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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, the show that answers your questions about all things retirement, including income, taxes, Social Security, health care, and more. This show is an extension of the book, How to Retire On Time, which you can grab today on Amazon or by going to www.howtoretireontime.com. My name is Mike Decker. I'm the author of the book, How to Retire On Time, but I'm also a licensed financial adviser, insurance agent, and tax professional, which means when it comes to finance, your money, all of the above, we can pretty much talk about it all. Now that said, please remember this is just a show.
Mike:Everything you hear should be considered informational as in not financial advice. If you want financial advice, you can request your wealth analysis from my team by going to www.yourwealthanalysis.com. With me in the studio today is David Franson. David, thanks for being here. Yep.
Mike:Glad to be here. David's gonna read your questions, and I'm gonna do my best to answer them. You can text your questions in to (913) 363-1234, or you can email us at, hey, Mike, at how to retire on time dot com. Let's begin.
David:Hey, Mike. I work with a financial adviser, but he doesn't charge me anything. That doesn't seem right. Can you help me figure out what I am paying in fees?
Mike:So everyone's gotta make a living. No one operates off of charity. Yeah. But it's okay to be paid. Nothing wrong with paying a financial adviser.
Mike:The question is, are you getting your money's worth? So let's talk about fees. Most people listen to this show are typically 50 years or older. Now we've got people that are in their forties, thirties, and twenties as well, but the large bulk of people that listen to this show, according to our Nielsen database, so the research we get, is 50 plus, which means you've probably been working with a financial adviser for a long, long time, which probably means you've got a bunch of mutual funds. So let's explain how mutual funds work.
Mike:Yeah. So mutual funds, which is kind of the old tried and true tested way, at least the old school way, is you've got, I mean, and I'm just doing three of them. You got a shares, b shares, and c shares. Okay. A shares, you pay a fee at the beginning, so all of your money dollar for dollar doesn't go in there.
Mike:It's most of it goes in there, but the mutual fund company, which could be someone that you're working with gets paid. Maybe there's a roundabout way that they're getting paid, but those fees are going in there just going into the mutual fund itself. K? Right. Then you've got B shares.
Mike:If you were to buy into the mutual fund and leave early, there could be a back end commission. But if you hold it in there long enough, five, seven years, whatever the time is, every mutual fund's a little different. Maybe you don't pay the fee because the money was in there.
David:Okay.
Mike:And then c, share mutual funds are really kind of an ongoing mutual fund fee structure. And we're talking about expense ratios. We're talking about 12 b one fees. We're talking about the fees in there. So to to figure out your fees, which is important, Google the mutual funds.
Mike:Google the tickers, and you'll see on Yahoo Finance or Morningstar, all these different research results on Google or what are the other places?
David:That we can search?
Mike:Yahoo, Bing Yeah. DuckDuck Go. Yeah. You know, wherever you're searching Yeah. It's gonna pull up these great places to where you're starting to you're gonna see the expense ratio and the fees.
Mike:Now there's nothing wrong with an expense ratio. There's nothing wrong with fees. It's are you getting compensated appropriately for the fees? K? So here's an example.
Mike:If you are invested in a C share mutual fund, and your expense ratio is, let's say, it's point 3% just to manage the fund. And let's say there's a 12 b one fee, which is kind of the marketing fee back end commission that typically goes back to the financial adviser to get paid, and let's say that's one percent. So you're paying 1.3% in fees.
David:Alright.
Mike:And let's say that mutual fund's job is to buy the S and P 500. Compare that mutual fund to SPY VOO or any other low cost ETF
David:Alright.
Mike:That's meant to buy the S and P 500. And I don't know what the expense ratio is. Let's say SPY or VOO. Let's say it's point 1%.
David:Okay.
Mike:And you have no intention of really selling this thing. Then I would question the validity of the 1% if you're not getting tax advice, planning advice, or other things. Because you could do the same thing, have 1% better performance, 1.2% probably better performance each year, because you're not getting the benefit for those fees because you're buying and holding something that's just sitting there.
David:I see.
Mike:And you might think ignorance is bliss. You might like having the fact that you're paying this adviser so you can call them, and they would answer your questions.
David:Sure.
Mike:And if that's what you want, then that's great. I think you could pay the same amount or maybe even less and get more out of the relationship, but that's up to you if you want to see this or not. But do you see how exploring the mutual funds is going to matter? Yeah. 12 b one fees, the back end commission fee for investment advisers that have a series seven license do not need to be disclosed.
Mike:So if they say they're not getting paid, they're getting paid somehow. It's probably a 12 b one fee. And if you're not having a portfolio that's actively traded a bunch, I would say you could probably just take those tickers, find the same equivalent in an ETF, get the same results, but now you've got 1% more each year. That compounding effect is significant. Layton, you did this study.
Mike:What did you find? Off the top of your head, what was the difference? 28% over how many years? Over the lifetime, like, 28% or so less money by just that 1% fee that you don't even know you're paying. So a million dollars, it's a big difference when you think about your inheritance or extra cash flow or whatever it is.
Mike:Now you might say, well, hey. I I have low cost ETFs, but you're paying 1% to the financial adviser. It's the same fee structure, just in a different way. Is there anything wrong with paying 1% in fees? No.
Mike:Are you getting compensated appropriately for what you're paying? If you're, again, you're buying and holding and you're not seeing much activity, I would question the validity of it. Yeah. If you're sitting down consistently, there's some adjustments, you're doing planning, they're talking about the income strategy, you're talking about how to grow, you're making adjustments, you're having conversations about the market, the sentiment, all that, then maybe it's justified. I personally believe that if you pay for something, you should be able to get a result better than if you just were to do it on your own.
Mike:Yeah. That makes sense. Absolutely. So those are fee structures, different ways advisers can get paid. Do you think I answered the question?
Mike:Am I missing anything?
David:I don't think so. Yeah. That can you help me figure out what I am paying in fees? So you may not be paying the advisor directly, but they might be getting some other kind of, like you mentioned, 12 b one, like, sort of back end commission. Should they disclose that?
David:Should the client know that they're getting commissioned to Should and regulations are very different things. Okay. So so does what does the regulation say?
Mike:12 b one fees do not have to be disclosed technically. I mean, it's like you'll get the prospectus, you get the information, but unless you know to look for it, ignorance is bliss. Not many people want to say, hey. Here's how much you're be paying in fees, by the way. People often like to not talk about fees.
Mike:I think that should be one of the first things you talk about.
David:Here's
Mike:how much you're gonna be paying, which means we need to hit this benchmark or better for it to be rationalized. Maybe that's in performance.
David:Is there ever a justification for an adviser charging, like, two to 3% or even 4% fees, or does that ever happen?
Mike:I've never heard of 4% fees, but yeah, two or 3% fees. But those are typically more for accredited investors, very sophisticated models, and it's also high risk. So which there's nothing wrong with high risk, high risk, high reward. Yeah. I know people that charge those fees and they do well.
Mike:I also know people that will charge those in very boring portfolios, and I can't make sense of the fee rationale.
David:Right.
Mike:Some people like the idea of paying more because it feels like you're getting a better service, but numbers don't lie. And it's like I can't remember who told me this, but like Red Bull, the energy drink. Oh, yeah. I'm familiar. Yeah.
Mike:Allegedly, they increased their price and made it taste worse. I've heard I don't know if this is true or not, and then that boosts their sales. So it's like sometimes raising fees might feel like you're getting a better experience because you're like, oh, I'm paying more, so I must be getting better.
David:Uh-huh.
Mike:And then you don't look around. No. Look around. Yeah. We want people to wake up.
Mike:Make sure you're getting compensated for the payments that you're making. Yeah. That's my stance. 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 podcast.
Mike: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 exist. 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.
Mike:Go to ww.yourwealthanalysis.com today to learn more and get started.