, which can exist in all of these scenarios.

And save your time is a big thing too. Absolutely. You don’t have to implement it yourself. Absolutely. So now that we’ve talked about this, there are some costs. Let’s talk about that. So there’s costs.

And James, you provide a good outline here. So there’s basically three types of fees, right? So there’s commissions up front. There’s expense ratios of any funds they’re invested in. And then there’s the advisory fee.

So give us a quick breakdown of the three. And then obviously I could address where these would never be applicable in some and they would be applicable in others. Yeah. So commissions, we’ve hammered this.

This is just like loaded mutual funds, commissions on a stock trade. We’re talking strictly investments here. Insurance is a different landscape. But basically, yeah, an advisor, you’re paying advisor to place that trade with you as we already talked about.

technologies made this like almost go away when you can just go online and There’s like the accounts like the the companies like Robin Hood have kind of like gamified trading which is a whole nother conversation They don’t agree with but it just made it easy and easy to do you don’t need to pay someone to place that trade a lot of times But yeah, these are just except accepting a commission like Last firm we were at like an individual stock was like a $15 trade fee So just little and that the client was forced to pay yeah, like we wanted to pay that for them And they would even let us yeah, so here that the conflict could be trade like if you’re if you’re only collecting the commission and Let’s say I’m the I’m the client you’re the advisor I’m coming in for an annual review meeting and there’s no ongoing Assets under management hourly planning fee planning fee at all The only way you’re gonna get compensated for your time is by placing some sort of trade That’s gonna generate a commission to you.

So that’s the band conflict. I would say that’s not best for ongoing advice, but so wrote really quick Who’s a big advocate that you can think of like a personality out there. That’s a huge advocate for paying someone commissions Can you think of it?

Dave Ramsey. Oh, is he really? He still recommends at least I check I mean I I haven’t listened to him in years I believe because there’s I didn’t know that A shares and then he has this whole network of like find a Dave Ramsey or whatever they’re called advisor And then they get it and then they get kickbacks and all that so and basically that then you know The idea is that those all those clients are still like Dave Ramsey followers and listen to his financial Literacy and everything like that.

So I would say 90% of his advice is good But the a couple things where his advice is really bad is like his return assumptions of 12% And he’s big and mutual I don’t think he likes it. Yeah, he’s big and mutual funds.

That’s completely flawed I mean if you just look statistically we just did a podcast and international investing where you know overall like 30 year periods, less than 5% of, in certain like large cap categories, less than 5% of managers ever outperform index.

So just use ETFs. If you’re investing internationally, the mutual funds can be appropriate for the right mutual funds. It’s only like a third of those outperform, but just in general, so that commissions is the first type.

And the second type is expense ratio. So what, what’s the, this still blows my mind. So commissions in general, other than like the, cause Dave Ramsey is like a huge following, like almost like a cult, like following, um, and not saying that some of that’s bad with, if you’re following, you know, those bad assumptions and ruining your financial plan, but I can generally, he does give great advice.

Um, what blows my mind is like the expense ratio is still so high. So give it, what’s the average expense ratio, even if you’re like working in a wrap program or commissions for, for funds for it. So if you have a portfolio with a basket of each ETF mutual funds, The Michael Kitch’s did a really detailed study on what the average expense ratio is.

What is that? Yeah, so this this chart here it depends on that Holistically the average is 65 basis points a point six five percent smaller accounts are higher like up to a million The average is one percent Many you have had in the visor one and one to like managers with kickbacks.

Yeah, so let’s just explain that we call that like soft costs Yeah, internal a lot of times they’re not even disclosed like you have no idea you’re paying them Like if you go online and buy a vanguard ETF you may pay five or ten basis points super cheap However like mutual funds are much more expensive you’re paying that manager where a lot of this comes into play is if What just say I own a I have a company I’m giving investment advice and I also sell mutual funds So I could then take and you have a mutual fund company.

I could agree I’m gonna sell your mutual funds to my clients and I’m gonna charge 1% and you’re gonna get you know 25 basis points. They’re basically there’s markups and incentives to you know use other companies mutual funds So that’s where a lot of the big conflict comes in here and why these are so expensive because you’re not just you’re not just going On to that vanguard ETF and buying it.

There’s different multiple players involved that are getting paid on this So in general, it’s important just to understand what what that cost is and again ETFs and passive investments have decreased this dramatically over the last like 20 years But just high -level overview many times not disclosed and could be another 1% that you don’t even know you’re paying Absolutely, so where that would come into play a Commission salesman option one we talked about being the podcast You’re probably gonna be closer to 1% because those upfront charges typically have high ongoing charges as well the hybrid if the hybrid is working out of your Their fiduciary hat not their commission hat then most likely that the portfolio was probably in half have between 30 to 60 basis points of soft cost.

And if you’re working the fee only person, that person’s gonna direct you on where to put your investments, they’re not gonna get paid on your investments, generally speaking. So that person hopefully will be directing to the right investments and you could pay 20 to 30 basis points if they’re directing you to mostly the ETFs, maybe some active stuff in emerging markets international.

And then RIA, they have the fiduciary duty to pick the lowest cost, best investments for you. So in general, you should be on the lower end with no conflicts, meaning the RIAs should not be receiving any revenue kickbacks.

And so we’re legally set up like that, like we can’t put a client into fund where we’re getting kickback. Cause all that is, it’s the same fund with a different ticker that has a higher expense ratio that gives a kickback to the person selling it.

And so we’re conflict free in that regard. So every share class that we sell is, what’s the cheapest? I share, institutional share that’s out there, what’s the cheapest that we have available through a big custodian like Fidel and Schwab?

And we’ve negotiated that we have the availability to do that. So no conflict free meeting. We don’t participate in any of the revenue from the soft cost. Those only go to the ETFs, mutual funds, et cetera.

That’s why we’re able to get our portfolio costs average between 0 .2 and 0 .3%. So 20 to 30 basis points. About a third of the industry average there, which is great. And so then let’s talk about the advisory fee.

This is generally the inverse of tax brackets. So usually you would pay, let’s just say, 1 to 1 and 1 and 1 half percent on the first half a million. Then it would go down to 1%. And then after a million, you’re going to pay maybe 0 .8, 0 .9.

And then 0 .8, 0 .7, 0 .6. The more you have, the lower that percentage should go. A $10 million account doesn’t have 10 times the amount of work at $1 million account. A $10 million account does have a lot more to plan for.

Potentially from estate planning, that person has probably had an inheritance or created the wealth themselves through a business or was just a really good savers. They probably have a lot more to do, but not 10 times the amount of work.

And that’s why a $1 million account may pay 1%, a $10 million account may pay half a percent. Even though it’s 10 times the size, they still get, in reality, they pay half of the percentage fee that they would otherwise.

To tie a bill and all that. So commissions, if you work with the Firmly Guest, those don’t exist. And then the expense ratio, you can never avoid those. Whether you buy a fund through us or go online, that’s going to the fund company.

So that’s with us as minimal as possible. And then third is the advisory fee, which obviously is fee for us doing the work. So that’s like we feel is, you know, that’s minimized as much as possible. Some of the expense ratios could be higher on top of that advisory fee.

Absolutely. Give us an idea if someone is paying a percentage of assets, like what would, there’s industry data out there. So what should someone, you know, on average, what do we see? Cause supply and demand and the, you know, capitalism really takes care of pricing.

I have people think like, oh, pricing should go down. I think what’s going to go down is like someone that just managing investments is going to become totally irrelevant. Cause that’s not worth paying for, but someone that does all of the things I listed out, full comprehensive financial planning, actually does the follow through.

Those are far and few in between. And I think the pricing is actually going to go up because good luck finding a good firm that can actually do all of that for you, has your best interests and does it consistently.

So I do think the pricing will go up for those type of people that are doing the comprehensive approach. But as we stand today, I think this, yeah, this is up till 2020. And I’m glad you said that because I, I was researching this and actually a couple of weeks ago, I came across a Vanguard article.

And so we’re going to go through data through 2020. But what this article said was because of COVID and like, seeing rapid portfolio changes, there’s been fee compression up until 2020. And then after COVID, fees actually have increased because people want to pay for advice more because they’ve, I think they’ve just, the understanding from that article is they’ve seen mistakes made and like people messed up and lost money during COVID and stuff.

So to your point, yeah, I think fees are going up, but this is up until 2020. This is just the not including that soft cost is just like the fee that would go to the advisor. This is like 10th through the 90th percentile.

We’ll just go through like a million dollars, the 50th percentile is 1%, and up to 5 million 50th percentile is 0 .78%. And obviously above that would drop would drop down below that. But I always tell people very candidly, you don’t want the cheapest, the cheapest is like probably not getting any advice.

And you don’t want the most expensive most of the time refer an advisor, I would say somewhere in the middle is usually, you know, what fits the best. Absolutely. Well, just some to wrap up some, some our discussion here.

So advice to the audience, just direct advice. If you work with a commission salesman, and this commission salesman really has your best interest in heart, not only like, meet with him, do the advice, you know, buy the term life, get the investment started, have him educate you about, you know, if you get to a certain level, he could transition, refer that person.

Because in general, that person, there’s there’s only so many good people like that out there. And there’s such a wealth gap in America, but there’s such a advice, there’s there’s such an availability gap of good financial planner.

So usually sales commission, commissionable salesman will talk to anybody, if you find a good one, make sure you sell it. If that person’s calling you all the time, trying to sell your products all the time, that I would run away as much as possible.

So just in general, probably nine out of 10 of these people would recommend, you know, not doing business, one attempt, definitely not only do business with them, but refer them around to all your friends and family.

If they have the same net worth as you, then this is a good person that’s going to do a better job mostly than any technology could. It’s going to handhold you through everything. So that’s advice for the commission salesman.

If the hybrid, the advice would be, because there’s some of the best financial advisors are hybrids, just period. Cause just for the mere fact is this is where most financial advisors are. Just flex about, you can do either.

You can do either or so. The advice would be, does that person fully disclose the hats that they’re capable of wearing? Does that person disclose the hat that they’re wearing for you? Does that person provide the pros and cons to both?

And is that person willing to grow with you? Do you have a one need that you’re going to solve or do you want a long -term relationship and then are they going to offer the fiduciary hat? And if so, that person’s probably great.

The same advice, do business with them. And again, they’re probably operating off a word of mouth. So refer them to your friends and family. The fee only hourly person, if you are one of two categories, so one, you think you want to do this all yourself, but need education, the fee only hour of a person is probably a good, good option.

Or two, if you’ve already done it yourself, but you have a really complex situation, go see a fee out hour of a person. If you’re a person that doesn’t want to do it yourself, wants to fully delegate it, I don’t think a fee hourly person is going to be good because most of the actual implementation work, which is a much harder.

They can say, Oh, it’s easy. Doing a backdoor Roth every year, doing a mega backdoor Roth, calling the company, rolling the after tax money out to the Roth, getting your estate plan done. If you’re a business owner, getting a cash balance plan, getting your 401k census up to date, doing that with their fee only advisor, all the work’s going to fall on you.

And you’re going to lose so much money with looking at what your time’s worth. It’s not even worth discussing. So a fee only hourly advisor can be amazing. If you’re going to end up being a do it yourself or if you already are, and you need help with one or two problems where the generally speaking, I’m saying for like physicians, executives, business owners that they want to free up their time, they need a fully quarterback.

And that’s where the fourth option in our opinion would be best. That’s the RA model. So no fees to get in, no fees to get out, look for a firm that doesn’t do a contract. So if you don’t think the fee is worth it, you can leave any time and then make sure that they truly, even though legally they are required to have your best interest at heart all the time, look at how they provide advice.

If you’re doing private equity trans transactions, if you’re doing real estate transactions, are they always guiding you away from that? Are they really taking a deep dive and educating you on how that may fit or may not fit inherently when it is a conflict, when they’d prefer that you invest the money with them from a revenue perspective.

But if they’re really focused on your financial plan, they’re always going to give you advice and respect what you want to do with your money as your life by design. So hope that that wraps up. our podcast around how the financial planning industry works around fees.

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