Advice Should Trump Fees - The 3% Study | Series 7.9 - Enjoy More 30s: Family Finance

Episode 9

Advice Should Trump Fees - The 3% Study | Series 7.9

Published on: 2nd May, 2022

Is the financial advice you're receiving worth it?

  • Goal statement: I now better understand how advice versus fees for that advice can separately affect my situation. (02:13)
  • Pensions are mostly a thing of the past and Social Security is not going to replace your six figure salary that you and your spouse have. You are now responsible for your own retirement in this society. (04:26)
  • When they came out then, so Vanguard, this low fee, low cost company, when they came out and said their research showed that having a proper advisor could add 3% per year in overall net worth growth above what you would have gotten without them? (06:13)

Quote for the episode: " This study didn't even talk about things that a good comprehensive adviser will be doing for you, like taking advantage of say matching contributions through work, or analyzing your cash flow to maximize how much you could save every month, or making sure you have the right life insurance or disability insurance so it doesn't blow up all in your face." (10:07)

Securities offered through TFS Securities, Inc., and Advisory Services through TFS Advisory Services, an SEC Registered Investment Advisor Member FINRA/SIPC. TFS Securities, Inc., is located at 437 Newman Springs Road, Lincroft, NJ 07738 (732) 758-9300.

Transcript
Voiceover Audio:

Welcome to the Enjoy More 30s Family Finance

Voiceover Audio:

podcast. The only podcast dedicated to making life more

Voiceover Audio:

enjoyable for young families by hitting on the financial topics

Voiceover Audio:

that tend to weigh on us, stress us out, and distract our focus

Voiceover Audio:

from simply enjoying life.

Joseph Okaly:

Hello and welcome once again to the Enjoy More 30s

Joseph Okaly:

Family Finance podcast. Today, what we're talking to you about

Joseph Okaly:

is the next episode of the Raising Your Investment Mindset

Joseph Okaly:

series. So this series we're wanting to help you reframe how

Joseph Okaly:

you may view the scary unknown, that's investments, and

Joseph Okaly:

therefore you can utilize them in a more constructive way you

Joseph Okaly:

can better reach your goals, you can make life more enjoyable.

Joseph Okaly:

That's the point of all this.

Joseph Okaly:

As always, if you like what you're hearing, please make sure

Joseph Okaly:

to subscribe, follow us on Apple podcasts, wherever you may

Joseph Okaly:

listen. Clicking those stars, leaving those reviews, it really

Joseph Okaly:

really helps us reach literally millions of other young families

Joseph Okaly:

that are just like you.

Joseph Okaly:

Now last week, we discussed how what may feel abnormal from an

Joseph Okaly:

emotional standpoint can actually be very normal from a

Joseph Okaly:

statistical standpoint. And by knowing what normal is then we

Joseph Okaly:

can better protect ourselves against acting emotionally, when

Joseph Okaly:

it does come to our investments. So take a look at if you know

Joseph Okaly:

what range of returns let's say for any one time period is

Joseph Okaly:

normal for your accounts. What is normal? What should you be

Joseph Okaly:

expecting, from a statistical standpoint on your accounts for

Joseph Okaly:

what can occur? So if you haven't checked out that episode

Joseph Okaly:

yet, definitely do that soon.

Joseph Okaly:

Today's episode I am super excited for. It is titled Advice

Joseph Okaly:

Should Trump Fees - The 3% Study, where what we're going to

Joseph Okaly:

do is review in my opinion, how advice should be viewed compared

Joseph Okaly:

to fees? What studies have supported being true in our

Joseph Okaly:

growingly fee focused society. So if you're going to pay for

Joseph Okaly:

advice, basically, you should really get some value out of it

Joseph Okaly:

right? That that should happen. And the goal for today's episode

Joseph Okaly:

then turns into so that if you can say this at the end of the

Joseph Okaly:

episode, then you have succeeded statement is "I now better

Joseph Okaly:

understand how advice versus fees for that advice can

Joseph Okaly:

separately affect my situation." So "I now better understand how

Joseph Okaly:

advice versus fees for that advice can separately affect my

Joseph Okaly:

situation." I want you to be able to know how if you are

Joseph Okaly:

getting advice from someone, is it worth it? Feeling confident

Joseph Okaly:

that it is worth it or that it's not. And so when we go through

Joseph Okaly:

today, the first thing I want to share with you is a story about

Joseph Okaly:

So when I was learning how to drive, you needed to take a

Joseph Okaly:

driving.

Joseph Okaly:

driving course for you know, so many hours as part of that

Joseph Okaly:

process. And I remember I started off really, really well.

Joseph Okaly:

The instructor seemed to be pretty impressed. You know, I

Joseph Okaly:

did have a lot of hours of racing cars and video game

Joseph Okaly:

experience. So I was really you know, excited to get behind that

Joseph Okaly:

wheel holding a controller would obviously be exactly the same as

Joseph Okaly:

driving a car in real life right? Now, as the time went on,

Joseph Okaly:

I guess the confidence was not helpful because I made a couple

Joseph Okaly:

of let's say shaky decisions before my time was up. But

Joseph Okaly:

luckily, I still was able to pass for my hours. And overall,

Joseph Okaly:

the reasoning for these courses, despite people that may have

Joseph Okaly:

extensive video game experience is that they want to make you

Joseph Okaly:

take these courses because it's important to know what you're

Joseph Okaly:

doing before you get behind the wheel of an actual car, a

Joseph Okaly:

machine that could kill you or somebody else. And no one really

Joseph Okaly:

argues with this process. Nobody says, "Oh, why are they making

Joseph Okaly:

me take this driving course?" Because the negative outcome is

Joseph Okaly:

so clear. It's injury or death. When it comes to investment

Joseph Okaly:

advice, it isn't so easy to see it. Some people have no advisor

Joseph Okaly:

and they're fine, right? "Don't advisors cost money? Are they

Joseph Okaly:

really worth the money? Can I see that value? How do I know if

Joseph Okaly:

I'm even getting a benefit?"

Joseph Okaly:

So let's start back two generations first with your

Joseph Okaly:

grandparents. My job didn't even exist back then. Because there

Joseph Okaly:

was no real planning that was needed. Everyone pretty much had

Joseph Okaly:

a pension. Everyone pretty much had Social Security. They would

Joseph Okaly:

retire and then they would just sit on their front porch for

Joseph Okaly:

like 10 years or so before they passed away. Now things are much

Joseph Okaly:

different today. Pensions are mostly a thing of the past and

Joseph Okaly:

Social Security is not going to replace your six figure salary

Joseph Okaly:

that you and your spouse have. You are now responsible for your

Joseph Okaly:

own retirement in this society. Now fees tend to come to the

Joseph Okaly:

forefront of the discussion. So how much is an advisor actually

Joseph Okaly:

worth? As of today there have been several studies that

Joseph Okaly:

actually tried to tackle this question. And they've been done

Joseph Okaly:

by leading firms. Not you know, not Joe Schmo down the street,

Joseph Okaly:

big, big notable firms. The most notable of these is Vanguard. So

Joseph Okaly:

pretty much everybody out there has seen a Vanguard commercial,

Joseph Okaly:

or probably has Vanguard funds in their 401(k), or something

Joseph Okaly:

like that at work and Vanguard decided to do a study that

Joseph Okaly:

talked about just this. Talked about fees. So I'll link this

Joseph Okaly:

study to the show notes if you want to really dive into it but

Joseph Okaly:

what they were trying to do is quantify this value. "How much

Joseph Okaly:

is an advisor worth?"

Joseph Okaly:

Now, Vanguard, like I said, I think most of you probably have

Joseph Okaly:

heard of them, but they are one of the largest investment firms

Joseph Okaly:

that are out there. And their approach to how they became one

Joseph Okaly:

of the largest investment firms out there is to try to have

Joseph Okaly:

mutual funds and ETFs. So you know, basically investment

Joseph Okaly:

options for you to use, that are as low cost as they can be. So

Joseph Okaly:

have the fun, just basically track an index as cheaply as

Joseph Okaly:

they possibly can so that, you know, they have the lowest fees.

Joseph Okaly:

And that's how they're competing against the rest of the market.

Joseph Okaly:

It's not a company that says, let me try to hire the most

Joseph Okaly:

expensive manager out there to try to outperform everybody

Joseph Okaly:

else. They do the exact opposite of that. So low fees, they very

Joseph Okaly:

much value. Low fees are their foundational element that built

Joseph Okaly:

them up to where they are today. When they came out then, so

Joseph Okaly:

Vanguard, this low fee, low cost company, when they came out and

Joseph Okaly:

said their research showed that having a proper advisor could

Joseph Okaly:

add 3% per year in overall net worth growth above what you

Joseph Okaly:

would have gotten without them? 3% more per year in overall net

Joseph Okaly:

worth growth, above what you would have gotten without that

Joseph Okaly:

proper advisor, it obviously got a lot of attention. How did they

Joseph Okaly:

come up with this net number? How did they get to this huge

Joseph Okaly:

value that they calculated?

Joseph Okaly:

Now, when you break it down, the biggest chunk of this came from

Joseph Okaly:

behavioral coaching, one and a half percent on average. And

Joseph Okaly:

they went about it in a really cool way. Because they have all

Joseph Okaly:

these accounts, they have all this data. So how do we go about

Joseph Okaly:

and say behavioral coaching actually adds one and a half

Joseph Okaly:

percent? How can we structure something to really prove that

Joseph Okaly:

one way or another? So what they did is analyze over 58,000 self

Joseph Okaly:

directed target date funds. So these are accounts that are

Joseph Okaly:

retirement accounts and using target date funds that are

Joseph Okaly:

selected based on your expected retirement year. So there's no

Joseph Okaly:

reason to touch it. So if you're going to retire in 2040, and

Joseph Okaly:

that's roughly when you think you're going to retire, there

Joseph Okaly:

really should be no reason that you would ever change your

Joseph Okaly:

investment. It's set up to get to be slightly more conservative

Joseph Okaly:

over time to when you get to that 2040. So unless you decide,

Joseph Okaly:

"hey, I'm going to retire 2050 now", or "hey, I'm gonna retire

Joseph Okaly:

in 2030 now." There should be really absolutely no reason to

Joseph Okaly:

ever make a change. Over five years, they charted the data for

Joseph Okaly:

these 58,000 accounts. And it came out that those people that

Joseph Okaly:

made even one investment change, just one, they trailed the index

Joseph Okaly:

by an average of one and a half percent. Again, there should be

Joseph Okaly:

no reason to make a change at a target date fund, it is set for

Joseph Okaly:

your retirement. Yhese investors were almost certainly acting

Joseph Okaly:

emotionally when they made these changes. And the data that

Joseph Okaly:

Vanguard calculated over five years shows that it cost them.

Joseph Okaly:

Now depending on somebody's situation, asset location was

Joseph Okaly:

another major item that they talked about. So basically,

Joseph Okaly:

asset location is where do you put your money? What kind of an

Joseph Okaly:

account? Are you putting it into an IRA? Are you putting it into

Joseph Okaly:

a 401(k)? Are you putting it into just a general taxable

Joseph Okaly:

account? Where are you putting that money? Does that matter?

Joseph Okaly:

Could add as much as 0.75%, according to all the data that

Joseph Okaly:

they tracked. So if you're earning $100,000 a year, let's

Joseph Okaly:

say and you're putting that money into a joint account,

Joseph Okaly:

instead of a Roth IRA that grows tax free, that's a huge

Joseph Okaly:

difference down the line. All the growth taxable to some

Joseph Okaly:

degree, or all the growth tax free. That really adds up. The

Joseph Okaly:

last very significant area was withdrawal order in retirement.

Joseph Okaly:

Where do I take my money out from first? Where do I take it

Joseph Okaly:

out from second, third, so on and so forth. I have all these

Joseph Okaly:

different accounts, I have a 401(k). I have a joint account,

Joseph Okaly:

I have an individual, I have a Roth, I have a 403 b. Where do I

Joseph Okaly:

take the money out of first, second, third, fourth, and so

Joseph Okaly:

on? And they found that this could add another 1.1%, up to

Joseph Okaly:

another 1.1% in additional value. This is kind of like if

Joseph Okaly:

you go back to algebra class, that whole order of operations

Joseph Okaly:

thing that we learned. So parentheses is first, then

Joseph Okaly:

multiplication and division, and so on and so forth. So following

Joseph Okaly:

the right rules can make your money last significantly longer.

Joseph Okaly:

They may all be three accounts, but which one you go to first,

Joseph Okaly:

second, and third, can actually affect how quickly you run out

Joseph Okaly:

of money. That's super important, right?

Joseph Okaly:

So if we take the approach and just go on the high side or

Joseph Okaly:

towards the high side, we're already way over the 3%. And we

Joseph Okaly:

haven't even gotten into comprehensive planning. If we

Joseph Okaly:

throw in let's throw in another 1% fees, you're still coming out

Joseph Okaly:

way ahead based on their data. This study didn't even talk

Joseph Okaly:

about, like I just said things that a good comprehensive

Joseph Okaly:

adviser will be doing for you, like taking advantage of say

Joseph Okaly:

matching contributions through work, or analyzing your cash

Joseph Okaly:

flow to maximize how much you could save every month, or

Joseph Okaly:

making sure you have the right you know, life insurance or

Joseph Okaly:

disability insurance so it doesn't blow up all in your

Joseph Okaly:

face. And it certainly doesn't address the most important thing

Joseph Okaly:

of all that an advisor should be doing for you; relieving you of

Joseph Okaly:

any anxiety that you may have, allowing you to go to sleep at

Joseph Okaly:

night with, with peace of mind. Without that anxiety. You want

Joseph Okaly:

to have clarity in where you're headed. And so making sure you

Joseph Okaly:

reach the goals that would make you happy in life. Again, all of

Joseph Okaly:

this comes back to happiness.

Joseph Okaly:

So let's do an example of some of those things. So Vanguard,

Joseph Okaly:

they helped us out they did that, that study the 3%. And I'd

Joseph Okaly:

even go into a bunch of the other areas. But we've got to

Joseph Okaly:

way over 3% if we wanted to already just based on those

Joseph Okaly:

three main items that they talked about. So let's do an

Joseph Okaly:

example of some of these things that we just talked about from a

Joseph Okaly:

comprehensive planning standpoint, things that the

Joseph Okaly:

study did not even include. So we already have that 3% from the

Joseph Okaly:

study, let's go outside of that, above that to some of the things

Joseph Okaly:

that the study did not even include. So I call this the

Joseph Okaly:

million dollar example. All right? So if we take advantage,

Joseph Okaly:

let's say we have a client that comes in, and they have a 401(k)

Joseph Okaly:

that offers a match that they are missing that they're not

Joseph Okaly:

taking advantage of. And let's just say that the person earns

Joseph Okaly:

$100,000, that matches 3%. So that would come out to almost

Joseph Okaly:

$375,000, over 30 years at 8%. Just because of that match being

Joseph Okaly:

missed. Now let's say that the advisor meets with them annually

Joseph Okaly:

and makes sure that they increase their savings as their

Joseph Okaly:

income goes up by 5% every year. Okay, now that adds another

Joseph Okaly:

$275,000 with those same assumptions, because of their

Joseph Okaly:

increasing contributions. You might say, "hey, oh, I already

Joseph Okaly:

take advantage of my match." Most people out there don't

Joseph Okaly:

systematically increase how much they're saving every year into

Joseph Okaly:

their plans as their incomes go up. In addition to that, now,

Joseph Okaly:

let's say that the advisor helps them save a piece of their bonus

Joseph Okaly:

every year. Most people that come into our office, and we ask

Joseph Okaly:

them, Where did your bonus go, they put their hands up into the

Joseph Okaly:

air, and they have no real idea where it goes. "I think I save

Joseph Okaly:

some of it does, some of it definitely gets spent. But I

Joseph Okaly:

really can't tell you Joe exactly where that bonus goes."

Joseph Okaly:

So let's say another $5,000 a year at those same assumptions,

Joseph Okaly:

which adds now over another $560,000. Now, let's say that

Joseph Okaly:

the advisor uses a Roth IRA that they weren't available weren't

Joseph Okaly:

aware of being available, or you know, 401(k)'s that are Roth

Joseph Okaly:

through work. All of that could now be tax free as well. So with

Joseph Okaly:

those elements that we talked about matching, incremental

Joseph Okaly:

savings increases 5% every year, saving part of the bonus $5,000

Joseph Okaly:

a year. We are already well over a million dollars in value at

Joseph Okaly:

that 8% growth. Let's say let's knock it down again, let's knock

Joseph Okaly:

it down to 7%. Let's add another 1%. In fees, you're still over

Joseph Okaly:

$1 million in value. So between the Vanguard study of the 3%,

Joseph Okaly:

plus all the other stuff we talked about, and all the stuff

Joseph Okaly:

I haven't even covered, whether it be life insurance, or

Joseph Okaly:

disability, or stock options, or all these other things that an

Joseph Okaly:

advisor a good advisor can help you with, I hope that it's clear

Joseph Okaly:

to see that a good advisor most likely can add significant value

Joseph Okaly:

to your situation. So I can't say that every advisor would add

Joseph Okaly:

value. I'm saying that a good comprehensive advisor, focused

Joseph Okaly:

on planning absolutely should in my opinion. If all you're

Joseph Okaly:

getting from your advisor is some investment recommendations,

Joseph Okaly:

and not planning in any of these areas when it comes to asset

Joseph Okaly:

location, when it comes to rebalancing, when it comes to

Joseph Okaly:

behavioral coaching, when it comes to matching, when it comes

Joseph Okaly:

to Roth IRAs, when it comes to withdrawal orders, all these

Joseph Okaly:

different things, then yeah, I could see it not being worth the

Joseph Okaly:

fee that's being charged. When you look at them helping you

Joseph Okaly:

save more though, when you look at them, helping you save more

Joseph Okaly:

in the right places. When you look at them, helping you

Joseph Okaly:

protect what you have, protect these dreams that you're

Joseph Okaly:

building towards, it really is not complicated to add up the

Joseph Okaly:

value that accumulates over the long run. So circling back

Joseph Okaly:

around to the goal statement for today, if you can now say "I now

Joseph Okaly:

better understand how advice versus fees for those advice can

Joseph Okaly:

separately affect my situation", then you have succeeded in the

Joseph Okaly:

goal for today. Congratulations as always.

Joseph Okaly:

Thanks, as always as well for tuning in with me today and join

Joseph Okaly:

us for next week's episode which is the Series Recap. We're done.

Joseph Okaly:

We will run down and cover all of these various elements that

Joseph Okaly:

we discussed when it comes to raising your investment mindset.

Joseph Okaly:

Overall if you are able to implement what we covered today,

Joseph Okaly:

that is fantastic. As always, I'm hoping to empower you in

Joseph Okaly:

whatever way would be helpful. Less to worry about means more

Joseph Okaly:

focus on enjoying life. If you're wanting help with these

Joseph Okaly:

things though, if you have questions if you want things

Joseph Okaly:

clarified, check out the ASK JOE section on the show's website

Joseph Okaly:

EnjoyMore30s.com. You can also connect with me directly by

Joseph Okaly:

visiting my wealth management firm New Horizons Wealth

Joseph Okaly:

Management at nhwmllc.com. Until next week, thanks for joining me

Joseph Okaly:

today as always, and I look forward to connecting with you

Joseph Okaly:

again soon.

Voiceover Audio:

The conversations on this show are

Voiceover Audio:

Joe's opinions and provided for general information purposes

Voiceover Audio:

only. They do not constitute accounting, legal, tax, or other

Voiceover Audio:

professional advice for your specific situation. You should

Voiceover Audio:

only seek appropriate advice from a financial advisor,

Voiceover Audio:

accountant, lawyer, or other professional before acting upon

Voiceover Audio:

any content or information found here first. Joe is affiliated

Voiceover Audio:

with New Horizons Wealth Management LLC, a branch office

Voiceover Audio:

of TFS Securities, Inc., and TFS Advisory Services an SEC

Voiceover Audio:

Registered Investment Advisor Member FINRA/SIPC.

Next Episode All Episodes Previous Episode
Never Miss an Episode!

Never Miss an Episode!

Sign up for our free newsletter, so you get each new show as soon as it's live! Plus, get exclusive content and updates just for subscribers - sign up below!
Show artwork for Enjoy More 30s: Family Finance

About the Podcast

Enjoy More 30s: Family Finance
Family Finance for Young Professionals.
Young families receive little to no personal finance help. We all grow up to have jobs and money, yet our education system focuses on Shakespeare and Algebra. Even professional advice can be hard to come by, with the majority of the industry chasing retirees and existing wealth.

Joe Okaly's podcast is aiming to change this, providing personal financial advice geared specifically to professionals with young families. This podcast is dedicated to making life more enjoyable for young families, by hitting on the financial topics that tend to weigh on us, stress us out, and distract our focus from simply enjoying life.

Joseph P Okaly is a CFP Certified Financial Advisor who fits directly in with who this podcast is focused on - a young professional with a family. With over a decade of experience as an advisor, there is passion and knowledge to make a difference.

Securities offered through TFS Securities, Inc., Advisory Services through TFS Advisory Services, a SEC Registered Investment Advisor Member FINRA / SIPC. TFS Securities, Inc. located at 437 Newman Springs Road, Lincroft, NJ 07738 (732) 758-9300.