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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, a show that answers your retirement questions. My name is Mike Decker. I'm the founder of Kedric Wealth. And joining me in the studio today is my colleague, mister David Franson. David, thanks for being here.
David:Glad to be here. We're gonna be
Mike:taking your questions. Text them right now to (913) 363-1234. Again, that number, (913) 363-1234. Let's begin.
David:Hey, Mike. Can you break down fees, where to find them, and how to build a good portfolio while being mindful of fees?
Mike:Yeah. This is kind of I don't know why, but it's on, like, Fantastic Beasts and Where to Find Them.
David:Alright. Yeah. Remember that.
Mike:I do. So this is a quest. When I say it's a quest, it's because a lot of this is hidden. It's not properly disclosed, in my opinion. A lot of times, fees are hidden.
Mike:They're kind of back end, just stuff. So let's talk about what was the first part?
David:It's Yeah.
Mike:So Breakdown fees. Okay. Yeah. Let's
David:break down.
Mike:Everyone gets paid in the financial services space. No one's a charity, especially in the financial services space. There's a reason why people like to work in the financial services space is because it can pay high commissions. So let's acknowledge first that if you're talking to someone that's driving a nice car, wearing a nice suit, working in a nice office, someone's paying for that. Alright.
Mike:Now that we've established that
David:There's nothing wrong with that. Right? Are we saying
Mike:There's nothing wrong with that. I have no problem with doctors having nice cars, going on nice vacations, because doctors, in my opinion, also help save lives. They reset your bones. They put your body back together. For the elderly, they'll give you a new hip.
Mike:So a new knee, you're reinvigorated. So I don't mind people being compensated for the work that they're doing, but let's make sure that they're being compensated appropriately for the work that they're doing.
David:Fair enough. Is that
Mike:fair?
David:Yeah. Absolutely.
Mike:K. So fees. The first place to look for fees, and this is so important, by the way. This is one of those things you probably wanna list to over and over again, take some notes, is understand who you're talking with and what their license or licenses is or are. Okay.
Mike:Proper grammar there. So when I say that, I mean, if you have a series seven license in the securities world, that's a fancy way of saying they're a broker. A broker, their job is to facilitate a transaction to where you buy or sell something. They just they make things happen. We need brokers.
Mike:K? Now that said, every time there's a broker involved, there's a good chance that there's a brokerage fee involved. They may receive a back end commission for helping you sell your mutual funds, for helping you buy a Delaware statutory trust, or something like that. That's their job. There's nothing wrong with that, but there is something wrong, I think, when it's like, okay.
Mike:You can pay $45 for this transaction. No problem. Or you could pay $400 for this transaction or 1% of the entire transaction. So there's a lot of nuance in, okay, what is the brokerage fee for this transaction?
David:And by transaction, you mean, well, like, either buying shares
Mike:or selling shares? Yeah. Just that a deal is being brokered.
David:Okay.
Mike:That's what the series seven license really is intended to do. That's there are other licenses that are like that, but that's the more common license. Why do I start with this? Something we do here, we help real estate investors, landlords leave their real estate. They sell their properties and buy Delaware statutory trusts.
Mike:Why? Because you can sell your property, do what's called a ten thirty one exchange, so you take all the proceeds, and you put it to another asset that's in real estate that has cash flow, so it's paying rent income, so to speak. But you're buying like 1% of a physical property. So it's not fractional ownership of a company. It's fractional ownership of a property, so it qualifies for a ten thirty one exchange.
Mike:So in other words, you take your million dollars, your $10,000,000, whatever your real estate portfolio is, you move it over to something you don't have to manage anymore, you maintain your cash flow, and you can retire. You've got your time back. That's a pretty sweet deal for some people, for a lot of people. A series seven person that's involved in that transaction might charge you a good amount of money on that deal. As in they might charge you around 5%.
Mike:Maybe it's 2%. Maybe it's 1%. Whatever it is. It's like, okay. You got $10,000,000 just to get in the DST.
Mike:Are you really gonna pay this back end commission, or do you know the back end commission is there to broker the deal? That's something that needs to be disclosed. It's not a problem that they're brokering a deal. It's kinda nice that you can defer a tax bill of 30% of this asset. I mean, 30% of $10,000,000.
Mike:That's a lot of money, and maybe it's a 5% deal. But the reason why I bring this up is there are other ways you could have brokered that deal, and people don't realize this. So, again, in my tangent of a Delaware statutory trust, we do those. I have a different license. I cannot accept back end brokered deals or commissions.
Mike:So what happens? That 5% back end commission that's supposed to go to me, since I can't accept it, it gets rolled up to the client. The client keeps it.
David:I'm sure they'd appreciate that.
Mike:Yeah. 5% of $10,000,000 is a good sum of money. Right. So again, a brokerage license isn't necessarily a bad thing. We need brokers.
Mike:But the arbitrary amount of what their fees or compensation is is somewhat negotiable. You can find brokers that can do the same job for a more reasonable rate, reasonable whatever you decide it to be, and then some that might be less reasonable. It depends on what you decide it to be, what what is reasonable. So that's the first level here.
David:Okay.
Mike:And, again, the reason why I bring this up is there are many brokers who have a series seven license, but they also have a series 66 or series 65 license. A series 66 license is typically what is paired with a series seven license. What that means is they can say they are a fiduciary too. You wear a fiduciary hat and say, I'm a fiduciary. I'm legally bound.
Mike:Do what's in your best interest. We're talking. We're talking. And then they're gonna take their fiduciary hat off, and they're gonna put their broker hat on, and now they're gonna broker a deal. And they may not have really disclosed in the way that you would comprehend what's going on.
Mike:That, I think, is a bit sketchy. I'm putting it lightly here. I mean, talk about hook, line, and sinker. Right? That's just that's crap.
Mike:Uh-huh. So and it's not bad that they're doing a job or not doing a job. It's that these things need to be disclosed. How are you being compensated? So many people I know, I won't say the company and say, well, I've got my guy, I've got my lady, my gal, or whatever, that works for this particular firm or one of these firms.
Mike:Think of a strip mall advisory practice. You're walking down a strip mall and you see their name. Kind of those places.
David:Okay.
Mike:And they say, well, I don't really pay my adviser fees. They just help me. No. You do. They're receiving back end commissions they may not have to disclose.
Mike:So let's be very realistic about this. Now where are those back end commissions? This is where fees are a conflict of interest in my opinion. So actually, Layton, can I tell your story real quick? Okay.
Mike:Layton, everyone is our producer in house that does the show, but he had a really funny I won't say who he was working with, but years ago, he was working with one of these people that weren't charging a direct fee. Layton had a bunch of mutual funds. K? And in his mutual funds, like, it's fine to have a mutual fund. There's nothing wrong with that.
Mike:That's how he's compensated. Layton walks in and says, hey. I wanna buy this stock, and he got talked out of it. That stock is worth a lot of money now, but that adviser would not have made more money been placed into a stock that doesn't receive it back in commission, but had stayed with the mutual funds because that's how the adviser got paid.
David:A little bit of a conflict of interest there maybe.
Mike:Yeah. Incentive. Yeah. Layton, what was that stock? It was Tesla back when Tesla was growing.
Mike:So and I know you've had these conversations with these people. This is before you worked with us, with Nvidia and other other companies. That's a problem. My grandma had the same situation. So this is before I got in financial services.
Mike:It's the the.com, the Internet's emerging. She says, I like that company Google. I don't really get it, but I think it's got some promise. She got talked out of it. Do know how much money she would have made?
Mike:But the fee conflict of interest, it's not just how they're getting paid, but is how they're getting paid swaying the advice that you're getting. Now from a regulatory standpoint, they're not supposed to do this, but let's accept that humans are humans.
David:Sure. K. Yeah. And so why Yeah. Why is it Your thoughts.
David:Why do they not have to disclose the fees that they get?
Mike:They're called 12 b one fees. Okay. And they're associated with a back end commission for marketing purposes, because mutual funds need to be able to market themselves, and that's part of kind of the revenue share of what it is. That's typically what you would see in there. And then you have different mutual funds.
Mike:There's, you know, a, b, c, different types of how you would put the funds in there, how fees are distributed, and how commissions back end commissions could be paid. It's a bit of a nuanced rat nest because there's so many variations of how it could be done. But basically, just if you put funds into a mutual fund, you don't believe you're paying your adviser anything, they're getting paid on the back end.
David:Right.
Mike:Which is fine, but calculate it. I don't know if this works or not, but if you wanna be safe, maybe upload your statements without the account numbers into, like, Grok or ChatGPT, and say, hey. What are my fees? If you put the different tickers in there, so the different mutual funds into an AI, it might might say, what are my total fees? What are the back end fees that I'm paying?
Mike:There's nothing wrong with what's called an expense ratio. An expense ratio is basically the fund existing. I mean, David, question. K. Would you rather buy one ETF or one mutual fund that gets you a little bit of access to all 500 companies of the S and P 500, or would you like to manually buy all 500 companies and trying to balance that appropriately?
Mike:What sounds more enjoyable to you? Well,
David:I mean, yeah, if I was the kind of person that really had all the time to devote to studying all 500 companies and understanding them, I don't know
Mike:who has that Yeah. A trade floor. An entire research department. Yeah.
David:So I guess the former as opposed to the latter there.
Mike:Yeah. So there's nothing wrong with expense ratios, because you're paying for the service to simplify your life, and they deserve that all day long. Mhmm. But there are high expense ratios and low expense ratios. So I won't say who or what or where, because we don't wanna disparage anyone, but there are S and P 500 ETFs and mutual funds where you could be paying, like, next to nothing, like point zero one, I think, in the expense ratio, or you could pay around point 7% or higher for the same thing.
Mike:So are fees holding you back on performance? Is there a conflict of interest in the back end to push certain mutual funds or ETFs or well, ETFs don't give a back end commission, but you see my point. Is there a conflict of interest here based on fees and how people are paid? You need to understand that. Now you might say, oh, Moe, Mike, you're getting paid.
Mike:Yes. I am. Our payment structure is admittedly unconventional.
David:And so what do you mean by that?
Mike:Yeah. I have a series 65 license. I cannot receive back end commissions for securities. Delaware statutory trust, mutual funds, ETFs, all that. I can't receive payment for that.
Mike:I have to charge my fees, and either take them by a credit card, a one time planning fee, and or deduct them from a agreed upon amount from the clients.
David:Is that by design? Is that an intentional choice on your part?
Mike:Yeah. I mean, the 65 license is the fiduciary license, so I am legally bound to what's in your best interest, and I can't receive the back end. So it keeps I think series 65 advisers have not more honesty, but their environment forces them to be more transparent. I don't want anyone to assume that just because they're quote, unquote, a fiduciary doesn't mean that they're honest. Enron had a fiduciary responsibility to their pension holders.
Mike:Right. How'd that turn out? Yes. So don't just assume that someone has a credential or a license that they're honest. Vet them.
Mike:Put them through the ringer. I mean, really, have your day in court with them. But when it comes to our fee structure, most commonly seen in the series 65 fiduciary space is a percentage of assets. Now when I first got started in this industry over a decade ago, I asked the owners of the practice I started. I said, how come they're paying more in fees than these folks, but we're doing the same amount of work for both of them?
Mike:That doesn't make sense. And then they gave me some roundabout answer, and I said, well, but, like, shouldn't we just charge the same amount? And they said, well, that's just kind of how the industry is. More money. There's more work.
Mike:I don't see us doing more work for them. It was just basically rationalizing and explaining away why they're charging people who have more money, more fees, because they can, and there's no regulatory reason why they can't, because that's how the industry is set up. That has bothered me for over a decade. So when I left the practices to start Kedric Wealth, we were very adamant about doing it under the CPA model. How much time does it take to do the job, and that's how much we charge.
Mike:That's it. So it's a flat monthly fee, and those who have more money end up getting the discount. Those who have less money end up paying a bit of a premium, but they're getting better advice. That allows us to take a step back. That allows us to also have a more holistic conversation about, okay, what is really right for you?
Mike:Takes more of a planning, more of a management standpoint, because we can offer anything. So what is really right for you? Let's really figure that out, because there's more than one way to skin this cat. There's over 10 ways to take income in retirement. There's so many ways you could invest in the market.
Mike:There's so many ways that you could hedge against the market. So if we can really figure out what is right for you, and we're charging a flat fixed fee every month, we're indifferent about the solution.
David:Yeah. It sounds like it would free you up to just do whatever's best for the client without any outside influence.
Mike:Oh, it's so liberating. I mean, it's like saying to an artist, you can only use these colors because that's we get paid off of advertising these colors. And it's like, well, we we have these other colors we wanna put in the canvas. Nope. You can't do it.
Mike:I've probably said too much, but that's okay. I want people to understand that fees do affect your performance. They do affect what's going on, and there is a, I think, a conflict of interest on the structure of fees and how people get paid and the advice that you may be getting. A person that's getting paid on mutual funds, if you're a real estate investor, if you go to the well, what should I do on a I wanna sell my real estate. They're gonna say, yes.
Mike:Sell it. Pay the taxes and put it in these mutual funds. That's how they get paid. It may be a good portfolio, but is it really what is right for you? They may not even know that you've got these other options to defer taxes or maintain your income, continue to grow the assets, defer until you drop, and then your kids get everything with a step up and basis tax free.
Mike:You may have a specific stock that has highly appreciated. Maybe it's your company stock, and it's grown for many, many years, and they say, well, we gotta put in this portfolio and blah blah blah. It's like, well, maybe we'll wanna ladder that out and slowly get out of that. I mean, what is right for people, I have found often conflicts with how to get paid faster. So when we could take a step back, if we were to treat financial advisors like CPAs, I think the advice would fundamentally change in the industry.
Mike:Mhmm. But who wants to give up their fees? This is true behind the curtain conversation. When I go to these advisory conferences, I speak on different panels and comment, and they'll say, well, how do you guys function? I said, we're a flat fee service.
Mike:They go, why? Because it's what's right for the client. We want to be honest in all that we do. Yeah. But you're giving up money, but we're doing what is right for the client.
Mike:That's like a doctor who's taking the Hippocratic oath, pushing a certain medication because there's some back end deal. I I don't think that happens in the medical world. Maybe it does. I don't know. But that would really upset me if I found my doctor recommended medication because that's how they got paid, and everything else they couldn't get paid.
David:That'd be wild.
Mike:You know, if a doctor could have recommended me Tylenol, and I went to the pharmacy and just bought some Tylenol, that's all I really needed, but they recommend something else that was more expensive and they got paid, that would really upset me. There are many people that come into our offices that say, want a one time plan. We say, great. Here's a portfolio you can manage, we recommend it, and they're not paying ongoing fees. That's a part of our business.
Mike:So again, the question fees and where to find them? Look at the funds and what's being recommended to you, and how the adviser is getting paid. Look at the structure of it, and do they get paid by keeping you in the market? Do they get paid by selling you to a bunch of annuities? Unless you can articulate exactly how they're getting paid, and you understand, is it 1%?
Mike:Is it 2%? Is it 3%? Whatever it is, you need to understand these things. Because how they get paid and where do they get paid the most may influence the rationalization of the recommendation.
David:So I was just gonna ask you before you started to sort of articulate for us how I wanted to make sure we answered the back part of the question there. How can we build a portfolio while being mindful of fees? And so I think you nailed it there at the end, like, just look at what's being recommended, and do those recommendations have commissions Yep. Attached to them.
Mike:The objective is not to avoid fees. The objective is to get the best net of fee performance. Mhmm. So if you're working with some adviser that's not keeping up with your expectations, fire them. Because you can buy a portfolio on your own, and maybe it's the equivalent of what they're doing.
Mike:The only reason why you would pay an adviser to manage your money in the market is because you believe they're gonna get you a better performance net of fees than you would have on your own.
David:That's a good baseline.
Mike:And for everyone that says, oh, well, you can't beat the S and P 500, that's not true. You just have to take more risk than the S and P 500 to have the potential of beating the S and P 500. So understand more risk, more potential reward. But if you don't wanna have as much volatility as in the roller coaster, then you're taking less risk. But don't be upset if you don't beat the S and P 500 because you can't take less risk and beat the fund or the index.
Mike:You gotta understand where you are with these these different things. Bad advice is the most expensive thing you'll pay for, because you get the bad advice and you implement it. You get hurt, and then you pay for good advice later. So it's better just to get good advice at the beginning, Whether that's paying for a one time optimization report or a plan, whether it's working in collaboration with an adviser or working with an adviser, that is up to you. The way I see it is that an individual who is okay accepting the responsibility of managing a portfolio through the ups and downs, maybe needs to see an adviser for a one time plan to put together the tax plan, the Social Security Optimization, the other facets of the plan, how to maintain this sucker, and then they can just maintain the portfolio and follow the recipe.
Mike:But for others who maybe if the markets were to crash or go down, maybe the fee does make sense, because it's helping them get through those difficult times. Almost like your financial professional is a coach, but the fee has to make sense. When I do an event, I've got prop money, so it's not real money, but I'll hold up $10,000 in cash. Mhmm. I'll say it's everyone in here that's got a million dollars paying 1%.
Mike:This is how much money you're paying your adviser every year. Are you really getting that kind of value? Because if if you wouldn't walk in with this chunk of cash and hand it to them for another year of services, then I would question the relationship.
David:Right. That would feel a little bit more painful, wouldn't it, actually handing your adviser a big stack
Mike:of bills? $10,000 in cash. Yeah. Are they really helping you, or are you talking with them every couple of years? The portfolio really doesn't shift around that much.
Mike:They're just kind of watching it. I mean, I know a lot of people that would love to be paid $10,000 to watch your portfolio and say, no. It's fine. Right. And that might be a very critical thing.
Mike:But, again, the barrier of entry to managing a portfolio, buying a couple of ETFs, as long as you have the grit, the discipline to not sell and lock in those losses, that is a viable option for many people. So let's not manipulate people and to say, well, everyone needs an adviser. That's not true. Let's not manipulate people and say, well, you can't beat the S and P, so just buy the S and P 500 and call it good. Let's not manipulate people in these oversimplified pieces of bad advice that cause people to go to one extreme or the other out of fear that ultimately can create crappy situations.
Mike:Right. 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. 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.
Mike: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 www.yourwealthanalysis.com today to learn more and get started.