320 Is It Worth It?

Sound Retirement Planning Podcast

In this episode Jason looks at the fees you pay for investing and the fees you pay for advice and asks “is it worth it?” Below are links to the research mentioned in this post.


Links & Resources:

Canadian study:
https://www.investmentexecutive.com/inside-track_/paul-bourque/canadian-investors-value-advice/

Vanguard Advisor Alpha:
https://advisors.vanguard.com/iwe/pdf/ISGQVAA.pdf

Morningstar Gamma:
https://www.morningstar.com/content/dam/marketing/shared/research/foundational/677796-AlphaBetaGamma.pdf

Envestnet PMC The Advisor Advantage:
https://www.investpmc.com/insights/white-papers/capital-sigma-advisor-advantage

Cost Matter Hypothesis:
https://www.morningstar.com/articles/740544/the-cost-matters-hypothesis

Should you hire a financial advisor:
https://www.thebalance.com/should-you-hire-a-financial-advisor-4120717

The 5 best S&P500 Index Funds (And the worst one)
https://www.doughroller.net/investing/the-5-best-sp-500-index-funds-and-the-worst-one/

ETF vs Mutual Funds cost comparison:
https://www.fidelity.com/learning-center/investment-products/etf/etfs-cost-comparison

Transcript:

Welcome back America to Sound Retirement Radio, where we bring you concepts, ideas, and strategies designed to help you achieve clarity, confidence, and freedom as you prepare for and transition through retirement. And now, here’s your host, Jason Parker.

America, welcome back to another round of Sound Retirement Radio. So glad to have you tuning in today. It’s my good fortune to have Emilia Bernal in the studio with me. And she’s going to share a joke with us in just a minute. The title of today’s show, episode number 320 is, Is It Worth It? I can’t wait to get into this one with you, but there’s two ways we like to start the morning right around here. The first is by renewing our mind. And so, I’ve got a verse here for us. This comes to us and I thought this was really appropriate. The world that we’re in today, I think we all need this reminder.

Philippians 4:8, “Finally, brothers and sisters, whatever is true, whatever is noble, whatever is right, whatever is pure, whatever is lovely, whatever is admirable. If anything is excellent or praiseworthy, think about such things.” Okay? And then Emilia, you have a joke for us today?

I do. Hope puts everyone in a good mood and the smile on your face.

Is it noble or praiseworthy or?

No, I don’t think so. Not at all. Here we go. All right. What lies on its back a hundred feet in the air?

No idea.

A dead centipede.

Lies on its… Wait a second, Emilia. It lies on its back a hundred feet in the air.

Yeah, has a hundred feet.

A hundred feet in the air. A hundred feet. I’m thinking about it. Oh, man. That’s so ridiculous. I’m sitting here in my brain thinking to myself, how did the centipede get up a hundred feet into the air?

There you go. We figured it out.

That’s so funny. Thanks, Emilia.

You’re welcome. Have a great show.

Do you remember the first time you had to make a life or death decision? About 20 years ago, I was working for the State of Alaska when my telephone rang. It was my wife. She did not usually call me at work, but this particular day was our one year wedding anniversary. So, I figured she was calling just to wish me a happy anniversary. Instead, she said, “Jason, I was at my mom’s house when she fell over and hit her head on the table and she’s bleeding. I called the ambulance and we’re on our way to the hospital. Can you meet us there?”

When I arrived at the hospital, I learned that my mother-in-law had a very bad headache. She was only in her mid 50s and had never been sick a day in her life. So, this was very unusual. The doctors thought the headache was because of her fall. She also had a small cut under her eye where she had been bleeding. My wife and I sat in the waiting room for what seemed like an eternity. But in all reality is probably not very long. We tried to call my father-in-law, but he was out of town on a business trip. We couldn’t track him down.

I remember walking back to where my mother-in-law was lying in the hospital bed. And I asked her how she was doing. She just reached up holding her head and said, “My head hurts so bad.” The doctors initially thought she was having a migraine. A short while later, the doctors walked into the waiting room and let my wife and I know that they had done a scan of my mother-in-law’s brain. The doctor said it looked like she had bleeding in her brain. He said she was going to need brain surgery. He went on to explain that they didn’t do brain surgery in Juneau, Alaska, so we would need to decide whether to have her flown to Anchorage or to Seattle to have the surgery. He went on to say that Seattle would be… the flight would be a little bit longer.

And I remember staring into the doctor’s eyes because this was really the first time in my life where I felt like I was having to make a life or death decision on behalf of another person. And probably like you, I looked at the doctor and I asked him a very important question. I asked, “Who has the cheapest brain surgeon in the world?” Probably not as good as Emilia’s joke, but that is not what I asked. That is not what I asked. I asked the doctor, I said, “Who has the best brain surgeon in the world?”

With my father-in-law out of town, I knew that if my wife and I had to make this decision, we wanted the absolute best. The doctor looked at me and told me the best brain surgeon in the world was in Seattle. Shortly, thereafter, my wife and mother-in-law were on a high speed jet flying from Juneau, Alaska to Seattle, Washington. And it turned out Seattle did indeed have one of the best brain surgeons in the world.

I’m very happy to report that 20 years after having brain surgery, my mother-in-law has made a full recovery and she lives just a couple of minutes now from where we are. And it’s wonderful to have grandma nearby to love on our kids. As this story relates to retirement planning, the important lesson I learned that day was the power of the question I asked, who had the best brain surgeon in the world? I didn’t ask the best cardiologist. I didn’t ask who had the best general practitioner. I didn’t ask my co-workers, family, or friends to perform the surgery. I wanted the best brain surgeon in the world. I wanted somebody who did brain surgery every day, day in, day out, 365 days a year.

One of the mistakes we see many people make when working on their retirement planning is that they ask for the advice of a family member, a friend, a coworker, even a general practitioner financial advice giver. While all of these people certainly mean well, chances are, they don’t know all of the specifics to your circumstances to truly give you expert advice. Really, all they are equipped to do is to tell you what worked for them and to offer their opinion.

Retirement involves many different areas of expertise. You must consider how to maximize your social security, pensions, and other income sources, as well as create tax efficient income. A financial advisor should be trained in how to preserve a lifetime of hard work and wealth and make sure you don’t run out of money during your lifetime. A skilled practitioner will be looking at your investments, insurance, estate plan, entitlements, pensions, inflation, and taxes to make sure that every area of your financial life is coordinated and optimized, so you will feel confident to be able to meet your goals.

The decisions you make as you transition into and through retirement will be some of the most important that you may ever make. Remember, you may spend as many years retired as you did working. 25 years of unemployment is a long time and you won’t be adding to your investments anymore. What you have is what you have and you need to make sure it’s going to last as long as you do.

The last thing you want to have to worry about is going back to work after 10 years of retirement because you made a financial mistake. It’s not fair to your friends and family members to place the burden of your questions on their shoulders. Instead, make sure you find an expert who specializes in retirement planning. Ask your friends and family members the most important question of all, who is the best retirement expert in the world? Seek them out, pay for their advice. It could be one of the smartest investments you ever make.

Stop paying high commissions and fees for your mutual funds. Just stop it. Okay. Now that I’ve got that out of my system, let’s move on. You need to understand the impact fees can have on your investment portfolio. I believe by diversifying your investments as suggested in the previous chapters of my book, you are diversifying your investments for principal preservation and growth, but you are also moving your investments to a very fee efficient accounts.

If you had all your investments in no-load mutual funds and the average fee on those funds was 1% per year on $100,000, your annual expense would be $1,000. If you currently own funds, it can be hard to uncover all of the fees that you’re paying. And of course, your prospectus will list fees, but a quick way to help uncover all of the fees you’re paying is to use a tool at personalfund.com.

Exchange traded funds versus mutual funds. I’m a fan of low cost investing using asset allocation as the foundation for maximizing risk adjusted returns. Jack Bogle of Vanguard is one of my personal heroes in our industry and an advocate for the smaller investor. Vanguard built its firm around low cost index mutual funds. And now, Vanguard is one of the leaders in the exchange traded funds arena. Both vehicles have advantages and disadvantages.

One common complaint about ETFs is the brokerage fees associated with buying and selling these investments. If you intend to do a lot of buying and selling within the portfolio of ETFs, then you should use a more fee efficient tool to attract an index like ETFs close cousin, the index mutual fund instead. When I wrote this originally though, there were still trading costs at a lot of the brokerage firms. Today, many firms offer no cost trades on things like ETFs. So, the whole argument about trading costs associated with ETFs is really… I don’t think is relevant today as it was when I wrote this just a couple of years ago.

However, I found that ETFs have lower costs. They are more liquid and can be very tax efficient, which is very important for your non-qualified accounts. Either choice serves the same basic purpose. Both are excellent vehicles for helping you achieve your long-term growth goals. ETFs and index mutual funds are both very efficient tools for creating global broad-based diversified portfolios among asset classes and sectors, and they should be considered as part of your overall diversification strategy. Okay.

So, now that I’ve kind of set the stage with these few short readings from my book, the purpose of this show today, and the title of the show is to talk about this idea of, is it worth it? And one of the things that I’ve been asking of our community at the retirement budget calculator is for them to chime in and give me their opinion on whether or not it is worth it to pay an advisor a fee to help oversee and manage their investments and do the planning and everything that’s involved.

So, in today’s show, I just want to explore that. Now, to be fair, I will tell you, I mean, this is the industry that I work in. This is how I make a living, and I recognize that I have blind spots. But this is the reason that I like being in community with people who are not financial advisors because they can challenge. They can push back. They can make me think about this in a way different than the way that I think about it.

And so, today, I want to have that. I want it to be an intellectually honest conversation about fees and whether or not they’re helping you or hurting you. So, here’s a couple of things I want you to think about. So, as we begin to explore this idea of fees, I want to look at some of the industry studies that have been done, but I also want to share with you what some of the people in our community have expressed, some of the concerns they’ve expressed about fees.

One of the things I did as I was preparing for today’s show is I asked some of the people that I work with, some, this idea of cost versus value like there’s a price that you pay for something and then there’s a value that you receive. And so, here’s what a couple of us had to say. Emilia, she mentioned that when she was a kid, her dad would take her to buy a really good pair of sneakers or tennis shoes at the beginning of every school year. She said some of the stores sold these really flimsy cheap shoes, and she remembered one time having to have the bottom of her shoe duct tape together. And so, she said, her dad thought that if he made an investment in a better pair of shoes, that the shoes would last longer. And she said that’s actually the case. She said that she felt like that was a truth.

Amy, one of the women that I work with, she said that her husband’s a plumber. And she says sometimes these guys will get it in their head that they can do this work on their own. And then her husband gets a call at eight o’clock at night asking for him to make kind of an emergency visit out to the house because what he thought was going to be an easy do it yourself project at home turns out to be much more difficult and much more involved. And now he needs the help of an expert.

And then I asked my friend, Steve, I said, “Steve, where’s an area… What do you think about this?” And he said, “Well, Jason,” he said, “You can…” My friend, Steve’s kind of an engineer and he’s very mechanically inclined. And he said, “If you were working on your car,” he said, “you can go down to the parts’ store and buy the parts for your vehicle at a very low cost.” But he said, “If you want to have somebody else install those parts for you, you’re going to pay the mechanic a pretty hefty fee.” In fact, the biggest cost in auto repair is not the part itself, but it’s actually having the expertise to have the person install the part.

So, he said, “You can spend a lot of time and energy and money. And if that’s something you really enjoy, maybe you should be your own mechanic. But most people, if you get a hundred people in a room,” he said, “maybe 15 of them would really enjoy it and are actually qualified to be able to do that work.” And so, those were some of the arguments that people had for paying a fee for some type of expertise.

One of the questions that I’d like you to ponder as you think about this question in terms of paying fees to hire an advisor is, should you be trying to find the cheapest financial advisor? Is that something that’s important to you? Would that be like as you’re making your list of characteristics or qualities that you’re looking for when you’re going to work with as an advisor would be finding the cheapest person the most important component to that?

One of the things I think is important to differentiate too is this idea between investing expenses versus the expense of hiring an advisor that is looking holistically at your entire financial wellbeing. Jack Bogle, he’s quoted as saying, “The case for indexing isn’t based on the efficient market hypothesis. It’s based on simple arithmetic of the cost matter hypothesis. In many areas of the market, there will be a loser for every winner. So, on average, investors will get the return of the market less fees.”

Jack Bogle, who is the founder of Vanguard, preached for years that costs matter. And he said they matter more than past performance. One of the things we have to look at is while the Vanguard Group and the Vanguard Mutual Funds and ETFs have really been a driving force in helping drive down investment fees, which has been a good thing for the individual investor. We’re going to look at some of the other studies that Vanguard has released about advisor fees and whether or not they think it’s worth it.

Now, I want to share with you a quick story of an experience that I had recently is in part why I thought it was important that we do a show titled, Is It Worth It About Fees? Many of you know that we are still accepting new clients. We have a process, the sound retirement planning process that we take everybody through, and we have a complimentary initial consultation, initial meeting. And the reason that we do that, the reason that we meet with people for one hour for free, is really just to understand whether or not the process that we’ve developed really could add significant meaningful value to their financial life and whether or not it would make sense for us to consider working together.

Well, this particular couple that had come in, they were just really wonderful people. They had a mast, a couple of million dollars for retirement. They had been listening to the podcast. They had read my book. Very, very detail oriented. And they had read about personalfund.com that I mentioned in my book as a tool that you can use to really help you understand all of the fees associated with your index funds or your mutual funds.

And let me just say, just because you have an index fund does not mean you’re paying low fees. So, one of the things we always like to do with people is help them understand the fees that they’re paying. But before I get too far off track, I just want to let you know I’ve looked at different index funds and for example, the S&P 500 index fund. Vanguard has S&P 500 index fund that’s 0.03%. It’s an ETF. So, while Vanguard has this S&P 500 index fund, that’s only 0.03%, I actually found another S&P 500 index fund that has a fee of 2.41%. That’s a pretty hefty fee for S&P 500 index fund these days.

So, just because you own an index fund, don’t think that you are necessarily paying the lowest fees. But to get back to the story, let me just kind of tell you a little bit more about these people and the experience that I had. I was somewhat perplexed. Because they had read the book and they’d been listening to the podcast, they took all of these. And the thing that was interesting is they had been investing for a lot of years, but they had never really had anybody helping them. So, really what they had was this kind of hodgepodge collection of funds. There was no real rhyme and reason to it. It was just kind of over time. They had pieced these different things together. They had worked at different companies, at different 401ks and IRAs, and just all these different accounts with these different. So, it wasn’t really this disciplined, focused effort on trying to achieve a single result. It was just kind of what they had purchased over the years.

Well, he used that tool that we had talked about in the book, and he went and looked up his own expenses. And when you’re looking at mutual funds, you’re looking at management fees, 12b-1 fees, other expenses, loads, tax costs, trading costs. And so, it really helps you to understand all of the fees associated with mutual funds. And I think one of the reasons we’ve seen such a shift to ETFs these last 10 years or so is because just the way that the ETFs are structured, they tend to be more fee efficient. They tend to have lower fees.

But this particular gentlemen, as we were going through this initial planning session and remember the sound retirement planning process is about income, investments, taxes, healthcare, estate planning. And we’re just trying to look at these different areas of your financial life to see if everything’s optimized, if everything’s working as well as it could be. So, as we’re going through this together, one of the things that he, this person had pointed out to me was that the fees he was paying on his mutual funds were about 2% per year. And he had no advisor. He had no financial plan. He had no one to help make decisions, no one to give advice on tax withdrawal strategies, or asset location, nobody to help guide him on Roth conversion strategies. And he needed to consolidate accounts because over the years, everything just like I said, he just had with these things all over the place.

And so, just the simplification of making your life a little bit simpler would have really helped these folks out. After we went through the planning process, initially, I thought, “Wow, this guy really, or this couple they really need our help.” Not only were we going to be able to significantly reduce the fees that they were paying, but we’re going to be able to help in all of these other areas that we’re going to be able to significantly improve his overall financial situation.

What I see happen time and time again is that we have this discussion about fees and people freeze. And they say, “Well, I don’t want to pay an advisor a fee,” even though he’s paying more money in fees to the mutual funds that he’s already using than he would be paying to us. For some reason, there’s this mental hurdle. And so, unfortunately, he made the decision, he and his wife, that they were going to continue to do it on his own. But he told me, he said, “Jason, if anything happens to me, I’ve told my wife,” because he was the one that enjoyed doing all this and she didn’t really enjoy doing it.

And he said, “I told her that you need to be the very first call that she makes because she’s going to need your help with all of this.” And of course, we like helping people. That’s just one of the things I love the most about the work that we do is I just get to meet all these wonderful people from all over the country. And I told them, “Of course, we’ll be here. We’re not going anywhere. If anything happens, just know that we can be a backup plan for you.”

One of the advantages of us working together would have been not just the fact that we were reducing his fees, but there were all of these other areas of his financial life that could have been optimized. So, I think to myself, what is it that causes people to make decisions that are not in their best interest? What is it that causes people to get frozen and paralyzed in indecision? And what is it about our character that makes us feel or believe that we don’t want or need help when it’s so obvious that the help would make your life better?

Now, this is just one particular example. I’ve met with plenty of other people who are really wonderful at what they do. They really are that 10 to 15% of people that really should be doing it on their own. They shouldn’t be hiring an advisor to walk life with them. I recognize that there is a small subset. She’s kind of like the guy that likes to work on his own car, the mechanic that says, “I don’t want to hire a mechanic. I don’t want to pay the mechanic fees. I’d rather go down to the parts’ store and buy the part and do it myself.” And they’re good at it.

And so, for those people, I think that’s wonderful. That’s the reason that I invented the retirement budget calculator is because I think that we can add value to people’s lives that want to do it on their own, but they just want to have better tools to help them make some decision. There was a survey that was completed in Canada and then subsequently updated. And we know from past research that advised investors build more wealth compared to non advised investors according to this study that was done up in Canada. It’s a study from the CIRANO Institute and I’ll include links to all of this.

But what this did was they controlled for nearly 50 socioeconomic and attitudinal differences. And what they found was that after 15 years, people that had advisors versus those that did not have advisors had 3.9 times more assets. The people that had advisors had 3.9 times more assets than those that were non advised investors. That’s pretty significant. That’s a significant increase in the amount of net worth that somebody had. And the only decision that they had was that they had an advisor.

Now, some people would claim that there’s a disparity in the world that we live in today because the people that have the least amount of money are also the ones that really can’t afford to pay for advice. And so, as a result, they get stuck in this world of… Because they can’t afford the advice, they get stuck in a world of making poor decisions. Find me wealthy people that don’t have advice or advice givers, or that are paying for advisors.

Now, there’s always going to be some, but I will tell you that my experience has been some of the wealthiest people I know pay for advisors. That was one report this study that’s been done up in Canada, but for almost 20 years now. And this is so interesting to me because the Vanguard Group, remember, they’re the ones that are responsible for helping to drive investment fees so low. But for the last 20 years, created what’s called Vanguard Advisor’s Alpha. I’ll include a link to this in the show notes as well. And so, this will be a resource for you to look back on where they’re trying to attempt to explore the value of working with a financial advisor. It may seem counterintuitive or illogical that the company responsible for driving down investing costs would also be the company responsible for recommending people pay fees to financial advisors.

And so, the question is, can we trust Vanguard and their research? Are they trustworthy company or are they just trying to play to financial advisors? Do they have some type of motive in this where they’re not trustworthy? And I guess we all have to ask the question. So, there’s two sides to this equation. Advisors need to be able to create value, preserve value, and perpetuate it. Because somebody like in my position, if we’re not creating value, preserving the value, and continuing the value, why would they stay with us? That wouldn’t make any sense.

And clients are responsible for knowing how much they’re paying in fees. And then they’re also responsible for knowing what they should be expecting for the fees that they’re paying. So, as we explore this work that Vanguard’s been doing, the Vanguard Advisor Alpha, here’s the conclusion that they have in their white paper. It says, “Putting a value on your value is as subjective and unique as each individual investor.” For some, the value of working with an advisor is peace of mind. For others, we found that working with an advisor can add about 3% in net returns through the following. And then they give these different areas for the framework of wealth management that they believe could really help investors.

And so, the different ways that they come up with this 3% of net returns, think about that because if the advisor’s charging 1%, they’re saying that above and beyond what the advisor’s charging 3% net returns. Now, they say those returns necessarily won’t always happen on an annual basis, but over time, 3% net. So, the first one is cost effective implementation expense ratios. They assign 34 basis points to that, a little bit less than half a percent to cost effective implementation of the investment vehicles. And this kind of goes back to that story I told earlier. This guy’s paying 2% in investment fees. And I know that the fees that he would be paying to our firm was significantly less. And so, that’s one area that Vanguard sees that advisors add value is by helping people reduce their overall fee structure.

The next area that they found was adding about 26 basis points. About 0.26% per year in fees was rebalancing a portfolio. So, we’ve talked before on the show about the value of rebalancing, how rebalancing forces you to buy low and sell high, how it’s counterintuitive. But Vanguard says that that’s worth about 26 basis points. Vanguard assigns 1.5% to advisors on this topic of behavioral coaching. And the point that they make is that most people get this wrong. And this can be proven out like in the Dalbar studies where they show how much significantly lower the average investor’s returns are compared to even the mutual funds that they’re investing in. Because what so many people tend to do is they tend to buy at the wrong time, and then when things are going to pot they sell at the wrong time.

And so, part of an advisor’s job really comes into full swing in times of great fear or great euphoria. And there’s value to be added to having somebody else look over your shoulder and give you advice and help you stay the course in the moments and in the times when it really matters the most. The next area that Vanguard says adds value is asset location. 0.75% is what’s included in that 3% net return that advisors bring. And asset location just has to do with tax efficiency. It has to do with making sure you have the right type of investments in the right pots. Many people have IRAs, non-qualified traditional or non-qualified accounts, Roth IRAs, brokerage accounts. And so, it’s just making sure that we have the right investments in the right accounts.

The last area that they found added significant value was having spending strategies and having a withdrawal order. And Vanguard says that that can add up to 1.1% value to investors. So, if you think about it, a 1% fee, if that’s what you’re paying, I don’t know what you’re paying in management fees, but let’s just say it’s a 1% fee for a 3% in net returns. Is that worth it? Would you do that? And we’re going to explore that in a little greater detail here in just a minute. But there’s another study that was done. This one’s done by Morningstar. So, this is another fairly large company that most people are aware of. They started out as a fund research company, but they’re involved in many different areas today. They have something called the Morningstar Gamma.

So, here’s how morning star talks about this research that they’ve done on gamma. They say, “We focus on five important financial planning decisions and techniques.” The first one is a total wealth framework to determine the optimal asset allocation. Number two is a dynamic withdrawal strategy. Number three is incorporating guaranteed income products, such as annuities. Number four is tax efficient allocation decisions. And number five is a portfolio optimization that includes a proxy for the investors in implicit or explicit liabilities. And then they go on to say that each of these five gamma components create value for retirees and when combined can be expected, given the paper’s assumptions about risk aversion and other variables to generate about 22.6% more certainty equivalent income when compared to a simplistic, static withdrawal strategy, according to our analysis.

The way that they frame this is interesting to me. They say, “22.6% more certainty equivalent income when compared to a simplistic, static withdrawal strategy according to our analysis.” Then they go on to say, this additional certainty equivalent income has the same impact on expected utility as an arithmetic alpha of 1.59%, and thereby represents a significant potential increase in portfolio efficiency for retirement income for retirees. So, here’s another large company. And one of the questions that we need to be asking whether it’s Vanguard or Morningstar is, is this really true data? Is this a company that’s just trying to make a case for financial advisors? Are they willing to stake their reputation and create data that’s wrong to try to justify the fees that a financial advisor charges? Or, are Morningstar and Vanguard in the study up in Canada? Do they point to something that’s important and relevant and significant?

Now, there’s another study that was done by another organization, not as familiar to most of you probably as Vanguard and Morningstar. They’re called Envestnet Portfolio Management Consultants. And they also looked to see what’s the value of financial advice for people. And they looked at the following areas, financial planning, asset class selection and allocation, investment selection, rebalancing, and tax management. And each element can contribute alpha or excess return over a given benchmark. They go on to say that, “According to our research, the combination of successfully implementing these sources has produced around 3% of value add annually. We explain each one and assign a figure to quantify the value that it generates.”

And again, if you’re interested in reading any of these studies, there’ll be links in the show notes. The first one was asset location, and they say that that’s worth 50 basis points, about a half a percent. So, again, the 3% of value add annually is what they came up with as the total number. But as we break that down, 50 basis points for asset location. They go on to say that, “Our research has determined that employing a strategy of selecting active mutual fund managers, according to certain risk adjusted return characteristics, can add 67 basis points of value annually to a diversified portfolio. And implementing the portfolio with passive investments can add 61 basis points of value each year.” We then address the fourth pillar of the advisor added value and that systematic portfolio rebalancing. And they say, “We demonstrate the advantages of regular systematic rebalancing and how it can help both to control risk by reducing portfolio volatility and also enhance returns.

We contrast the effects of more or less frequent rebalancing and offer a rationale to explain why an annual rebalancing frequency is optimal. The process of systematically rebalancing diversified portfolio can add 30 basis points of value each year compared with a naive strategy of rebalancing once every three years.” And then Envestnet says that tax management can add about 1% per year. So, again, there are areas where financial planning, 50 basis points or half a percent asset selection and allocation, 52 basis points, active management, 67 basis points, passive management, 61 basis points, systematic rebalancing, 30 basis points and tax management 1%, 100 basis points for around 3% per year.

The point to all of this is that there’s more to costs than just fees. Costs matter, but fees are just the tip of the iceberg. The other major cost of investing or taxes advice, investor behavior, and those areas are more difficult to quantify to qualify. So, after we look at all of these different studies that are being done, there are a couple of questions I think we all need to ask ourselves. Number one, are these studies true? In which case, why wouldn’t you want to benefit from paying the fee and working with an advisor?

The second question is, are these studies false? And so, in order to believe that they’re false, you have to believe that all of these different studies are being done so that advisors can justify the fees that they charge and that the people who have done these studies are lying or exaggerating the numbers because they have a vested interest in the outcome. So, you have to believe that somebody like Vanguard, who was responsible for driving the fees down, is also the company now that’s trying to get you to pay fees because in one sense, they say investment fees could be lower, but when it comes to financial advice fees, they actually make a case that you should be paying a fee to advisors. But do you believe that these Vanguard, Morningstar, Envestnet, these Canadian studies? Are these people just lying to try to benefit financial advisors?

And then the third thing that you have to accept is maybe you were just uninformed. Maybe you didn’t know that these studies existed, in which case you’re just flying blind. But now that you know the truth, now that you know or depending on what you believe to be true is truth, you have a decision to make. There’s a couple of verses and quotes I thought of. Number one, there’s that old saying, “You can lead a horse to water, but you can’t force it to drink.” That’s kind of how I felt with the guy that I thought, “Man, there are so many different ways that we are going to be able to make his life better.” But you can lead somebody to water, but you can’t force them to drink, I think that’s a good one.

The other one that my friend Steve reminded me is Proverbs 15:22. It says, “Plans fail for lack of counsel, but with many advisors they succeed.” So, there’s this proverb, this bit of wisdom that has existed for thousands of years, that says, “Plans fail for lack of counsel, but with many advisors they succeed.” What you have to question about your own thinking is, is that a truth that has stood the test of time?

And the other one that my friend Steve reminded me of is that saying, penny-wise and pound-foolish, or sometimes my friend, Greg, he will say, “People will step over a dollar to pick up a dime.” And Greg reminds me of the time that he decided to do the bathroom remodel on his own only to make a mess of things, end up having to hire a contractor, and then ended up costing a lot of time and extra money and effort. And that was just the bathroom.

Now, I want to share with you some of the things that I’ve learned from working with real people. For those of you that have purchased the retirement budget calculator, if you have not yet joined us in the private Facebook group, join us over there because it’s a really neat place where we can have conversations and I can learn from you and you can learn from me and together we all get better. So, when I asked our community about fees and there’s a lot of do it yourself investors in the Retirement Budget Calculator Community. I mean, remember that’s the reason I invented the retirement budget calculator is for the do it yourself community. If you’re a do it yourself out there, and you’re listening to the show, I want you to know that I stand behind you, I support you. We’re building tools to help you make better decisions.

I don’t think it’s a wrong decision to be a do it yourself. I just think you need to understand that just because you’re choosing to do it yourself, it means you’re probably in that small percentages, really good at it. Here’s what Michael had to say from within the Retirement Budget Calculator Private Facebook Group. He said, “Now all my funds are in low cost index funds,” and he says, “I would not stay away from any fund just because of the fee if I thought that the fee could be recouped in earnings.” And then he says, “I look at expense ratios, but the only time that would matter to me is if two funds were exactly the same, then I’d go with the one with the smaller fee.” He talks about how one of his funds as a fee of 0.91%, the other one has a fee of 0.87%. And just because one fund has a fee that’s a little bit higher, it didn’t stop him because those were the funds that he wanted to use.

So, in his case, fees are important, but it’s not ultimately what makes the final decision for him. Doug said that minimal costs, nowadays, if you use stocks, ETFs are typically lower than mutual funds. And then he says, “AUM fees generally don’t seem fair and appropriate to me. A flat fee seems a reasonable approach to pay for someone’s time and effort.” And then Bill and I, we really got to a dialogue here. And so, I want to share with you a little bit more about what he says. He says, “I think fees are way too covert. Fees within funds, AUM fees, annuity management fees, buried in the payout fee only, what does that mean?” He says, “It means one thing to one person and another to another.” So, chances are fees are not worth it when they have to be hidden or difficult to fully comprehend.

He goes on. Well, we had this back and forth and we talked about how fees have really been coming down in the investment space on things like mutual funds and ETFs, and how fidelity recently rolled out zero trading costs on certain funds. And some of their funds that they introduced have zero expense ratios. He was saying that, “In anything, there’s going to be a rush to the bottom. Whoever can do this for the lowest cost is ultimately going to win.” And he points to Walmart being an example of somebody who is able to figure out how to reduce fees down. And I said, “Well, how much lower can you go than zero?” I mean, if the idea is to get the tool down as low as possible, the cost of the tool, can you go lower than zero?

And then he says, “Well, the race to the bottom is more on trading funds and not necessarily on advice. Many advisors have been mirror, glorified, trade middlemen, who ultimately get people to their goals through sheer momentum of savings and growth rates.” He makes this argument. He says, “Look, if I have a $5 million portfolio and I go to an advisor for investment management, and I’m going to pay that advisor 1% per year,” he says, “I don’t see how $50,000 in annual costs can be justified unless there are unknown complications. And then he goes on to say, “I don’t even see how you can justify $5,000 in fees to manage $500,000.” And that’s just looking at the 1% assets under management.

One of the things I found in this industry and this isn’t always the case, but in many instances, when you’re working with a fee based investment advisory firm, there’s usually break points in their fee. So, I don’t know very many people that are charging a full 1% when assets get to $5 million. I know that at our firm, once assets get over $2 million, there starts to be a significant reduction in overall fees to clients.

So, one of the things I’d be careful with there, Bill, is just this idea that 1% is always going to be 1% no matter what the asset level. I think that’s the point that you’re trying to make by using a large number like 5 million. Again, if we just kind of bring this back to Vanguard, let’s say on $5 million, let’s say you’re paying 1% in fees, so you’re saying it’s going to cost you $50,000. But Vanguard says that the net benefit to you is 3%. So, we’re talking about $150,000 net benefit. Would you be willing to pay 50,000 to have a net benefit of 150,000? To me, that seems like a fee that regardless of the amount of money that you have would be pretty hard for somebody to argue against. And the only reason or way that you would argue against it is if you believe Vanguard, Morningstar, Canada BlackRock, Envestnet, all of these different companies that are doing these studies to understand the value of fees are lying to us. It’s just a big scam to try to get you to work with a financial advisor.

And I suppose that’s a possibility. I don’t know that the company responsible for driving down investment fees would be willing to ruin their reputation to try to publish inaccurate information. I just don’t think everything’s a conspiracy theory of myself, but it’s possible. I guess that’s the decision that we all have to make. Remember, however you do it, at the end of the day, really what we want is the outcome. We want you to have a good retirement. We want you to have cashflow. We want you to pay your fair share in taxes, but not a penny more. We want you to have an investment strategy that’s right for you, that’s right for the amount of risk that you’re going to be comfortable with to make sure that you’ve got a good plan for healthcare. What if somebody gets sick? We want to know that the plan is going to continue. If the person that’s always run, the numbers is no longer around to do it, or they just don’t have the capacity to do it anymore, we want to make sure that we’re not leaving a big mass for the next generation or the people that are going to be coming after you.

So, there’s a lot that goes in to this, and there’s a lot of responsibility. I think it’s a reasonable question to have to ask. And what I hope to leave you all with today is to ask yourself the question, is it worth it? For some of you, the answer is going to be yes. And for some of you, the answer is going to be no. But whatever the case may be, at least it’s the right answer for you. This is Jason Parker signing out.

Information and opinions expressed here are believed to be accurate and complete for general information only, and should not be construed as specific tax, legal, or financial advice for any individual, and does not constitute a solicitation for any securities or insurance products. Please consult with your financial professional before taking action on anything discussed in this program. Parker Financial, its representatives, or its affiliates have no liability for investment decisions or other actions taken or made by you based on the information provided in this program. All insurance related discussions are subject to the claims paying ability of the company.

Investing involves risk. Jason Parker is the President of Parker Financial, an independent fee-based wealth management firm located at 9057 Washington Avenue Northwest, Silverdale, Washington. For additional information, call 1-800-514-5046. Or, visit us online at soundretirementplanning.com.