Early Retirement - Financial Freedom (Investing, Tax Planning, Retirement Strategy, Personal Finance)

Do You Know How Much You Are Paying Your Advisor?

• Ari Taublieb, CFP®, MBA • Episode 202

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There are many reasons to work with an advisor and I want to ensure you are getting value for it!

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Ari Taublieb, CFP ®, MBA is the Vice President of Root Financial Partners and a Fiduciary Financial Planner specializing in helping clients retire early with confidence.

Speaker 1:

If you were to walk into your advisor's office or talk to them on Zoom and ask them how much am I paying you today? Would they be able to answer the question clearly for you and do you know the answer Right now? You might go. I don't even know what I am paying my advisor and I think I'm getting value. I mean, I hope so, but I don't know because I don't see it on my statement. I don't know what all the fees are and I don't know because I don't see it on my statement. I don't know what all the fees are and I don't know if, ultimately, I'm getting what I deserve right now. Now, if you feel, nope, I'm in an awesome spot, well, great.

Speaker 1:

This episode might not be for you, but this is for all of you wondering if I'm paying my advisor. I want to make sure I'm getting value. I just need to know what the fees are, because too often someone says I think I have a good advisor, but I don't even see what the fees are and where can I figure those out? I'm going to show you all of that today, so a lot of what I'm going to discuss will be via YouTube on my screen, if you're listening to this on the podcast app. As many of you have told me, it is easier to listen on the podcast. You can certainly keep doing this. I'm going to explain it easily for you, so it doesn't matter where you are tuning in.

Speaker 1:

Now I want to make sure that you understand if it makes sense to hire and continue paying your advisor, or if it makes sense to potentially stop or shift to a different advisor. Now, yes, I am a financial advisor, but my parents were burned by multiple advisors. That's why I like doing this, so that people know what they are paying for and that they're getting value for it. I want you over the moon paying your advisor, and you should feel that way. That sounds odd, but that is a requirement I have. I want someone going. I'm paying you 20,000 bucks a year. I love getting 40, 60, 80, 100 X in value, and I'm sleeping at night. Well, this is awesome. That's how a relationship should work.

Speaker 1:

So the first question I invite you to ask your advisor is actually very simple how much am I paying you? And I want you to shut up and just hear what they have to say If they start rambling and going. Well, there's a lot of fees, and actually this is what the investments. But don't worry, like we all pay that, even me. And don't worry, trust me, this fee is just it's not significant, don't? You? Don't got to worry about it. Well, now they're maybe talking a little bit too much and not giving you a direct answer. They should be able to give you a percentage and a dollar amount, and it should be very transparent.

Speaker 1:

So on my screen here you're going to see me walk you through an example, and this is how I like to do it with clients. So just a hypothetical for you, I'm going to explain it as well, in case you're just listening here. Now, if you don't already know, my name is Ari Taublieb. I am the host of this podcast, the Early Retirement Podcast, and I'm the vice president at Root Financial Partners. So what you're going to see here is this is a fee calculator. It is very simple. You can see. This is our fee structure. It is very transparent and it is like most investment managers.

Speaker 1:

Now, some charge 1%, some charge north of 1%. I'm just giving you an example. So let's assume there's $2 million that you're working with that an advisor would manage Well. First of all, what does manage mean If someone has a million dollars in an IRA and a million dollars in a 401k. Those should be managed very differently. Meaning a 401k is something that we will give you guidance on, but we're not going to bill on that because we're not actually managing it for you.

Speaker 1:

So the first question, truly for your advisors do you manage on everything? Because some advisors will bill on your net worth. So if you have a $2 million home and $2 million in investments, they'll go yep, it's 1% of 4 million. That's $40,000 a year. Now, if they're giving tremendous value for it, be my guest and pay it. But oftentimes there's not a ton of clarity as to what managed mean. Managed should mean what they're actually investing and helping you out with, but they should be giving you guidance on everything. So if someone comes to me with $3 million but 2 million of it is in an IRA and 1 million is with their current 401k where they're still working, we're only billing on 2 million.

Speaker 1:

That annual fee is $17,500 a year and oneelfth of that fee comes out of the account every month. The reason we do it this way is because when my parents were at Wells Fargo, they were told they had to be there for three years and after one year they wanted out because they didn't feel there was sufficient value and they couldn't leave. They ended up leaving through different means and it was a hassle, but they were able to do it, and that is not how a relationship should work. You should be hiring an advisor, going, I'm going to pay you gladly, but you have to be justifying the fee through peace of mind, through value, through many, many different means. And I had a previous episode, if you have not seen it, where I have a few episodes. I have one called am I crazy for paying 30,000 a year to an advisor, and I have another episode where I go should you manage your own money? And I go into detail on all of this, in addition to hidden fees.

Speaker 1:

I like talking about this. I am the weird advisor that believes in this level of transparency. So you can see here, the annual fee percentage is 0.88%. So the question is can an advisor add value in excess of this? Now, one of the reasons I'm not loved in the advisor world and I'm going to explain it as well as showing it on my screen is, I will generally say on some of my videos sometimes at the end I'll say if you want a traditional advisor, someone who's going to help you rebalance, pick this stock, instead of that one.

Speaker 1:

And when to collect social security, I'll say don't hire me. And I don't think you should hire any advisor, because I don't believe they can justify the fee. Now, fidelity is like ari, you got to stop saying that. And schwab is like hey, when you say that you hurt my business and my clients watch your videos. Now they're asking questions and they listen to the podcast and I go look, look, I'm really sorry, but that's not my problem. I need to add significant value in excess of the fee or no one should ever pay me, and it is that simple.

Speaker 1:

So the point here is, what we do goes much deeper Tax purpose, insurance, estate, health care, withdrawal. We do planning to a different degree, but I want you to ask your advisor hey, what am I paying all in? So I want you to say that word what am I paying all in? So the first thing you're going to do is say, hey, what am I paying? Engage their answer. If they say you're paying $17,500 a year, you'll go great, that's very simple.

Speaker 1:

I would love to understand more as to the value for that Great Like you can keep it. You don't have to be mean. You can be very, you know, can't use, be straightforward. I was looking for the word candor there. I was thinking of canter, for some reason, I don't know why. So what I want you to do next is go. What is the all in cost? And they're going to go all in. And you're going to go, yeah, what's the all in cost? Meaning of all the investments I own. And they might tell you they might go oh, that's included. They might kind of beat around the bush a little bit, but I'm going to show you an example of someone that we work with today that went through this type of process when I had them ask these questions. So you're going to see it on my screen, but you're also going to hear me explain it.

Speaker 1:

So this couple came and they had $4.4 million and they were paying 1% per year. So 1% on 4.4 million is $44,000 a year. And I said, hey, guys, that's awesome. I have clients paying north of that and they're getting way more value. So totally get your pay in that. Do you feel you're getting that value? And they go.

Speaker 1:

No, I feel like I'm getting the kind of first three of things you talk about with. Yeah, they rebalance and they're telling me what stocks to buy. They're actually giving me some good guidance on when I should collect social security, but I'm not getting tax help. They're not telling me if I need health insurance and long-term care. They're not telling me if I should do charitable giving in a different way. They're not telling me which account to pull from. I said that's okay, let's talk further. They said okay, so I'm paying 1% a year. And they said do you do all of that? And I said we do that, but you shouldn't hire us because we do that, but that is included. And they're like okay, well, what do you do and what's the difference? And so we had a conversation, transparently, about that and I'm going to pull this up on my screen so you can see exactly what I'm looking at, but I'm also going to explain it.

Speaker 1:

So this couple came to me and whenever you look at an advisor's value or want to analyze anything along these lines, you need to know what's called the all-in cost. Now, what does that even mean? What that means is there are a few different fees. There's what's called an advisory fee that goes directly to an advisor, so that is just what you're paying the advisor. So that person told me they have $4.4 million. You can see all of their different investments on my screen. But if you're just listening, they have T Rowe Price and they have Vanguard and they have T Rowe Price and they have Vanguard and they have Guggenheim and they have all these different investment companies. Nothing wrong with that. But it comes out to $4.4 million, of which they're paying 1% a year, or $44,000.

Speaker 1:

I said totally cool, guys. And I said go ask your advisor what the all in cost is. And they said Ari, you're wrong. I just talked to them and they told me it's 44,000 a year. I said they're lying to you. And they're like uh, what are you crazy? Like you don't even know the advisor. I've worked with this guy for 15 years, so he's not going to lie to me. I said he's lying to you and they're like hey, you sure you want to still say that? Like I talked to him, I go, you're spending 44,000 a year to the advisor, but there's another investment cost of what your investments actually are. And they're like huh.

Speaker 1:

I said all of your investments have fees as well. Some of them are transparent, some are less so, but let's look at them. He said okay. So they sent me their investments and I said you have one fund here called the Artisan Small Cap Fund. It has an expense ratio of 1.2%. What that means is if you have a 10% return, there's a fee of 1.2%, which means your actual return that, if you look at your statement, will show 8.8%, because the SEC, which governs investments, they require after fee returns. So if you look at your returns and you go great, 8.8%. Well, yeah, that's what you received, but you really got 10%. And then there were these fees.

Speaker 1:

Now let me be clear I'm not anti-fee. Okay, you are not anti-fee. I can promise you that because you've been paid in a career your whole life and you've been paid a fee. That's what a salary is. Sometimes this word fee gets a bad rep because people go I don't want to pay hidden fees. I'm like I don't want you to either, but you've been paid a fee for your career your whole life. You deserve to be paid it. So everyone deserves to make money. I'm not against that. If money, I'm not against that.

Speaker 1:

If you could prove to me that this one fund that has a fee of 1.2% could outweigh the fee by the performance, I would say I want you to own that thing. If you could tell me that the fee was 1.2% and it would generate a return of 1.5%, I would say please own this. It's awesome. But the problem is there are years it will outperform and there will be years that underperforms. And what happens is there are years it underperforms and you're assessed the fee. So not only are you hit with underperformance where the fund didn't do well, but you're now hit with the fee on top of that and that can eat into returns in a major way.

Speaker 1:

So this particular couple you can see it on my screen, but I'm explaining it they have hidden fees of $35,000 a year, meaning they are paying an advisor $44,000 and the investments they own cost $35,000. Some of this they start freaking out. They're like oh my gosh, you're telling me I've been paying this amount every year. I go. Don't beat up your advisor too much, because a large portion of what you have is in your 401k, where you have limited options. Have they given you guidance on that? And they go. No, they only told me what to do with investments that they're actually managing for me. I said, well, that's a little bit of a pink flag, because they should be giving you guidance at anything they're not even managing. But you can see here this is a real number.

Speaker 1:

So they're like, hey, am I spending 35 plus 44,000 a year? I said yes, and they said, well, that's 80,000 a year. I said that's correct. And I have clients spending north of 100,000 a year and they cannot wait to pay more because they're making way more money because of it. I have other clients that perspective, clients that want to work with me, and they're like I can't wait. I'm excited and I'll say we can't add value in excess of this. And they're like, why not? I said, well, your plan doesn't allow for that, meaning everything's in a 401k. You already did some of these conversions. You told me what you wanted to spend. You're not losing sleep over your strategy. I'm not sure that you should pay us. I will do both of those.

Speaker 1:

It depends on if someone can add value. So this person's paying 1% a year to their advisor. That's 44,000. We are 32,000. So they said that's 12,000 less. I'm gonna start working with you. I said don't work with us because we're less. That's like going to the dollar store because it's less. You don't want to do that. You want to ask yourself is there value. Now they were not getting guidance regarding tax and withdrawal and insurance in a state, so for them there was a level of complication.

Speaker 1:

It made sense to shift advisors. They're working with us now and, instead of their investments having a cost of $35,000 a year, I like companies like Vanguard and Dimensional that generally keep income and the cost, the fees, very low, but have a great performance and track record. So this should be closer to about $2,000 to $3,000. If I wanted it to be zero, I could do zero, but what we want to make sure we're doing is having an effective portfolio and keeping costs really low, without being too low. And I'll use my grocery store example and tell people hey, why don't you just go to Whole Foods and buy paper plates? And they're like what are you crazy? You want me to throw money away? I go no, I'm just joking, but don't do that. Okay, that's active management.

Speaker 1:

The fees are high and there's not a lot of value. Don't, though. Why don't you just go to the dollar store for everything You're going to be able to eat? And most people go, yeah, but the value is not the best, and I go. That's what we want to start to determine. Could we possibly find a better alternative, and that's our job for our clients. So I've shown you now what is the advisory fee. I've explained what is the investment fee. Those are the two major fees, the only other fees that exist, and every advisor works differently. Some advisors will do what's called a flat fee. Hey, ari, pay me 10,000 bucks a year and just give me guidance.

Speaker 1:

The issue I see with that model and there's nothing wrong, there's no perfect model, everyone's different is, if someone were to pay me 10,000 a year, my incentive even if I think I'm a good person and I think, believe so, hopefully you believe so too is to bring on, because this is human nature. I'm a reasonable skeptic. That's just who I am. If I paid someone 10,000 a year, said watch my money, I know they're gonna try to take on as many clients as possible at 10,000 a year. That's how they're gonna build revenue. Try to take on as many clients as possible at 10,000 a year. That's how they're going to build revenue. They're not going to be proactive to me. They don't have an incentive. I pay them 10,000 a year. Their incentive is to keep me happy. So they're going to talk to me when I reach out and they're not going to go. Hey, ari, let's have another two hour chat about social security, because it could have a $500,000 impact on your plan. They might talk to me about it upfront, but we didn't spend a ton of time on it. They would rather go, try to find a new client and make another 10,000 a year. Now, I'm not against them feeding their family and going on vacation, but I wanna make sure that any of my advisors can be proactive with you and that there's no limit to how often they speak.

Speaker 1:

So our philosophy is very simple. We believe we are paid very fairly. We believe that you've done a good job saving, investing. We wanna add significant value. We generally can only do that by doing everything tax, estate, healthcare, withdrawal, insurance. We are optimizing your entire financial life, making sure you don't have to deal with it.

Speaker 1:

So ultimately, I just want you to know the advisory fee and the investment fees. If you know them and go, wow, it's very low. For example, vanguard, very low. The advisory fee to be able to speak to Vanguard is 0.3%, known as 30 basis points. That's awesome, but if we're just getting investment guidance without tax and withdrawal and healthcare and all these other things, sometimes it makes sense to maybe go to Trader Joe's as opposed to the dollar store, but I don't necessarily need that person to go to Whole Foods and buy paper plates. So there's a balance here and what you wanna make sure is that you're aware of the fees and, if you're paying for them, that you're getting value. That's what I care about. I will be very transparent.

Speaker 1:

The majority of people working with us are coming from an advisor where they're not receiving tax guidance, where, if they ask their advisor a question, they'll say regarding taxes, they'll say talk to a CPA. Your CPA says talk to your advisor. Now you're playing middleman in retirement, you're having to coordinate between an estate attorney and an insurance agent and now there's just a lot more hassle and you're like I think that's just how this works. No, that's not how this works. You should have one advisor that is able to do all of those things and facilitate everything for you. So my job is to do what's called often tax planning. That is forward looking. Those are things like Roth conversions and tax gain harvesting and when do you withdraw, and should you do health care subsidies or prioritize conversions instead? Or how do you compare charitable giving and pair that in a year when your income is low, so that you can offset that by doing a conversion.

Speaker 1:

It's the next level of strategies. It's not for everyone and I'll tell people very transparently we might not be a good fit because we do holistic planning for an early retirement. If that is what you're looking for. Other people are like, no, that's awesome. But like I just want my advisor to tell me to buy Apple or Microsoft, I go cool, we're probably not a good fit. So what we're doing generally is heavy tax and estate planning in addition to making sure you're invested well, and that's why most people reach out. And then after a year they're like well, I don't know what. I didn't know. Like there's so much to this. Oh, my gosh, you're opening up my eyes. This is what real holistic planning is like. Oh, this is different and I am very transparent.

Speaker 1:

But the point here is I require your spouse is on our meetings. Other advisors are nicer and they'll go. Nope, you're the breadwinner and you've been managing the finances and you're a good team. I can tell your wife doesn't want to be on it or your husband doesn't want to. That's cool. I'm not cool with that because if something happens to you, I need to make sure your spouse or partner knows where to go. Now I recognize that you're humans and not robots, and there will be certain meetings that your spouse just won't want to be on. I get that and I'll offer a meeting to be recorded and say there's going to be a 10 minute bit here. I need them to rewatch this after and they'll be like cool. So I'm a reasonable guy.

Speaker 1:

But oftentimes people are hiring us so that they go hey, if anything happens, like my spouse, like they don't even know where to go to find any of this and how to do this, and so I want someone who's gonna organize your life, save you on taxes and bring excessive value, and you're paying for quality of life so that you can live and spend time doing what you wanna do most, which you can't exactly quantify. So I do believe in hiring an advisor if there's significant value. I don't if you truly are not getting the value. So ultimately, this is just a transparent episode on fees. Hopefully this was helpful and if you're looking to work with us, you can go ahead and see in the description to apply to work with us. If you're looking for the Academy, which is just the software and different tools that I discuss, you can go ahead and check that out as well. I'll see you guys next time.

Speaker 1:

Thank you for listening to another episode of the Early Retirement Show. If you have a question that you want answered in a future episode, you can always go to my website, earlyretirementpodcastcom. That's earlyretirementpodcastcom, and you can go ahead and submit a question that I'll look to answer in a future episode. Thank you all for listening. Please do rate it, review it and share it with someone who you think would benefit from this information. If there's anyone out there that you know, I certainly appreciate it and I will see you all each week. Hey guys, it's me again. Please be smart about this. Nothing in this podcast should be construed as financial, tax or legal advice. Consult with your tax preparer or financial advisor before taking any action. This podcast is for informational purposes only.