Fees & Transparency | How is Your Financial Advisor Being Paid?

Unfiltered Finance

Financial Advisors don't work for free. Depending on how their practice is structured, investors will be charged an assortment of fees for a financial advisor's services. In this episode of Unfiltered Finance, we are joined by JT Lavery, Symmetry's Associate Director of National Sales, to discuss how fees are structured and how advisors can work to be transparent with their clientele.

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Symmetry Partners, LLC, is an investment advisory firm registered with the Securities and Exchange Commission. The firm only transacts business in states where it is properly registered, excluded or exempted from registration requirements. Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. No one should assume that future performance of any specific investment, investment strategy, product or non-investment related content made reference to directly or indirectly in this material will be profitable. As with any investment strategy, there is the possibility of profitability as well as loss. Due to various factors, including changing market conditions and/or applicable laws, the content may not be reflective of current opinions or positions. Please note the material is provided for educational and background use only. Moreover, you should not assume that any discussion or information contained in this material serves as the receipt of, or as a substitute for, personalized investment advice.

0 00:00:06.970 --> 00:00:10.520 Hello and welcome to Unfiltered Finance. This is your host, Tom Romano.

1 00:00:10.520 --> 00:00:13.640 And thank you all for joining us for, uh, this edition.

2 00:00:13.930 --> 00:00:16.320 Today we're gonna talk about something that I think, uh,

3 00:00:16.620 --> 00:00:21.160 weighs on a lot of investors' minds. Um, there, there tends to be, uh,

4 00:00:21.400 --> 00:00:24.320 somewhat of a lack of transparency on this topic in the industry.

5 00:00:24.320 --> 00:00:28.400 And the topic is, is fees and all fees associated with investing.

6 00:00:28.460 --> 00:00:32.400 We have the perfect guest for us here today. Uh, JT Lavery, uh,

7 00:00:32.400 --> 00:00:34.040 longtime coworker and friend of mine.

8 00:00:34.070 --> 00:00:37.320 He's the Associate Director of National Sales at Symmetry Partners. Jt,

9 00:00:37.320 --> 00:00:38.440 thanks for joining us here,

10 00:00:38.740 --> 00:00:40.560 Tom. Thanks for having me. Appreciate it. So,

11 00:00:40.740 --> 00:00:43.280 Jt, tell us a little bit about, about your background, um,

12 00:00:43.310 --> 00:00:44.600 working with advisors.

13 00:00:44.870 --> 00:00:48.000 I've been working with advisors, Tom, for about 23 years now, kind of in,

14 00:00:48.000 --> 00:00:51.920 in different facets. Uh, I started off on the service side of things at a, at a,

15 00:00:51.940 --> 00:00:55.720 at a major mutual fund company up in Boston, answering phones and, and,

16 00:00:55.860 --> 00:00:58.080 you know, trying to solve problems. And I, you know,

17 00:00:58.080 --> 00:01:02.160 transitioned over to the sales side, uh, a few years after that. So I have a,

18 00:01:02.160 --> 00:01:05.880 you know, pretty good background working with advisors that were more on the,

19 00:01:05.880 --> 00:01:07.240 uh, commission side of things,

20 00:01:07.380 --> 00:01:10.640 as well as advisors that are on the fee-based side of things. For

21 00:01:10.640 --> 00:01:14.160 Our listeners, um, describe the difference between the two because I,

22 00:01:14.240 --> 00:01:18.000 I think a lot of folks out there don't know if they're paying fees or

23 00:01:18.000 --> 00:01:18.700 commissions, and,

24 00:01:18.700 --> 00:01:22.760 and I've heard many times talking to investors that they don't think they pay

25 00:01:22.920 --> 00:01:23.630 anything. Mm-hmm.

26 00:01:23.630 --> 00:01:26.120 Yeah. So, uh, you know, commissions are paid out, uh, by,

27 00:01:26.120 --> 00:01:27.240 let's say a mutual fund company.

28 00:01:27.390 --> 00:01:30.680 They will pay out a commission to the advisor who sells that particular mutual

29 00:01:30.710 --> 00:01:32.080 fund to, uh, to their client.

30 00:01:32.460 --> 00:01:36.400 And it's could be paid out in a very various of different ways. Um, you know,

31 00:01:36.400 --> 00:01:39.240 if it's a shares, it'll be an upfront sales charge, B shares,

32 00:01:39.240 --> 00:01:40.760 which don't even think is even a thing anymore.

33 00:01:40.760 --> 00:01:43.760 It was a contingent deferred sales charge. There was no upfront sales charge,

34 00:01:43.980 --> 00:01:46.680 but it was a declining sales charge As time goes on and you,

35 00:01:46.700 --> 00:01:49.120 and you were to sell that particular holding, you know, the,

36 00:01:49.120 --> 00:01:53.120 the sales charge would be reduced. And then you also had c shares that were,

37 00:01:53.140 --> 00:01:56.280 you know, about a 1%, you know, uh, uh, trail that would, uh,

38 00:01:56.350 --> 00:01:57.800 that would pay out to the advisors.

39 00:01:57.800 --> 00:02:00.520 And those are paid through various fees that are within the mutual funds that

40 00:02:00.520 --> 00:02:03.040 the mutual fund companies, uh, structure around, you know,

41 00:02:03.040 --> 00:02:05.520 marketing of their particular products as well as, um,

42 00:02:05.540 --> 00:02:06.920 as selling those particular products,

43 00:02:06.930 --> 00:02:10.200 verse the fee side of things where it's advisors are just simply charging a fee

44 00:02:10.200 --> 00:02:13.640 for their advice. They're advising their clients on what they should be doing.

45 00:02:14.180 --> 00:02:17.240 Um, there's often, there's more than just, um, more advice,

46 00:02:17.310 --> 00:02:20.400 more than just advice that goes into it. It's, you know, financial planning,

47 00:02:20.680 --> 00:02:23.040 holistic planning and things like that. But it's generally a,

48 00:02:23.120 --> 00:02:25.760 a fee that's fully disclosed that they, that they pay.

49 00:02:26.300 --> 00:02:29.560 And the way most advisors will structure their fees,

50 00:02:29.590 --> 00:02:32.440 they'll structure 'em in such a manner that the more money you have, uh,

51 00:02:32.440 --> 00:02:34.840 you'll start to see those fees actually go down. So

52 00:02:34.840 --> 00:02:37.360 What I'm hearing you say, it sounds like, and I think the,

53 00:02:37.460 --> 00:02:39.800 you said contingent deferred sales charge, right?

54 00:02:39.860 --> 00:02:43.280 If if you're earning a commission, that is a, it's a sales charge, correct?

55 00:02:43.370 --> 00:02:48.040 Right. Whereas, uh, fee for advice is exactly that,

56 00:02:48.240 --> 00:02:51.480 right? It's a fee for, for giving advice so that it's not necessarily a,

57 00:02:52.040 --> 00:02:53.600 a sales charge. Um,

58 00:02:53.660 --> 00:02:56.200 why do you think it's important for investors to know the difference between the

59 00:02:56.200 --> 00:02:56.760 two? Well,

60 00:02:56.760 --> 00:02:59.440 It's important for them to know the difference. It's,

61 00:02:59.440 --> 00:03:02.040 I think it's just important for them to know what they're, what they're getting.

62 00:03:02.090 --> 00:03:05.040 First of all, commissions. You can say that there's, you know,

63 00:03:05.280 --> 00:03:08.120 conflicts of interest perhaps. Are they getting sold something that,

64 00:03:08.230 --> 00:03:10.880 that has a higher commission that, that, you know,

65 00:03:10.880 --> 00:03:14.040 the advisor's gonna get paid more money on, you know, verse, you know,

66 00:03:14.040 --> 00:03:14.873 they always say, you know,

67 00:03:15.000 --> 00:03:19.000 a fee-based advisor usually will generally sort of align themselves with the

68 00:03:19.000 --> 00:03:22.040 client, let's say, on the, on the same side of the table, so to speak. They're,

69 00:03:22.040 --> 00:03:25.400 they're, they're going in as a team, we're here to, you know, you got your,

70 00:03:25.420 --> 00:03:27.120 you want to get from point A to point B,

71 00:03:27.210 --> 00:03:28.800 let's figure out the best way to do that,

72 00:03:28.800 --> 00:03:31.680 and then we'll put you in the appropriate investments. And, you know,

73 00:03:31.680 --> 00:03:34.040 because they're not, you know, getting any commissions, you know,

74 00:03:34.040 --> 00:03:35.680 generally speaking, there's a, I think,

75 00:03:35.760 --> 00:03:39.240 a certain comfort level knowing that the investment solution's gonna be right

76 00:03:39.240 --> 00:03:39.780 for them.

77 00:03:39.780 --> 00:03:42.360 No, that, that's a really great explanation. And you know, this,

78 00:03:42.510 --> 00:03:45.160 this podcast where, where our advocates of,

79 00:03:45.220 --> 00:03:47.200 of financial advisors and financial advice,

80 00:03:47.200 --> 00:03:51.400 I've said many times before that I always get asked, you know, what's a,

81 00:03:51.400 --> 00:03:54.520 what's a great stock tip? What's a great tip? What's some advice for investing?

82 00:03:54.520 --> 00:03:57.520 And my advice is always work with a, a fee advisor,

83 00:03:58.030 --> 00:04:00.200 because that advice is extremely valuable.

84 00:04:00.470 --> 00:04:05.280 What are you seeing the average on the fee based side average advisory fees in

85 00:04:05.280 --> 00:04:09.360 the industry? What should investors, what should they know about advisory fees?

86 00:04:09.580 --> 00:04:10.720 Um, just generally? Yeah, generally,

87 00:04:10.720 --> 00:04:13.280 Generally speaking, I would, I would say that the, you know,

88 00:04:13.280 --> 00:04:18.160 the average fee probably comes in around 1%. Um, you know, we see, you know,

89 00:04:18.160 --> 00:04:20.160 just on our, on ourt here at Symmetry,

90 00:04:20.240 --> 00:04:23.360 I think the average advisory fee is somewhere around 97 basis points,

91 00:04:23.380 --> 00:04:24.280 if I'm not mistaken.

92 00:04:24.460 --> 00:04:29.120 And so we'll see advisors charge as little as maybe 60 or 50 basis points,

93 00:04:29.420 --> 00:04:34.280 and we'll see advisors charge, you know, as, as high as 125 basis points.

94 00:04:34.430 --> 00:04:37.760 It's hard to say what's right. It's, what it comes down to is, you know,

95 00:04:37.760 --> 00:04:39.960 your comfort level and what you're getting for those services.

96 00:04:40.350 --> 00:04:44.000 Some advisors will, uh, will charge, let's say lower basis points,

97 00:04:44.060 --> 00:04:47.120 but they'll also charge on top of that for other services, like, let's say,

98 00:04:47.120 --> 00:04:48.320 financial planning. Okay.

99 00:04:48.320 --> 00:04:52.680 Whereas some advisors will charge 125 basis points and let's say maybe financial

100 00:04:52.840 --> 00:04:56.040 planning's included in that. And so it's always good to know, you know,

101 00:04:56.260 --> 00:04:57.520 you know, not only what you're paying,

102 00:04:57.540 --> 00:05:00.960 but also what you're getting for that particular price or that fee that you're

103 00:05:00.960 --> 00:05:01.360 paying. Okay.

104 00:05:01.360 --> 00:05:03.920 So these are a couple things that I kind of want to dive into a little bit.

105 00:05:03.920 --> 00:05:05.840 First and foremost, I think, you know,

106 00:05:05.840 --> 00:05:10.360 it's not fair to talk about price and fees without talking about value, right?

107 00:05:10.360 --> 00:05:10.740 Right.

108 00:05:10.740 --> 00:05:15.600 And so I think that you are going to see varying degrees of fees across the

109 00:05:15.600 --> 00:05:18.600 board, depending on, on, on the advisor's value proposition,

110 00:05:19.180 --> 00:05:23.000 1% that we've seen that fee, that that really hasn't changed. Mm-hmm. Right?

111 00:05:23.000 --> 00:05:27.880 Mm-hmm. Um, we, we do hear a lot about price compression in the industry, but I,

112 00:05:27.880 --> 00:05:30.880 I think when it comes to the, the financial advisor's compensation,

113 00:05:30.940 --> 00:05:33.560 and I would argue that the financial advisor is the, uh,

114 00:05:33.560 --> 00:05:37.040 most valuable person in the value chain. Mm-hmm. That fee hasn't changed,

115 00:05:37.260 --> 00:05:40.800 but investors are looking more for, from their advisors. So there's some,

116 00:05:40.800 --> 00:05:42.520 there's some margin compression there, right?

117 00:05:42.790 --> 00:05:44.000 Yeah. The advisor, you know, uh,

118 00:05:44.000 --> 00:05:47.360 clients are becoming more savvy conversation around fees. It's,

119 00:05:47.360 --> 00:05:49.680 it's out in the open, right? You see 'em on commercials all the time,

120 00:05:49.870 --> 00:05:53.480 whether it's Schwab or Fidelity or Vanguard, you know, talking about, you know,

121 00:05:53.500 --> 00:05:57.720 low fees. So, uh, it's out there and clients are well aware of that.

122 00:05:58.180 --> 00:05:59.760 And so they're starting to ask questions,

123 00:05:59.760 --> 00:06:02.760 they're starting to ask what they're getting for, for that particular fee.

124 00:06:03.140 --> 00:06:05.040 But at the end of the day, you know, you know, it's,

125 00:06:05.040 --> 00:06:07.280 it's only an issue in the absence of value, you know,

126 00:06:07.280 --> 00:06:11.000 so if the advisor's providing value and they see that and they know that, then,

127 00:06:11.020 --> 00:06:12.000 you know, generally speaking,

128 00:06:12.000 --> 00:06:13.680 clients tend to be comfortable with what they're paying.

129 00:06:13.750 --> 00:06:17.800 Certainly, certainly. What are you, you know, the advisors that are charging 1%,

130 00:06:17.800 --> 00:06:21.960 what are the typical types of services that you see advisors performing for,

131 00:06:22.060 --> 00:06:24.120 for that fee to add value to the equation?

132 00:06:24.380 --> 00:06:26.560 That's a great question. You know, we, we kind of see,

133 00:06:26.980 --> 00:06:30.320 we see a lot of advisors that are rolling financial planning into their fee.

134 00:06:30.460 --> 00:06:32.600 You know, we, we, we see that there's, um,

135 00:06:32.600 --> 00:06:36.440 there's a lot of advisors that actually have a, a, um, what I would say,

136 00:06:36.480 --> 00:06:40.320 a very big financial planning focus. So they'll charge for financial plans,

137 00:06:40.540 --> 00:06:43.760 and they may do some advisory business along the way, uh,

138 00:06:43.760 --> 00:06:45.720 just to help out clients. And so they'll, you know,

139 00:06:45.720 --> 00:06:48.760 they may charge maybe a little less, maybe around 80 basis points,

140 00:06:48.760 --> 00:06:51.080 80 to 90 basis points, kind of what we're seeing there.

141 00:06:51.470 --> 00:06:53.040 Okay. That makes a lot of sense. I, I,

142 00:06:53.080 --> 00:06:56.120 I think that the value proposition for the advisors actually shifted quite a bit

143 00:06:56.120 --> 00:07:00.720 over the years. You know, you and I have talked, um, a lot about this and,

144 00:07:00.720 --> 00:07:01.000 you know,

145 00:07:01.000 --> 00:07:05.960 there was a time where the value proposition was thought to be returned. Mm-hmm.

146 00:07:06.470 --> 00:07:10.520 I'll pay you a higher fee for higher rates of return. And is that the case? No,

147 00:07:10.520 --> 00:07:10.720 because

148 00:07:10.720 --> 00:07:15.440 It's, you know, I, I think the, the juries, you know, come in, in terms of,

149 00:07:15.580 --> 00:07:19.160 of returns and in terms of what types of investments you should be in. I mean,

150 00:07:19.160 --> 00:07:19.720 right now, I mean,

151 00:07:19.720 --> 00:07:23.080 you're seeing huge outflows from going from what I would say traditional active

152 00:07:23.860 --> 00:07:28.080 to more traditional passive types of investing. And so I think the, the,

153 00:07:28.080 --> 00:07:32.000 the main role for the advisor is just really being that behavioral coach. Uh,

154 00:07:32.000 --> 00:07:33.880 when we're left to our own devices, we don't make,

155 00:07:33.900 --> 00:07:36.960 we necessarily don't make the best decisions, uh, when it comes to investing.

156 00:07:36.960 --> 00:07:41.040 We, we get very emotional about our, our money and when, when markets are down,

157 00:07:41.140 --> 00:07:43.600 we, we tend to hit, you know, hit the panic button and sell,

158 00:07:43.600 --> 00:07:46.760 and that's the wrong time to sell. And so, um, you know, when you look at the,

159 00:07:46.910 --> 00:07:51.000 like, industry studies that are out there, I mean, the vanguard's out, you know,

160 00:07:51.000 --> 00:07:53.440 advisor Alpha is a big one, shows that, you know,

161 00:07:53.440 --> 00:07:56.280 working with a financial advisor, you can, um, you know,

162 00:07:56.280 --> 00:08:00.840 capture about 300 basis points extra just by working with a financial advisor.

163 00:08:01.260 --> 00:08:02.760 And they actually attribute most of that to,

164 00:08:02.760 --> 00:08:04.920 but I think about half of that to behavioral coaching. Sure.

165 00:08:04.920 --> 00:08:07.160 And the, um, just for our listeners out there,

166 00:08:07.180 --> 00:08:10.480 the advisors Alpha study that was done by, uh, Vanguard,

167 00:08:10.560 --> 00:08:13.880 I believe it's a paper that they put out in conjunction with,

168 00:08:13.880 --> 00:08:15.120 with the Spectrum group. And,

169 00:08:15.120 --> 00:08:19.320 and it does show that investors who tend to work with financial advisors tend to

170 00:08:19.320 --> 00:08:20.400 have better performance,

171 00:08:20.460 --> 00:08:23.400 but it doesn't necessarily mean that the advisors tinkering with the portfolio.

172 00:08:23.500 --> 00:08:27.920 The value proposition, to your point, is coaching. It's competent,

173 00:08:27.920 --> 00:08:32.400 it's communication. It, it's, it's these things that help the investor, uh,

174 00:08:32.400 --> 00:08:34.520 whether the good times and the bad. And, and,

175 00:08:34.580 --> 00:08:37.240 and providing that sort of foundation,

176 00:08:37.270 --> 00:08:41.840 helping the investor stay the course really is the, the secret to,

177 00:08:41.900 --> 00:08:44.240 to having a successful investment experience. I

178 00:08:44.480 --> 00:08:47.240 Think it's also important to add that I think a lot of advisors now, you know,

179 00:08:47.240 --> 00:08:48.920 there is sort of a, a paradigm shift.

180 00:08:48.920 --> 00:08:52.720 It's not necessarily the returns that I can generate for you. Um, it's,

181 00:08:52.750 --> 00:08:55.240 it's the other things that I can do for you, um,

182 00:08:55.240 --> 00:08:58.360 because they know that they're not portfolio manager. Mm-hmm. You know, they're,

183 00:08:58.420 --> 00:08:59.040 you know, they're,

184 00:08:59.040 --> 00:09:01.840 they're running their own business and that business is helping people.

185 00:09:01.900 --> 00:09:04.560 And if they're spending all their time trying to figure out what the best stock

186 00:09:04.580 --> 00:09:07.320 is, they're, they're probably gonna miss the boat on, you know,

187 00:09:07.320 --> 00:09:09.600 helping their clients, you know, with their financial planning and,

188 00:09:09.600 --> 00:09:12.720 and meeting their, you know, their financial goals over time. Sure,

189 00:09:12.870 --> 00:09:16.000 Sure. So, you know, we talked a lot about the advisor compensation,

190 00:09:16.300 --> 00:09:19.720 and I kind of wanna revert back because, you know, the topic today is fees.

191 00:09:19.720 --> 00:09:21.520 Mm-hmm. It's not just advisory fees.

192 00:09:21.520 --> 00:09:24.040 There are a number of other fees associated with investing.

193 00:09:24.220 --> 00:09:27.040 You talked a little bit about the ahas, B shares and CS shares,

194 00:09:27.040 --> 00:09:29.520 which are typically sales charges for mutual funds,

195 00:09:29.520 --> 00:09:33.360 but there are no load mutual funds out there. There are. Correct. And, uh,

196 00:09:33.390 --> 00:09:36.680 what that means is there, there isn't a, a sales charge per se,

197 00:09:36.700 --> 00:09:39.080 but that doesn't mean that they're for free. Correct. Correct.

198 00:09:39.080 --> 00:09:40.000 Nothing's for free.

199 00:09:40.050 --> 00:09:40.860 Right.

200 00:09:40.860 --> 00:09:43.680 So talk to us a little bit about the costs that are associated with investing in

201 00:09:43.680 --> 00:09:47.160 something that, that, that no load or doesn't have a, a sales charge. Sure.

202 00:09:47.160 --> 00:09:47.280 Yeah.

203 00:09:47.280 --> 00:09:50.200 There's a couple costs to think about. You know, there's, I always refer to it,

204 00:09:50.200 --> 00:09:53.600 you know, the cost of investing, right? There's, there's gonna be, you know,

205 00:09:53.600 --> 00:09:56.280 some cost to, you know, running a portfolio. I mean,

206 00:09:56.280 --> 00:09:59.760 that's where your expense ratios come in, which is the really, it's the,

207 00:09:59.780 --> 00:10:02.760 the cost of running that particular, let's say, mutual fund if,

208 00:10:02.760 --> 00:10:05.680 whether it's a no load or, or a loaded mutual fund. I mean,

209 00:10:05.680 --> 00:10:09.040 those are things like, you know, trading costs, management fees, um,

210 00:10:09.040 --> 00:10:11.960 things of that nature. There's also, um, you know,

211 00:10:11.960 --> 00:10:14.760 custody fees that you have to think about, you know, what, uh,

212 00:10:14.760 --> 00:10:17.920 what custodian is gonna be housing those, those, um,

213 00:10:17.920 --> 00:10:21.160 those assets for you and what that pay structure looks like. I mean, we see,

214 00:10:21.620 --> 00:10:25.040 you know, uh, some custodians that'll do a flat, you know, flat rate fee,

215 00:10:25.260 --> 00:10:27.440 and we see some that'll have more of a tiered structure.

216 00:10:27.440 --> 00:10:30.720 So the more that you give them the, the lower that fee will come down. Again,

217 00:10:30.720 --> 00:10:32.320 there's, you know, certain services that are,

218 00:10:32.320 --> 00:10:35.640 that are provided by the custodian that you may seem are valuable.

219 00:10:35.700 --> 00:10:37.960 So maybe paying 15 basis points is worth it,

220 00:10:38.340 --> 00:10:41.760 and you may not see any value in that. And, and paying something like, you know,

221 00:10:41.760 --> 00:10:44.040 five or seven basis points maybe more, more suited.

222 00:10:44.040 --> 00:10:48.600 But those are all sort of what I would say in the category of just the cost of

223 00:10:48.600 --> 00:10:49.430 investing.

224 00:10:49.430 --> 00:10:52.600 Sure. Sure. And, and when you're looking at investment vehicles,

225 00:10:52.600 --> 00:10:54.280 mutual funds mm-hmm. ETFs,

226 00:10:54.770 --> 00:10:58.280 those expense ratios that comprise some of those costs,

227 00:10:58.750 --> 00:11:02.400 what are you seeing on average out there, and are those fees coming down? Uh,

228 00:11:02.400 --> 00:11:05.400 They are coming down, I pulled some numbers, you know, looking at just on,

229 00:11:05.420 --> 00:11:06.920 on averages, the, you know,

230 00:11:06.920 --> 00:11:09.440 the average expense ratio for a large cap mutual fund,

231 00:11:09.440 --> 00:11:13.640 about 86 basis points on the small cap side, it's averaging around, you know,

232 00:11:13.640 --> 00:11:17.360 1.4%. You know, so again, those are the averages. So you,

233 00:11:17.360 --> 00:11:19.880 you do see some mutual funds that can be as high as a, you know,

234 00:11:20.050 --> 00:11:22.600 north of a hundred and twenty five hundred thirty basis points.

235 00:11:22.660 --> 00:11:25.880 And then you can see some that are just a couple of basis points, you know,

236 00:11:25.880 --> 00:11:29.360 two basis points, five basis points for, you know, just a simple, uh,

237 00:11:29.490 --> 00:11:31.440 index tracking strategy. Okay. So

238 00:11:31.440 --> 00:11:34.160 You said a couple things there that I find interesting. First and foremost, uh,

239 00:11:34.500 --> 00:11:38.120 the asset class matters, right? Mm-hmm. Large cap versus small cap.

240 00:11:38.340 --> 00:11:41.680 And I think it would make sense that smaller cap stocks,

241 00:11:41.680 --> 00:11:46.200 smaller stocks are probably more costly to, to manage and maintain.

242 00:11:46.200 --> 00:11:47.240 So you'd expect higher expense

243 00:11:47.240 --> 00:11:49.880 Ratio, right? Yeah. And to trade 'em, it's harder to get access to 'em.

244 00:11:49.880 --> 00:11:52.120 Yeah. And we see the same thing in, in liquid alternatives.

245 00:11:52.120 --> 00:11:55.680 Like those alternative strategies tend to be a little pricey. Um,

246 00:11:57.340 --> 00:12:01.480 so the asset class matters. We are believers of global diversification,

247 00:12:01.540 --> 00:12:05.000 so having a little bit of all of those asset classes I think makes a lot of

248 00:12:05.000 --> 00:12:06.160 sense. Correct. Um,

249 00:12:06.260 --> 00:12:09.080 but you also mentioned something that I kind of want to dive into a little bit.

250 00:12:10.340 --> 00:12:14.840 You know, 86 basis points on average for large cap mutual fund.

251 00:12:15.300 --> 00:12:19.080 But you said you can get asset class exposures with index funds for just a

252 00:12:19.080 --> 00:12:23.240 couple of basis points, correct? Or hundredth of a percent. Mm-hmm. Why is that?

253 00:12:23.780 --> 00:12:25.480 Uh, I think it comes down to, you know, activity.

254 00:12:25.540 --> 00:12:28.480 The more active a strategy is you're, you're gonna see, you know, more turnover,

255 00:12:28.480 --> 00:12:30.520 that's more trading, and that's gonna, you know,

256 00:12:30.520 --> 00:12:33.840 cause the expense ratios to be a little bit higher than a more passive

257 00:12:33.840 --> 00:12:37.360 portfolio. Let's just, let's, let's just say tracking the s and p 500.

258 00:12:37.710 --> 00:12:38.100 Sure.

259 00:12:38.100 --> 00:12:42.960 So someone who is trying to attempt to outperform the s and p

260 00:12:42.960 --> 00:12:47.600 500 will do so by buying and selling Correct. Creating activity,

261 00:12:48.070 --> 00:12:51.400 raising costs, also taxes. Mm-hmm.

262 00:12:52.270 --> 00:12:56.280 Whereas simply buying and holding an index of the s and p 500,

263 00:12:56.310 --> 00:12:59.960 obviously is going to not only be less costly, but also more tax efficient.

264 00:12:59.960 --> 00:13:00.460 Correct.

265 00:13:00.460 --> 00:13:02.400 And it's also important to know what you're, what you're buying.

266 00:13:02.430 --> 00:13:05.520 There's a lot of people out there who, who believe in active management.

267 00:13:05.520 --> 00:13:06.400 They think that that,

268 00:13:06.400 --> 00:13:10.000 that there is alpha out there that a portfolio manager can provide,

269 00:13:10.500 --> 00:13:12.040 and in order to capture that alpha,

270 00:13:12.040 --> 00:13:15.240 they're willing to pay the extra expenses for that. So if you,

271 00:13:15.240 --> 00:13:18.520 if you know that going into it, then knowledge is king. Right? So,

272 00:13:18.660 --> 00:13:21.800 so you're okay with that. It's the people that don't understand that,

273 00:13:21.830 --> 00:13:24.760 that are in a portfolio, let's say a 401K plan, for example,

274 00:13:24.780 --> 00:13:26.360 you go into the menu, you,

275 00:13:26.510 --> 00:13:29.240 most people are probably gonna look at what their historical returns are,

276 00:13:29.240 --> 00:13:32.680 and they're gonna probably make a decision based off of past performance not

277 00:13:32.680 --> 00:13:35.320 knowing what, what's under the underlying securities or,

278 00:13:35.320 --> 00:13:38.240 or what the strategy is behind the individual mutual fund.

279 00:13:38.240 --> 00:13:39.320 And they could be paying, you know,

280 00:13:39.320 --> 00:13:42.480 higher fees and not knowing really what they're paying or why they're paying it.

281 00:13:42.550 --> 00:13:42.840 Yeah.

282 00:13:42.840 --> 00:13:44.880 And it, and it's important, right? At the end of the day,

283 00:13:45.390 --> 00:13:49.160 what you pay in fees comes off the top of what your return is. And over time,

284 00:13:49.160 --> 00:13:52.600 that can be substantial. We say lot on this podcast, you know, we,

285 00:13:52.620 --> 00:13:55.600 we can't control the markets, we can't control asset allocation,

286 00:13:55.740 --> 00:14:00.120 we can't control costs, and we can't control taxes. And we, we,

287 00:14:00.260 --> 00:14:04.600 we educate our listeners that, hey, focus on things you can control. Mm-hmm.

288 00:14:04.680 --> 00:14:08.120 Right? And so fees do matter at the end of the day.

289 00:14:08.380 --> 00:14:11.400 And I think there's been a lot of studies out there, if I'm not mistaken,

290 00:14:11.510 --> 00:14:13.880 Morningstar had one not too long ago that says,

291 00:14:14.060 --> 00:14:17.680 one of the key indicators of a mutual fund's performance is the expense ratio.

292 00:14:17.700 --> 00:14:20.640 The lower the fee, the greater likelihood it's gonna perform well. Yeah. Well

293 00:14:20.640 --> 00:14:22.800 Think about this. So in, in keeping with that,

294 00:14:22.900 --> 00:14:27.520 if you are in a mutual fund that has a 1% expense ratio and that mutual fund

295 00:14:27.520 --> 00:14:28.520 returned 5%,

296 00:14:28.580 --> 00:14:31.720 you're automatically giving up 20% and you're giving that back to the,

297 00:14:31.720 --> 00:14:32.840 to the fund company, right?

298 00:14:33.190 --> 00:14:34.720 501 is four. Exactly.

299 00:14:34.830 --> 00:14:37.400 Just, you know, basic math right there. Mm-hmm. So there, there, there is,

300 00:14:37.740 --> 00:14:40.040 you know, fees do matter and they do erode, you know,

301 00:14:40.040 --> 00:14:42.120 performance particularly over time. Uh,

302 00:14:42.120 --> 00:14:44.800 I got a couple other examples here I can share with you. You know, please just,

303 00:14:45.180 --> 00:14:46.600 you know, keeping things simple, you know,

304 00:14:46.600 --> 00:14:49.600 a hundred thousand dollars investment over 20 years, um,

305 00:14:49.880 --> 00:14:54.320 assuming a 6% rate of return in a mutual fund that has a 1% expense ratio,

306 00:14:54.340 --> 00:14:55.600 forget about, you know, custody,

307 00:14:55.780 --> 00:14:58.120 forget about advisory fees and all that other stuff,

308 00:14:58.150 --> 00:15:01.720 just straight up just investing in a one per, in a mutual fund that's, uh, 1%,

309 00:15:02.020 --> 00:15:04.200 uh, at the end of that 20 years, you know, you'll end up with a,

310 00:15:04.240 --> 00:15:08.680 a gross return of $320,713 and 55 cents.

311 00:15:08.830 --> 00:15:10.800 Take a look at the cost of fees.

312 00:15:10.800 --> 00:15:14.880 The cost of fees of that are actually $55 $383 and 78 cents.

313 00:15:14.880 --> 00:15:17.680 So you're gonna end up, uh, at the, in your account at the end of the day,

314 00:15:17.680 --> 00:15:18.640 after 20 years with, uh,

315 00:15:18.640 --> 00:15:23.120 $265,329 and 77 cents.

316 00:15:23.420 --> 00:15:26.240 And that's if you're invested in a, a, a mutual fund that has, you know,

317 00:15:26.240 --> 00:15:29.960 expense ratio 1%. And some people look at that and they say, that's great.

318 00:15:29.960 --> 00:15:32.680 That's that, that's a good return over 20 years. I'll take that.

319 00:15:32.870 --> 00:15:36.320 When you compare that, everything else being equal, but it's invested. Now in a,

320 00:15:36.320 --> 00:15:40.720 in a mutual fund that has an expense ratio of, uh, 25 basis points, again,

321 00:15:40.760 --> 00:15:44.640 a hundred thousand dollars over 20 years, 6% rate of return. The end of that,

322 00:15:44.640 --> 00:15:45.060 you, you,

323 00:15:45.060 --> 00:15:49.800 you still end up with the $320,713 55 cents,

324 00:15:49.900 --> 00:15:51.920 uh, on the gross end. But on the net,

325 00:15:51.920 --> 00:15:56.720 what you end up with is $305,919 and 75 cents.

326 00:15:57.420 --> 00:16:00.600 And so that's a cost, cost of fees there of 14,

327 00:16:00.620 --> 00:16:03.480 do $14,793 and 80 cents.

328 00:16:03.740 --> 00:16:07.000 So that's a significant difference ends up in your pocket. That's,

329 00:16:07.000 --> 00:16:08.440 That's, that's, that's massive. And we,

330 00:16:08.440 --> 00:16:12.120 we told our listeners there wouldn't be any math, but, uh, no, that, that,

331 00:16:12.120 --> 00:16:13.800 that is very true. But the thing is fees,

332 00:16:14.070 --> 00:16:16.480 it's part of investing like anything else. Mm-hmm. Right. They're,

333 00:16:16.480 --> 00:16:18.480 they're there. And I think it's important for investors to know,

334 00:16:18.820 --> 00:16:21.160 one of the things, uh, I read an article many years ago,

335 00:16:21.300 --> 00:16:25.720 and I think it's still prevalent and it's the notion of transparency, right?

336 00:16:25.780 --> 00:16:28.200 And, and, and what this article did, it was from,

337 00:16:28.310 --> 00:16:32.240 from State Street Global Advisors partnering with, uh, Wharton.

338 00:16:32.860 --> 00:16:37.120 And they interviewed a number of investors, um, about fees and,

339 00:16:37.140 --> 00:16:39.120 and their sentiments around fees.

340 00:16:40.100 --> 00:16:44.680 And what that study showed us was, it's not so much the,

341 00:16:44.700 --> 00:16:47.400 the level of the fee as they just wanted to know what it is.

342 00:16:48.300 --> 00:16:50.960 And why do you think there's such a lack of transparency with,

343 00:16:51.350 --> 00:16:53.200 with costs in this industry?

344 00:16:53.560 --> 00:16:55.960 I just think it's easy to, it's easy to bury. That's

345 00:16:55.960 --> 00:16:56.460 Unfortunate.

346 00:16:56.460 --> 00:16:58.360 You know, I think, and, and I think that's, that's,

347 00:16:58.380 --> 00:17:01.200 that's starting to change a little bit. I know we see it in our business,

348 00:17:01.420 --> 00:17:02.760 you know, and one of the things that,

349 00:17:02.760 --> 00:17:05.760 that we always kind of pride ourselves on are full transparency on fees,

350 00:17:06.260 --> 00:17:07.400 you know? But if you can look,

351 00:17:07.620 --> 00:17:09.760 if you can look less expensive than your competitor,

352 00:17:10.190 --> 00:17:13.680 then you feel that's gonna give you a competitive advantage. And so, you know,

353 00:17:13.740 --> 00:17:14.400 so it's,

354 00:17:14.400 --> 00:17:18.040 it's unfortunately I would say it's not uncommon for investment companies or

355 00:17:18.090 --> 00:17:20.080 other providers to, you know, kind of, you know,

356 00:17:20.280 --> 00:17:24.440 bury their fees or sort of hide them within, you know, the structure of their,

357 00:17:24.620 --> 00:17:26.320 of their, um, of their costs.

358 00:17:26.830 --> 00:17:30.360 Well, I think you, you said it best, right? In in, if there's value,

359 00:17:30.460 --> 00:17:33.560 the fees don't matter. Correct. Right. If you're getting what you're paying for.

360 00:17:34.020 --> 00:17:38.320 And so I think that there's a notion of a lot of advisors out there not wanting

361 00:17:38.320 --> 00:17:39.200 to talk about fees,

362 00:17:39.300 --> 00:17:42.800 cuz they might not be confident in their own value proposition. However,

363 00:17:43.130 --> 00:17:47.960 there are a lot of advisors that you and I work with on a daily basis that

364 00:17:48.190 --> 00:17:50.640 they're very upfront with what their cost structure is.

365 00:17:50.640 --> 00:17:53.800 They're very upfront with the fees are of the underlying investments,

366 00:17:54.300 --> 00:17:58.400 and they bring that transparent to the table because they have a very strong

367 00:17:58.400 --> 00:17:59.520 value proposition of their

368 00:17:59.520 --> 00:18:01.320 Clients. Yep. Yeah. They'll have it on their website, they'll have their,

369 00:18:01.320 --> 00:18:04.520 their fee, you know, their fee schedule on there along with, you know, the,

370 00:18:04.660 --> 00:18:07.240 the various services that they charge and, you know,

371 00:18:07.480 --> 00:18:10.320 whether you feel it's high or whether you feel it's low, at the end of the day,

372 00:18:10.320 --> 00:18:13.280 it's up to you to decide what's best for you. But at least you know,

373 00:18:13.280 --> 00:18:15.880 you have that full disclosure. Um, so you can make the,

374 00:18:15.880 --> 00:18:17.800 the best decision possible. Certainly,

375 00:18:17.800 --> 00:18:20.800 Certainly. So if, if our listeners are out there looking for a,

376 00:18:20.840 --> 00:18:22.080 a financial advisor, you know,

377 00:18:22.080 --> 00:18:24.680 some of the things that I'm hearing you say that they should be looking for is,

378 00:18:24.780 --> 00:18:29.480 is the advisor using a commission-based mo a commission-based model or a

379 00:18:29.480 --> 00:18:32.120 fee-based model? Mm-hmm. Are they, uh,

380 00:18:32.510 --> 00:18:36.080 transparent with their compensation and uh,

381 00:18:36.080 --> 00:18:38.560 are they transparent with their value proposition? Correct. Is,

382 00:18:38.560 --> 00:18:40.480 is there anything else that, that you would add to that?

383 00:18:40.740 --> 00:18:43.720 Um, just knowing what services you're gonna get. You know, I think, you know,

384 00:18:43.720 --> 00:18:45.120 time and time again, we, he,

385 00:18:45.180 --> 00:18:49.520 we hear stories that client felt that they were gonna get something from an

386 00:18:49.520 --> 00:18:50.200 advisor that they're,

387 00:18:50.200 --> 00:18:53.240 they're just not getting and they end up firing that advisor. You know,

388 00:18:53.260 --> 00:18:56.000 so knowing what you're gonna get from that advisor, and, and some advisors,

389 00:18:56.000 --> 00:18:58.720 again, they'll have this right on their website or they'll have it on that first

390 00:18:58.720 --> 00:19:01.720 consultation that they talk to. They'll tell you, Hey, look, you're gonna get,

391 00:19:01.720 --> 00:19:04.000 you know, four, you know, four meetings a year.

392 00:19:04.000 --> 00:19:07.120 You're gonna get six phone calls, you know, from me a year and,

393 00:19:07.120 --> 00:19:09.960 and here's my cell phone number. If there's ever an emergency for something,

394 00:19:09.960 --> 00:19:13.160 you know, give me a call. And then there's other advisors that'll say, you know,

395 00:19:13.160 --> 00:19:16.840 I'll meet you with you twice a year and we'll review your portfolio and if

396 00:19:16.840 --> 00:19:19.040 everything looks good, then we'll, I'll talk to you in six months.

397 00:19:19.540 --> 00:19:20.600 And if you're okay with that,

398 00:19:20.860 --> 00:19:24.080 and you at least you know that going into the relationship, I think where,

399 00:19:24.080 --> 00:19:25.360 where people get burned is they,

400 00:19:25.360 --> 00:19:28.440 they think they're gonna get more outta the relationship than they're getting.

401 00:19:28.700 --> 00:19:31.840 And a lot of times it's just slimy cuz of lack of transparency.

402 00:19:32.290 --> 00:19:34.120 Right. And I think that transparency is a,

403 00:19:34.360 --> 00:19:36.400 a tremendous way for advisors to build trust.

404 00:19:36.400 --> 00:19:38.440 Cause it's all based on trust at the beginning of the Absolutely.

405 00:19:38.440 --> 00:19:39.640 At the end of the day anyway, so Absolutely.

406 00:19:40.340 --> 00:19:41.800 And it's also important, Tom,

407 00:19:41.800 --> 00:19:44.720 to remember that as you're looking for a financial advisor, it's a,

408 00:19:45.100 --> 00:19:48.680 you think of it as a, a mutual interview. It's, it's, you know, they're,

409 00:19:48.680 --> 00:19:51.000 they're looking to see if you're gonna be a good client for them,

410 00:19:51.510 --> 00:19:54.000 just like you're looking to see if they're gonna be a good advisor for you.

411 00:19:54.340 --> 00:19:57.480 And so it's important that, that, uh, that a, your values are aligned.

412 00:19:57.550 --> 00:19:59.520 It's important to look for that full transparency,

413 00:19:59.700 --> 00:20:02.440 but it's also important that it's, you know, somebody that you can connect with.

414 00:20:02.810 --> 00:20:06.600 Absolutely. Absolutely. And, um, every investor's unique. Mm-hmm.

415 00:20:06.700 --> 00:20:09.640 And every advisor's unique in, in trying to find that match,

416 00:20:09.720 --> 00:20:12.800 I think is very important. So for our listeners out there, uh,

417 00:20:12.800 --> 00:20:14.720 those that might be looking for financial advisor,

418 00:20:14.720 --> 00:20:17.360 make sure that you're getting, uh, transparency into costs.

419 00:20:17.870 --> 00:20:20.400 Make sure you're getting transparency into value proposition.

420 00:20:20.790 --> 00:20:25.560 Make sure that you're using someone who is maybe not necessarily earning sales,

421 00:20:26.300 --> 00:20:30.880 uh, charges or sales commissions, uh, but actually giving fee for advice,

422 00:20:30.970 --> 00:20:34.840 which eliminates conflicts of interest. Um, and so I think that's, there's a,

423 00:20:34.840 --> 00:20:39.040 there's a lot there for our listeners to digest. JT, I want to thank you for,

424 00:20:39.100 --> 00:20:41.560 for joining us here today. It's been a pleasure talking to

425 00:20:41.560 --> 00:20:43.200 You. This has been a great time. We gotta do this more often.

426 00:20:43.250 --> 00:20:46.920 Absolutely. We'd love to have you back on the show. Uh, so in closing,

427 00:20:47.040 --> 00:20:50.800 I wanna thank the listeners for, for chiming into this, uh, podcast. And, uh,

428 00:20:50.800 --> 00:20:52.840 we'll get you at the next one. And, uh,

429 00:20:52.860 --> 00:20:56.480 for those of you who are looking for our, some of our previous episodes, uh,

430 00:20:56.480 --> 00:20:58.720 you can find them wherever you're currently finding your podcast.

431 00:20:58.940 --> 00:21:01.840 So thank you so much for your time and, uh, I'll see you at the next one.

432 00:21:01.960 --> 00:21:03.600 Symmetry Partners llc,

433 00:21:03.830 --> 00:21:07.760 it's an investment advisor firm registered with the Securities and Exchange

434 00:21:07.760 --> 00:21:08.580 Commission.

435 00:21:08.580 --> 00:21:13.280 The firm only transacts business in states where it is properly registered or

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440 00:21:26.940 --> 00:21:30.080 No one should assume that future performance of any specific investment,

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447 00:21:56.770 --> 00:22:00.790 Please note the material is provided for educational and background use only.

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