Subscribe
Share
Share
Embed
Welcome to How to Retire on Time, a show that answers your retirement questions. Say goodbye to the oversimplified advice you've heard hundreds of times. This show is about getting into the nitty-gritty so you can make better decisions as you prepare for retirement. Text your questions to 913-363-1234 and we'll feature them on the show. Don't forget to grab a copy of the book, How to Retire on Time, or check out our resources by going to www.retireontime.com.
Welcome to How to Retire On Time, a show that answers your retirement questions. My name is Mike Decker, founder of Kedrick Wealth, and joining me in the studio today is Mr. David Franson. David, thanks for being here. Hello.
Mike:Get your questions answered on our show by texting them to (913) 363-1234. Again, that number, (913) 363-1234. David, let's dive in.
David:Hey, Mike. How come financial advisers make money even when the client loses money?
Mike:Yeah. This is a very fair question. One that I have struggled with most of my career, admittedly.
David:Okay.
Mike:And from a regulatory standpoint, there is good reason. Not everyone loves regulation. I tend to actually appreciate a lot of these regulations that are here, because you have to understand why is the rule there. What happened? What adviser did something really dumb that caused regulators to put in a different rule or a new rule?
Mike:So fiduciaries and financial advisers in the public sphere, okay, the ones like you would work with for most people that are listening in, They don't have performance based fee structures as in if you make money, they make money. If you don't make money, they don't make money, because it may incentivize the adviser to take more risk than is appropriate trying to maximize their own pockets. That was at least the intention behind this. So the traditional fee structure is really around, like, 1%, one and a half percent typically what I've seen advisers charge, and it's whatever you're making up or down, their job is to try and help you navigate through the storms, to the good times and the bad. But yeah, it is kind of a funny situation when you think about it.
David:Yeah. Yeah. It really is.
Mike:But it it's intended to bridle greed and to help advisors be more of a fiduciary and less of a hedge fund. Now hedge funds, if you're an accredited investor and you've got enough money to meet their minimums, yeah, you could put in a hedge fund, and those that's where the performance fees are. Many hedge funds blow up because they take on that extra risk. Many hedge funds struggle in certain times, and there are many hedge funds that do wonderful.
David:And our hedge funds really for, like, average investors or those just for like the high rollers?
Mike:Yeah. It's for those who have multiple millions of dollars. Yeah. And then there's often like a $2.03, $4,000,000 minimum just to have them manage your So it's not a common thing. The everyday adviser, they're trying to make it advisable for individual.
Mike:Now there's a second question on the fees that I think needs to be addressed, and it's net of fee performance. Okay. Explain that. Yeah. There's two sides to this.
Mike:The first side is, what are you paying the adviser to do, and what's the objective? And then the second side is, could you do it better on your own? The second side is often based on ignorance. I'm not saying people are ignorant deliberately. You don't know what you don't know.
Mike:So if you tell an adviser, hey. I wanna grow my assets, but I don't want a ton of risk, you're probably never gonna beat the S and P 500. And so when you say, well, I could have just bought the S and P five hundred and beat what I'm paying my adviser to do. That's true. But you're also taking greater risk, and when the markets go down, all of your money's gonna go down.
Mike:So the adviser is trying to give you a more of a steady or consistent growth on that trajectory. So you think, well, what am I paying you to do? It's to do the research to put together a portfolio that is suitable for you, that fits within your emotional limits. If you don't like that, if you wanna try and beat the S and P, let your adviser know they can get more aggressive, but it needs to be suitable, and you've gotta understand you're taking more risk. You can't separate risk and growth potential, and it's not more risk, more reward.
Mike:It's more risk, more potential reward. So that's one layer of all this. But the other thing that I think is very interesting is you can buy stocks, mutual funds, ETFs on your phone. There is no barrier of entry for these publicly traded investments. So if you wanted to do the research, if you want to manage your portfolio, maybe you don't need advisor.
David:Is that a controversial statement?
Mike:Yeah. I wrote an article that went on Business Insider some time ago that said how a comprehensive plan could replace your advisor and save you fees. If your advisor's charging you 1%, and you're just sitting on a bunch of mutual funds and ETFs, I think that's kinda like a participation award, because you could fire the adviser, keep the same portfolio, and you got 1% better performance. You're paying an adviser, in my opinion, to actively trade your portfolio. Now does that mean you're actively trading all of your portfolio?
Mike:No. I mean, for our portfolios, we have a component or part of every portfolio just has the S and P 500. Could you do that on your own? Yeah. But we're trying to smooth out some of the volatility, the ups and downs, as we're also actively trading other parts of our portfolios.
Mike:But you're paying your adviser to get you a better return than you could on your own according to suitability that you have. That's your basic function of a financial adviser or an investment adviser. Now here's a caveat. What else is the adviser supposed to do for you? I mean, really, what other services are you asking of your adviser?
Mike:That is one of the most fundamental questions, and I think people are often shocked when they approach this of what actually is being offered and what they're not getting, and you don't know unless you ask. Okay? Right. You don't know what you might be missing out on unless you you just don't know. So let me tell you a quick story.
Mike:Couple of weeks ago, my son was choking on a pancake. Very difficult situation. He couldn't cry. He couldn't call for help. We got lucky.
Mike:We noticed that he was in tears. He just started tearing up a little bit. He was holding his throat, and he didn't know what to do, and so quickly we sprung into action. Now let's pause real quick. Okay?
Mike:Choking kills people. People die every year from choking. It's a very serious situation, especially when they can't cry or vocally speak. It is completely clogged. K?
Mike:So what are my options? I have one option, quickly drive him to a hospital, which is fifteen minute drive away, probably would have significant damage to some part of the body. I'm not a medical professional, but I'm assuming if you don't breathe for fifteen minutes, you could die and or suffer severe health issues with
David:that. Yeah.
Mike:I could take him to the urgent care clinic, which is about three minutes away, quick drive from my house, or I could give him the Heimlich, and just clear it right away. So being your good old Eagle Scout from when I was a kid Uh-huh. Quickly sprung into action, and I cleared out the throat, couldn't get it all out, gave him the Heimlich, a child Heimlich, not the adult one where you could break ribs or whatever, but gave him the Heimlich, and it came out and started vomiting. Traumatic experience. Now you think that we would be resolved at that point, but it wasn't.
Mike:He had a horrible bark. Now this is a pancake you choked on. Part of the debris could have gone deeper down into the lungs. If it goes down into the lungs, it could create additional issues, And maybe his airways are still partially blocked because there's this horrible bark, he still says he can barely breathe, that could be from hysteria, it could be from a partial obstruction. So what do I do?
Mike:I drive to the urgent care. I walk in there, I say, my son's choking. I did the Heimlich. He's now able to speak a little bit, and they could hear him cry. I said, but there's still something I think that's in there.
Mike:Can you help? This is what they said. They said, we'll get the doctor right out here. The doctor comes up pretty quickly and says, we can't help you. Go to a hospital.
Mike:Let me just let me just dwell on that for a second. I'm going to an urgent care clinic because my child has been choking. Yeah. And they say, we can't help you. We're doctors.
Mike:We're medical professionals, and we can't help you go to a hospital. So my child is now choking. I think he's choking. There's a horrible bark. He's hysterically crying.
Mike:I'm doing everything I can, and I drive to the hospital. We calm him down. Things ended up okay. Right? We were on watch for a couple of days to see if there was anything that got into his lungs, and we took x rays and did all sorts of stuff, and he's fine.
Mike:Thank goodness. But you would think that an urgent care clinic would have been able to at least stabilize and verify that he wasn't at least partially choking. No guidance. Nothing. The reason why I bring this up is many people assume that their financial adviser can give them comprehensive and holistic advice.
Mike:Many advisers can't. They can't give you tax advice. They're not licensed to give you the insurance advice. Maybe they can give you a couple of insurance products, but they really don't know what they are. It's just kinda like they can explain it away real quick.
Mike:Many financial advisers, they can't do tax returns. They're not talking about your estate plan. They don't know that if you have over $12,000,000, you maybe should have considered an a b credit shelter trust and not pay a ton of estate planning taxes. You go down this list, and you start to realize your adviser had one purpose, that was just to grow your money. But retirement requires so much more, and it's that eye opening moment where people start to wake up and say, well, maybe I should find someone else.
Mike:K? Now on fees and all that, there are other layers of issues with fees, but you have to ask yourself, what are you paying, and are you getting the value of what you're paying? If you've got a million dollars, you're paying 1% in fees, guess what? You're paying $10,000 for what? Is it the same model everyone else has?
Mike:Are you paying $10,000 to have a friend to call once in a while and ask a question about the market? Are you paying is it 1.5%? Are you paying $15,000 for this million dollar portfolio just to, I don't know, have someone buying a hold for you?
David:Check-in once a year and say, yep, these are the mutual funds you're in.
Mike:You have to start to ask, are the fees worth it? Now there's another line that needs to be addressed here. And by the way, just for context, because obviously, we have fees at Kedrick Wealth. We subscribe to the CPA model of fees. We charge a flat fixed fee, like a subscription or a membership, or based on how much time does it take to do the thing that needs to be done.
Mike:So if you're just growing your assets and we're just doing tax planning on the growth of your assets, we're managing your portfolios in the market, we're doing the insurance planning, we're reviewing the estate each year. That's a simpler situation than if you're retired and we're having to take income, plan your RMDs, and so on. But if you have a million dollars, 2,000,000, 3,000,000, 4,000,000, 10,000,000, it's the same price. Because we charge a fixed rate for how much does it cost to do the job. And now we can actually line item.
Mike:This is what you're paying for to the hour. This is what you're paying for. This is the time it takes to do it. Do you want it? Do you not want it?
Mike:And now it actually makes sense. At least we can explain it. Instead of this 1%, but you get the same amount of it just it it feels weird. This person's got 500,000 invested with this adviser. This person's got 2,000,000.
Mike:They both kinda get the same attention, the same service, but one's paying significantly more. It does not make sense today based on how the technology and the industry functions. I get how it was in the seventies having to call in every trade. The more shares you had, the harder it was to offload or to buy, But today, it's simple, and yet the industry has not adjusted, in my opinion, to be what's best for the client. All fiduciaries, you know, and we're a fiduciary to do what's right for the client.
Mike:We're legally bound to do that, but they haven't updated how fees should be done. So the question here, how can how can financial advisers make money when even the client loses money? There are so many potential issues in my opinion on how fees are done that I think things need to be reconsidered, and I think this is why there's a huge exodus of DIY retirement plans, because many people can't rationalize the fees for the services they're actually getting. And I think as people are continuing to do their research, they're waking up to maybe they're paying more in fees than they realize. Did I answer the question?
David:Yeah. I think so. Yeah. You've touched all the bases there. It sounds like what you're saying is that technology has disrupted the industry enough that we're at the sort of turning point where we need to reconsider maybe the industry why they charge what they do.
David:Is that fair to say? How much are
Mike:you paying in fees, and are you getting the value for it? Because if you don't check that, there's a good chance you might be the annuity to the adviser. That you're the residual. They're getting a participation award of just having your assets sit in some funds, and they're just overseeing it. It's very easy to oversee something, and that's all you do.
Mike:It kind of breaks down the integrity of the financial services model in my opinion. For everyone here that's starting to kinda wake up a little bit about that, you're wondering, well, how much do I have in fees? Ask your adviser, how much are you paying in fees? And not just fees on, like, the 1% that they're charging, but find out. Do you have mutual funds?
Mike:How much fees are associated with the mutual funds? How many fees are associated with your ETFs? How many fees for all you got, the variable annuities? There's like three or four layers of fees that you're paying. Add them all up.
Mike:If you don't know what your fees are, I haven't personally done this, but I would assume that you could probably upload some stuff to your AI of choice, whether it's chat GPT, and it would probably break down how much you're actually paying in fees. Get that total, and then ask yourself, am I getting the services that are appropriate for the amount of money that I'm paying? If the answer is no, consider looking around. That doesn't mean you should just DIY your plan. It means maybe you ought to look for someone that would charge the same amount or less, but offer you the same or more services.
Mike:It is possible. That's all the time we've got for the show today. If you enjoyed the show, consider subscribing to it wherever you get your podcasts. Just search for how to retire on time. Discover if your portfolio is built to weather flat market cycles or if you're missing tax minimization opportunities that you may not even know.
Mike:Explore strategies that may be able to help you lower your overall risk while potentially increasing your overall growth and lifestyle flexibility. This is not your ordinary financial analysis. Learn more about Your Wealth Analysis and what it could do for you regardless of your age, asset, or target retirement date, go to ww.yourwealthanalysis.com today to learn more and get started.