Investment Fees - Do You Know What You're Paying? - Childfree Wealth Podcast Ep. 44

Dr. Jay

Alright. Childfree Wealth listeners, if you listened to our last podcast on the John Bogle book, a little common book of comments, a little book of I could never get the damn right name right little book of common sense and wrestling, whatever it is, I don't care. But the point was, the book was talking about fees and Bri and I have been dealing with fees lately with clients and I thought we would do this podcast just so I can spin Bri up because you missed it offline.

We've been looking at clients portfolio shows and fees and diving in and Bri lost it one day and she was like, “How is this legal to charge these fees?” Is that fair?

Bri

Yeah, that's fair. I think it's very… if you saw some of the fees and just for people who haven't worked this before, what we'll do is we'll go and we'll list out all of the different funds you have or different stocks, and then we'll put the fees right next to it, the percentage, and we'll figure out what the dollar amount is and it pisses me off is a nice way to say it.

Dr. Jay

That's okay. I'm with you, Bri. And here's the thing. We're going to talk about fees and you're going to then go look at your investment. You're going to figure out you're paying a lot of fees. That's okay. Don't beat yourself up. Just fix it for the future. I'm just starting with that because most people don't realize what they're getting charged or how or where.

And it's just one of those big issues. But I'm giving you a little break that, hey, right now, your structure might not be right. It's okay. And sometimes you can't get around the fees. So, for example, in your 401k, you have very limited control on which funds you can pay. And I've seen some where I'm like, I don't like any of these funds, I don't like any of their fees, but these are the only choices you have. We're going to pick this one.

 And that's where people like, Wait, what? I'm like, Yeah, if we put it in your IRA, you’d pay a whole lot less and we get stopped. Sometimes that's the case. We're going to include in the show notes links to a couple of different things. One is actually a notice from the Securities Exchange Commission that outlines fees.

They put out a notice a few years ago now. It said, hey, you should understand what you’re paying. And you should know it upfront. And I don't think people sit around reading SEC guidance. I mean, I do, but, you know, other people don't. It gives you a good view of it. The other thing we're talking about is we're going to talk about two specific kind of companies/funds, because we've seen them a lot lately.

I am not picking on them specifically just because the heck of it. It's because we've seen it recently. They're not better or worse than the others. Actually, there's much that are worse. But we'll go with that. But we're going to talk about American funds, which is Capital Group. We're also going to talk about Edward Jones just because their fees have been ones we've run into like multiple times over the past month.

Dr. Jay

And I'm just… got Bri on a, you know soapbox about these. Use your own judgment. But we're going to use the real stats. So, Bri, you outlined you actually had some stuff at Capital Group American Funds for a while, didn't you?

Bri

I did. It was stuff that was started and given to me. And then as I got older and I realized it, I went, then opened up my own things with fidelity, did something else, did a lot lower fees and moving my stuff from American Funds Capital Group to Fidelity took a year. It was that big of a pain to do it.

And then when I moved it, I was like, oh, I don't think I can touch this or what do I do with it? I sold all of it and oh my God, the day I sold it, I felt so good, especially after seeing all the fees and now I just have low cost index funds instead there. But man alive!

I had it because I've said before I grew up in South Dakota, very small area. You go to the person on the corner, you go to the person that you know from church, and that is how you do things. There isn't a lot of information or information spreads very slowly. The people who set it up for me just didn't know any better.

It's not their fault. I don't blame them, but it makes me sad that I feel they were taken advantage of. And I think people who have these funds are often taken advantage of.

Dr. Jay

Yep. And you'll see we've got the data. We're going to include links. We're going to show you all the numbers. It's not numbers we're making up. Yeah, we're going to about American funds, which are about Edward Jones because they're everywhere like they're in the home town areas. You know, I'm in Mississippi in the middle of nowhere and there's still, what, Edward Jones office right down here.

And that's where you go because it's right there in the square and you do your thing, but then you're paying a lot of fees and that just is what it is. And these fees don't stop. We're talking about fees that are there the entire time you're investing with a company. You're working with them. And if you don't realize it, you can be making very little, you know, to the point where the market should be doing great, but you're not because all is being taken up in fees.

So couple of things just to give you a little background. When in the financial world, when we talk about fees, you'll hear us talk about bps, bps. Well, the way it works is 1% is 100 bps. And I say this because it's really hard and confusing to talk about 1% or 1/10 of 1%, 1/10 of 1%, ten standards, 1%, 100 bps.

So we're going to use that throughout. We're going to our percentage and bps. So just give you a context and the going rate, let's call it that in the industry is for some of these charging assets under management as a percentage of your assets just to exist is 1% or 100 bps just to like exist. Now that means you're going to pay 1% every year for the rest of your life.

And the SEC investor bulletin actually did a little analysis of this and talked about hey, you know over 20 years how does this have an impact? And it's interesting, they looked at over 20 years, if you started with $100,000, the 1% fee would be almost $28,000 in fees. But if that $28,000 in fees was invested instead of paid to a company, you'd actually earn an extra $12,000.

So really, that 1% ends up in almost $40,000 difference over 20 years, which doesn't sound like much, but I don’t know about you, but I don’t have an extra $40,000 to give away. What do you think?

Bri

Yeah, I definitely don't have an extra $40,000 to give away either. Now, I've laid out some of these fees and depending on how much you invest, let's say you want to invest $100,000 and you're want to go buy an American fund. Many of them have a 5.75% load fee, which means that is what you pay to purchase it.

Dr. Jay

On top of. Yep. The annual fee.

Bri

Correct. Which are often half of a percentage. So like 56 bps was one of the last ones. Some also have this small fee called a 12b-1 fee, which is a marketing fee of another 25 bps 0.25%. So you're nearly at 1% plus you have that additional management fee add that up and that can easily be like six and a half to 7% in fees right there.

And you could pay us one on one for a year and still pay less in fees for that.

Dr. Jay

Yeah. And by the way, this is not about selling our service. You know, we picked an advice only model because it fits childfree folks and we don't believe in charging a percentage fee. That's just kind of how it is. But what happens is… we will link to capital groups, outline of their fees, and here's what they say.

They go, well, the fees are designed for people who choose to compensate their financial professional based on and I'm like, wait a minute, that's okay. You choose to compensate a mike. Oh, that's marketing speak that I'm just going to lose my mind over. But here's how this works. In the financial world, you can do what's called fee-based.

[They] charge you commission and don't charge you money out of pocket. Bri was talking about the fees. We're going to fee-based. She was talking about American funds. This happens to be a class A share. They charge 5.75% upfront. They don't charge you a feature like you don't pay on your credit card or you don't pay them a fee.

Then you're actually getting charged. They're just hiding. And that's in the fee based commission world because they said, well, it's no cost to you. Well, I want to give you a little lesson here. If it's no cost to you, you're getting charged somewhere. They’re just telling you, I don't care. They're not doing it for free just to have you as part of their team.

You look like you want to jump through the screen on me on that one.

Bri

When I was 22, I think it was, and one of my first job out of college, I set up my retirement account and I asked the guy… when he got there, first of all, he was a jerk. He walked in. He was like, “Do you even know what a retirement account is?” That was the first thing he said to me.

I was like, “Well, hello to you too. And yes, I do actually, like, I've been doing my own stuff and I was like, actually, and I'm only doing this because I'm getting a match, otherwise I don't want to deal with you.” We started off on a great foot. I am not afraid to tell somebody [off] if they are being a jerk and be a little confrontational.

So I asked him how he got paid and he told me, Well, we don't charge you anything. I was like, You're lying to me. And then without even asking me what my goals were or anything, he had this whole multiple sheets paper and he highlighted a couple of things. He goes, This is what a lot of your coworkers do.

That made no sense for me. Like, I'm not like any of my coworkers. When the law allowed me to, I finally got my stuff out of there and I'm very happy because I did not like him.

Dr. Jay

Yeah. Do you ever wonder why people don't like financial advisors? So keep in mind, by the way, people can call themselves a financial advisor without being a CERTIFIED FINANCIAL PLANNNER™ or having any certification or even being an investment advisor. You can be a financial advisor & just be selling insurance or other products. Yeah, I understand it. You know, it's a pit of snakes.

Okay, so I talk to people, financial planners all the time, and I actually spend most of the time talking about childfree folks. Of course, you know, surprise. There are some meetings. I'm like, dude, I would never want to be in the same room with you because… I meet via Zoom… I have to take a shower because you're, like, slimy.

It's usually those ones, by the way, that say to me, “Well, if you charged a percentage of assets, you'd make more money off your clients than you do.” And I said. “Yes, I would. Is that a bigger value for my clients? No. Am I doing more work because they have more assets? No, I'm not. The numbers changed, but the work. Ehh.”

There's a place for paying fees, but they kind have to have a value. Alright. Fee-based. They hide it. So now we have it going to world called fee-only, which is I only charge you a fee. But there's some caveats here. That percentage based person charging you a percentage of assets each year can be fee-only.

I just grabbed Edward Jones’ numbers that are publicly available. They have different models. One is based on commissions ranging from 0.99. So 99 bps to 450 bps. Or they have their assets under management, which is a fee of 1.35%, which is 135 bps with lower tiers if you have a whole lot of money with that. So we're talking about a large percentage of fees.

But here's what they also say in there. It also says some investments have third party internal expenses, which are a nice way of saying we can also sell you funds that have other fees. So when we talk about investing, we had talked about a simple three fund portfolio. The whole US, the whole world, and some bonds. You know, that one adds up to about ten bps of fees, 1/10 of 1% or less.

That's a whole lot different than a fund that's charging you 1% you to exist or 5.5% upfront or whatever. And then an asset fee. And that's the problem. So people well, I went to a fee-only person, so it should be better. Maybe. It is better than a commission based. I'm going to go on a limb there and say it's better in most cases, but there's a big difference between fee-only.

That's either what they call flat fee. Like you pay them X per year, they do everything for you. I'm okay with a flat fee because then I know what I'm paying and I pay for it myself. I'm not charging a percentage versus I'm going to charge you, give you a percentage of my money for my life. And here's where I have a problem for childfree folks.

I believe the percentage based AUM model has a conflict of interest with people who want to die with zero. If you go to somebody, they charge you 1.35% or 35 bps for your assets. They want your assets to always go up. If you're childfree and trying to die with zero, you want your assets to go down.

Guess what? The advice they give you might have a conflict of interest in there. This is the problem with fees. The problem with fees is you've got to know what you're buying and what's behind it. So the commission model, the fee-based, they're actually getting paid to sell you stuff. I was say crap, but yeah, crap, they're getting paid to do that.

And actually there's some issues and they've had some places get hurt for this, they call it churning. We're like, hey, I'm going to sell you out of this and buy into this. And they do it too frequently just because they get a commission every time it goes by. The Bogle approach, you set it then forget it. They're earning commission once and not ongoing.

That doesn't help them. I think the hard part of that is you don't see those fees. They don't tell you about them in Bri's example.

Bri

Yeah, I. I would just get statements and I would say, okay, you know, it went down this quarter here and there and like for the past couple of years with the whole retirement account from my previous work, I haven't talked to the person in a few years and but I was still paying them every year simply because I had to.

And as soon as the law allowed me to get out of there, I did because I was like, he didn't help me. I talked to him that one day when he was royal jerk and that was it. Now, not everybody is a jerk who does, but in this case, this guy was and I just I don't think I could sleep at night if I… even talking about this sometimes I don't sleep because I get so upset.

Dr. Jay

And I get upset, too, because the issue is, oh, I'm worried I’m being taken advantage of.

Bri

Mm hmm.

Dr. Jay

Even like people go. Oh, okay. I went for a fee-only fiduciary, which is by way, good. Fiduciary means you know, they have to watch out for you first and they have to actually put you first. Versus a broker, by the way, is not necessarily fiduciary. They can be just what's called a best interest standard.

And then you go, Oh yeah, but I'm still paying all these fees on top of it. It's just like more transparent. I go more transparent isn't completely transparent. That's the difference. Somebody comes to us right now, our monthly rate is $500 a month. We teach them, they get an hour with us, an hour offline. We help them.

We'll tell them what to do. Doesn't matter if they have a dollar or $1,000,000 or $100 million. Now, if they have a complex situation, they may have to buy some extra hours with us so we can help them on it. But you know what you're getting. That's the difference. So advisors go, well, I want to charge you a percentage fee because if you make money, I make money.

Okay, that's a logic. But it also means the more you make, the more they take.

Bri

Yes. That is one of the chapters in Bogle's book is The More Investors Make, The More Managers Take, which is the less investors actually make.

Dr. Jay

Yep. That's why I'm okay with flat fees. If you want somebody to do it for you, you won't pay them a flat fee. I'm okay with that. But a percentage based not so much. And the problem is they're all out there. Let's walk you through this. We're going to actually look at a fund and show you this. We're going to look at the ticker is AMCPX.

This is American Funds, one of the big funds. Let's call it that growth fund. And we're going to look at the fees American funds, AMC cap, which they're big fund and that has a different tickers depending on structure. And CP X is a specific a-share, which means you pay the funds upfront and here's how this works. So the first thing you pay is a front load fee 5.75%. 575 bps just to happen, if I buy $10,000 worth of it, they're going to take 5.75% out of that day one just for me to get the fund.

But here's what happens with that. So now I actually start in the hole 5.75%. So to get back to my initial investment, I'd actually probably have to make almost close to 7% just to make that money back, because I'm starting at a lower number. So that's frontload then they have expense ratio. Expense ratio is like, hey, we're running the funds, this active fund.

So they charge fees for that. This happens to be 67 bps 0.67 and that's 67 bps. You're going to be paying that every single year. Just cuts. Now on top of that, the 12b-1 fee that Bri mentioned. So a 12b-1 fee is a marketing fee for funds. Now in a 401k, when you have mutual funds, you'll see these 12b-1 fees.

Part of that is to pay the fees for the 401k, but this is 24 bps, so what that ends up being is I'm going to pay 191 bps for my expenses just for that fund every single year on top of paying 5.75 to come in. That fund better beat the market by a hell of a lot for me to be in it.

By the way it doesn't. That's… I just can't justify that every year and coming in now they go well but they have this long chart and well clue this also the notes. Yeah the 5.75% is the only if you invest less than 25 grand. If you invest $100,000, it's only 3.5%. But wait, why am I paying you 3.5% for the honor of honoring your fund?

This is where I start losing my mind on top of the annual fees. What, do you think Bri?

Bri

If you are listening to this and not watching, you're missing the fact that I'm sitting here trying to restrain myself and biting the inside of my cheek because this makes me so mad.

Dr. Jay

Bri’s got a point. Now, you know, Bri and I will review clients’ information. Now I’ll go like Bri they have your favorite fund. And she just starts getting cranky at it and we can add up the fees and every year and structure and working that through and with thousands and thousands and thousands of dollars going away, people go well, but I was told I needed this fund.

And I'm like, Yeah, I can do the same exact thing with an ETF or less than ten bps in have no upfront fee.

Bri

Yeah. And do some of these advisors present options that are lower cost? Yes. But have I seen it where it is presented as the absolute last option out of all the options I presented? Yes. What are they given as the first couple options, American funds or other high, high fee funds.

Dr. Jay

And usually, by the way, those are actively managed mutual funds. There are a few ETFs and high funds, but they tend to be rare. Let me actually show you the alternative. So actually for American funds, they have one AMC, AP version C, which has a ticker of AMPCX, which does not have a front load.

Instead, it's got deferred load. We're going to charge you 1% when you sell. Now, here's the thing on that. That means after it grows, they're going to charge you. So guess what? The math works out pretty similar, but on top of that, the expenses go up. So now the annual fee, the expense ratio is 143 bps and the 12b-1 100 bps.

So 100 bps. So you're paying 243 bps a year in fees, but you save a 5.75% upfront. That really just sounds like, Hey, I didn't screw you on the way in. I'm going to screw you on the way out.

Bri

Yeah, exactly. It is.

Dr. Jay

Now, by the way, there might be a place you could you might be able to prove to me one of these funds has a long term return that's better than the market and the fees are worth it. There might be one of those. I haven't found it yet. I just like… I might be missing something because I don't believe in paying these you know, the only fees and I mentioned previously. So I pay a little extra because I do ESG funds. So they have to select. But it's actually ten bps. It's not an extra 150 bps just to have a fund. You know, you have if you're buying a fund with fees, you have to be getting something on it. And that's where I go. I don't know what I'm getting out of this fund and somebody will probably like in the comments, they'll beat me up and say, Oh, well, you know, over this time period, this would be better.

Okay. Yep, you're right. If you cherry pick a time period that fund may have done better, but you’ve got to overcome the fees just to say hi. Yeah. And by the way, in many cases that's on top of the account fee.

Bri

True. There's a lot of fees. I don't think that they're fully disclosed to people and explained in a way that makes sense.

Dr. Jay

Okay, so let's get this straight. They are disclosed because they provide a prospectus which includes the fees in there.

Bri

But in a way that people understand what that is. Yes, they're given it, but do they understand it? 

Dr. Jay

Well, that’s another thing. So alright. I bought a new headphones and there was like a three page agreement just to, like, turn on headphones because I guess, I don't know, I’ll blow off my ear or something. I didn’t read it at all. I'm going to be honest on that. And you wouldn't either. The prospectus comes to my house, I throw it in the trash.

Bri

Okay. But when it comes to money like it, it's irresponsible for somebody to sell you something and not explain it to you in a way you understand.

Dr. Jay

Okay. Well, so here's the thing. This is where we get into to morals, ethics and legal battles.

Bri

Yes. And I think that a lot of people don't have that great of morals when it comes to this.

Dr. Jay

So. Alright. Here's what's happened over time. The SEC, by the way, we got like rules we got to follow for everything. I mean, I got to keep every email ever and I got to do all this stuff. And they've made these forms. It says form CRS, which is the customer relationship summary and the prospectus. Now they made these forms which outline every like thing like, you know, hey, this could go from good to bad and make the world come to an end.

And like all this crap that nobody reads because it's gotten so long, right? At least that's my theory. But what happens then is they go, Yeah, yeah, I trust my financial advisor. I just going to do this. My answer when I talk to clients, we send them homework, read this, do this, look at this. Now, if they don't do it, I have no way to.

I can't force them to do the homework. But we want them to be informed, not just take our word for it. And what happens, though, is like some of these, we haven't even gotten into fees of annuities and insurance buys and life insurance. Oh, you want to see fees that are hiding. We'll do a separate episode on that.

But they don't explain it because then you won't buy it. Now, the hard part of this is brokers are held to what's called a best interest standard. And people… and this gets really weird. So bear with me for a second. Some firms are both brokerage firms and registered investment advisors. When they're brokers, they're held to a best interest.

When they're registered investment advisors they’re held to a fiduciary. So how do you split the difference? I have no clue. We're a registered investment advisor. We have a fiduciary standard, which is a higher standard. But you have to explain these and, you know, work this through and now best interest though the weird one is a well I think it's an brings best interest of by this one with the fees cause I believe this and the hard part is like I can't say, well your belief is wrong, although I can.

The data says you're wrong, but I really can't. But the problem is with finance, any thesis on finance works, you're like, I think it's best if we invest in orange futures and commodities. Okay, I don't agree, but that's a thesis and it works and you can try it and that's okay. You can justify it to a client, you know, somebody saying, hey, I prefer active managed funds because of, I don't know why, but let's just go.

Whatever the reason, they can say it's in somebody's best interest. That's the problem. The other problem is if they, if they follow the Bogle approach and just three funds. Set and forget it, they make no money on it.

Bri

Yeah. And that's fine. It's okay to not make a ton of money by screwing people with fees.

Dr. Jay

So hold on. I got to call this out. We're going to share a little inside baseball here, a little behind the scenes. Bri’s been with me now four or five months. We've been working on different things. We did an informal interview. Let’s call it that. It wasn't really a formal process. I said, Bri, come work for me. I will train you how to do this.

I will make sure you've got the best training. You'll be the best planner you can come to. I don't pay well, isn't that what I said, Bri?

Bri

Yeah, that's what you said.

Dr. Jay

About you took the job anyway. Like, we'll have a separate discussion on why she took a job, didn't pay well. But here's the thing. The advice-only model and the structure we have, it's not the best way to make money, but it's the best thing for the client.

Bri

And I feel good about myself. I feel like I'm actually helping people.

Dr. Jay

Yeah. The reality check is that the fees, the financial incentive is to charge more fees and percentage based, not to serve the clients.

Bri

Yeah.

Dr. Jay

Ever wonder why Bri and I get all fired up about this?

Bri

Yes, I've been holding this towel underneath my desk in my hands, wiping like the sweat off my hands because I'm so frustrated with this. Now, probably I'll take a walk after this because it makes me so angry.

Dr. Jay

Yep. And now, by the way, I just picked two funds and I'll pick a fund and a company random. I could pick any company if you want.

Bri

Yeah, exactly.

Dr. Jay

That's what they're doing. If we use the apps as an example, because generations change, they're trying to convince you that it's fun to buy and sell stocks because guess what? They make money every time you do that.

Bri

Mm hmm.

Dr. Jay

And by the way, they're getting better now. They get, like, this payment for order flow and a few other funny things that are going on. But they're getting paid every time you do that.

Bri

Yeah.

Dr. Jay

Why are they incentivizing you to do this? Because they're getting paid off it. That's the problem. This is why they set it. Forget it works. What are the minimum fee? They have to do it to do it as low as possible, like Fidelity is right now, trying to do some 0% fees on a lot of like the index funds.

Now, by the way, they're still making money somewhere in there on the buy & selling it like let's be real. But that's where we're heading to is something close to zero if they go well I don't pay commission. No, but you pay the spread in between what you buy and sell at. That's just the commission hidden is getting better hiding fees.

Here's the thing. If I buy an ETF and just hold it for a while, if I pay that, whatever, ten basis points, eight basis points, whatever it is, to have that fee, that fund, and that's it. I'm not buying and selling, not paying a fee. Every time I do this, I'm making out.

Bri

And it shows in the numbers, too.

Dr. Jay

So we're going to include some links. I will tell you, if you want to get Bri fired up, just, you know, next time you're having a cup of coffee with her, ask her about investing fees. She might throw a cup of coffee at you.

Bri

No I won't do that. I will be nice. I will just say, “Know your fees,” in a very stressed voice.

Dr. Jay

I will tell you that there are a lot of financial planners that will challenge me and the the running joke has now become, hey, if you're advice-only a vegan and you do CrossFit which you talk about first, you know, and I'm like, well, you know, advice-only of course now, but like most anyone knows me, I'm not a vegan, I'm a meat eater.

But, you know, I talk about it because I believe it's right for clients. The only things I'm okay with, like if you do it, asset management is a flat fee because you know what you're paying for, you pay for it. I still think you do most of it yourself, but if you need help, cool, you pay somebody a flat fee.

You can do this. You pay X amount per year or per month or whatever per hour. And that's it. That's how you manage your funds and you learn. And by the way, investing is the easiest part of financial planning. So we really shouldn't pay fees for that. We should pay fees for the other services, the other financial planning, the tax planning, anybody, the insurance, the life planning, all that stuff.

Here's your homework. And by the way, this can probably piss you off. So I'm warning you in advance you go into your app whenever you're tracking your investments on your 401k, your investments, whatever, grab a Google sheet list every ticker make a column of what percentage fees and do the math if you're paying in total more than like ten basis points ish, maybe 20 basis points, I'll go that far.

You need to make some changes. And by the way, also, I'll look at your monthly statements to see if you're getting charged like a quarterly percentage fee. It's usually quarterly rather than monthly, but sometimes monthly as well as annually, whatever, some type of fee just for the honor having that account, add that up, that fee is going to be the one you're paying year over year.

And by the way, each year your investments go up, the fee goes up to.

Bri

Another thing to note that not all places are good about showing you the fees. So we like to use either Morningstar or Yahoo!Finance and you can search on those to look for your fee like expense ratio front load 12 B one. So that is a good place to find it. We'll put links to that in the notes as well.

Dr. Jay

Yep. But really add it up. Yeah. And if you're looking at saying wow, that's a lot of fees, sometimes in 401(k)s you can lower your fees, sometimes you can't. I will look for Vanguard Fidelity funds first and anyones for one K because those are usually the lowest fees. You'll see some other funds that are pretty low fees. Cool. I'll also look at other funds.

That one I know is going to have a high fee you know anything that's matching funds I'm going that's probably a high fee and you can buy that if you say there's a reason you're buying and paying that fee, but you have to you have to be able to say, this is why I'm paying that fee. And that's where most people just can't.