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

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Welcome to the Enjoy More 30s Family Finance

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podcast. The only podcast dedicated to making life more

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enjoyable for young families by hitting on the financial topics

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

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from simply enjoying life.

Joseph Okaly: 00:00:16

Hello and welcome once again to the Enjoy More 30s

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

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is the next episode of the Raising Your Investment Mindset

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

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

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therefore you can utilize them in a more constructive way you

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

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That's the point of all this.

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

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

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

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really helps us reach literally millions of other young families

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that are just like you.

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

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emotional standpoint can actually be very normal from a

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statistical standpoint. And by knowing what normal is then we

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can better protect ourselves against acting emotionally, when

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

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

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

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expecting, from a statistical standpoint on your accounts for

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

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yet, definitely do that soon.

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

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

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

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to fees? What studies have supported being true in our

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

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

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

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

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

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understand how advice versus fees for that advice can

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

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advice versus fees for that advice can separately affect my

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

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

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

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

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

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driving.

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

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

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

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

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

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wheel holding a controller would obviously be exactly the same as

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

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

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

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

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the reasoning for these courses, despite people that may have

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extensive video game experience is that they want to make you

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

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

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

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

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

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

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

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

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

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I'm even getting a benefit?"

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So let's start back two generations first with your

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

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

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

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

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

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

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Social Security is not going to replace your six figure salary

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

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

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

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worth? As of today there have been several studies that

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

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

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

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pretty much everybody out there has seen a Vanguard commercial,

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

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

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

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

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

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is an advisor worth?"

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

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

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

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

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mutual funds and ETFs. So you know, basically investment

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

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

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

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

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

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expensive manager out there to try to outperform everybody

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

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much value. Low fees are their foundational element that built

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

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

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said their research showed that having a proper advisor could

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

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

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worth growth, above what you would have gotten without that

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

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

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value that they calculated?

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

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

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

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

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and say behavioral coaching actually adds one and a half

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percent? How can we structure something to really prove that

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

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directed target date funds. So these are accounts that are

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retirement accounts and using target date funds that are

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

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

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

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really should be no reason that you would ever change your

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

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

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

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

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

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

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

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

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

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your retirement. Yhese investors were almost certainly acting

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emotionally when they made these changes. And the data that

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Vanguard calculated over five years shows that it cost them.

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Now depending on somebody's situation, asset location was

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another major item that they talked about. So basically,

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

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

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

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

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

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

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

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

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difference down the line. All the growth taxable to some

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

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last very significant area was withdrawal order in retirement.

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

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

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

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

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

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

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

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

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thing that we learned. So parentheses is first, then

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

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the right rules can make your money last significantly longer.

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

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

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of money. That's super important, right?

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

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

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haven't even gotten into comprehensive planning. If we

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

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

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about, like I just said things that a good comprehensive

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

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matching contributions through work, or analyzing your cash

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

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

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

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

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

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

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

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

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

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this comes back to happiness.

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

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

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

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

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

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

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comprehensive planning standpoint, things that the

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

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

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

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

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

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

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

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

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

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

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and makes sure that they increase their savings as their

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

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

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

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

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systematically increase how much they're saving every year into

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

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

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

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

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

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

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

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

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

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

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

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

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those elements that we talked about matching, incremental

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

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

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

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

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

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

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

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

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

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

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

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

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

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getting from your advisor is some investment recommendations,

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

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

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

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

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

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

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

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

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

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

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value that accumulates over the long run. So circling back

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

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better understand how advice versus fees for those advice can

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

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goal for today. Congratulations as always.

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

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

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

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we discussed when it comes to raising your investment mindset.

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

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

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

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

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things though, if you have questions if you want things

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

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

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visiting my wealth management firm New Horizons Wealth

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

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

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again soon.

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The conversations on this show are

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Joe's opinions and provided for general information purposes

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

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professional advice for your specific situation. You should

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only seek appropriate advice from a financial advisor,

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accountant, lawyer, or other professional before acting upon

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any content or information found here first. Joe is affiliated

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with New Horizons Wealth Management LLC, a branch office

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

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Registered Investment Advisor Member FINRA/SIPC.