Advised Podcast Ep 004: Stop Paying for Investment Management (only)

The retail investor today has access to more investments, free platforms and better tools than advisors did a short 10 years ago. While the data proves that the long term investor is better served with a low cost, well diversified portfolio, why are so many still paying so much for something that can be done for free.?

In this episode I discuss a new way of thinking. I encourage you to update and raise your expectations. If you are paying for investment management and not receiving comprehensive financial planning, you deserve more. If you are a DIYer, or wish you were, but are too scared to take the leap, hopefully this is the first step in empowering you to do it. It's time we all take a look at what we are paying for and where the value is being added. Don't let the fancy pamphlets and quarterly market outlooks fool you. The smartest and most sophisticated money managers regularly underperform a well built portfolio over the long term. Don't let fear get in the way of making prudent financial decisions.

Listen above or read the transcript below, and let us know what you think of the episode!

Rick Luchini (00:00):

In today's episode, we're going to discuss why you shouldn't be paying for investment management anymore, should not what your options are and some things that actually are worth paying for. So stick around and don't forget to hit subscribe, so stay up to date on all the upcoming episodes, especially the one that I'm excited about coming up soon, where I do a deep dive into the hidden forces that are reducing your investment accounts every single day. That's right. We're going to talk about the government. I'm kidding. It's an episode about fees and taxes. It's fees and taxes and you're not going to want to miss it. So hit subscribe and stick around. Okay, let's get started.


This episode was born this morning as I was standing in front of my Keurig, waiting for my coffee so that I could rush out the door to get my kids to school on time, which seems like a repeat of Groundhogs Day every single morning. But as I sat there waiting, I found myself swearing at the machine to hurry up saying some things that Apple won't let me put on this podcast, and it made me think as I was driving to the office this morning how much my expectations have changed since being exposed to single serve coffee machine 10, 15 years ago. I'm mad at this machine for brewing my coffee in 45 seconds instead of 35 seconds instead of being happy that I had a fresh cup of coffee in 45 seconds rather than waiting four or five minutes for a full pot to brew. And as I pondered that on my way to the office, it really made me think about expectations and exposure and that's really the basis of this conversation today, having an outdated or an updated expectations based on what your exposed to and how it relates to financial planning and investment management.


A lot has changed over the past 10 years or so in the investment world for the better. I believe for the end consumer zero commission trades are everywhere. The rise of ETFs, it's a big positive in my opinion for the retail investor and the fact that you can open an account today on your iPhone or your laptop in less than five minutes with multiple different registrations, joint I r a Roth, you name it, you can do it yourself, has really changed the landscape. However, a lot of you have not changed along with it, and that's because of lack of exposure. So that's what we're going to try to cover today. What are you paying for? What are you getting? What should you do yourself? What should you outsource? This is not an episode about fees. We're going to go there in another one, and I'm going to geek out on all the numbers. This is just conceptually what are you paying for? What if I told you that there is undeniable research that proves that over 90% of active managers, that's mutual fund managers, portfolio managers, big and small, fail to outperform a diversified portfolio over the long term?


Think about that. Okay, I'm going to rewind. Over. 90% of active managers fail to outperform a diversified portfolio over the long term.


That's true, and it is, what value is your advisor or your firm providing for their fee?


Likely you're paying somewhere between one to one and a 5%, which is the industry standard. So let's do the math there. On a $500,000 portfolio, there's not a magic number. It could be much less. You could have $5,000 invested. It's still a percentage or 5 million, but 500,000 is kind of that sweet spot that I bring up a lot because that's where folks say that's a lot of money and I am scared to do it myself and I understand that, but they also don't have so much money that the really big fancy firms are soliciting them, so they're kind of stuck in the middle and they often get low end service for high fees. So anyways, you have $500,000. You're paying somewhere between 5,070 $500 to an advisor or a firm to manage that portfolio. That doesn't count if they're using a third manager, which would include more fees or mutual funds, which includes more fees. I'm not going to go there. That's another episode. What are you getting for that five to $7,000 right now? Is it just access to the same investments that you can buy for free online? Is it a review of the information that you can clearly see on your statement every year? This is how many dividends were paid into the account. This is how much the account went up. Here's a brochure that my company produces that that shows you how much we know about the economy and where we think the market's going. This should give you plenty of confidence


That we know what we're doing and that's our value add. If that sounds like you keep listening, okay? Because if a diversified portfolio is likely going to outperform no matter what it is going to do it, whether you do it yourself or whether somebody else does it for you, it's going to outperform that actively managed one. Do you need to pay somebody $5,000 a year to review your statement with you? But Rick, I wouldn't know where to start. I don't know how to build a diversified portfolio.


It can be as simple as a handful of the right ETFs for free yourself. Do the research. How much is $5,000 a year worth to you every single year for the next 20 years? You can't do a little bit of research on modern portfolio theory. The ETFs exist to take away all of the which stocks, all that stuff. They're bundling it together and now all you need to do is say, how much US large cap do I want? How much small cap do I want? How much overseas do I want? Do I need any bond exposure or not? Bundle up 3, 4, 8 of these ETFs and now all of a sudden you've got a pretty decent portfolio at no cost. If that intimidates, you still a likely can pay a professional, a financial planner of sorts to build a portfolio for you. It would be maybe like a one-time thing. Here's what it looks like. Go click the buttons and then check in every couple of years to see if anything needs changed. It's an option, something to think about, but if all you're getting is a review of what already happened and a confidence boost that we got this taken care of, we know what we're doing, we're going to, don't worry about the election or whatever the next thing is that you're scared about on the news because look at this fancy brochure that says, we really know what's going on. We've got this economy on lock and we're making all the right trades to position you correctly. If that's all you're getting


And you're paying anything for it, you're paying too much because you can do it better for free online. If that's true and it is, what should you be paying for? Where could someone add value? Well, on the portfolio side, there's the actual construction and ongoing oversight. Obviously the right person, the right strategy can add value beyond you just doing it yourself, but I don't think it warrants $5,000 a year. I think that could be put together by somebody once and then you go execute it. So what else is worth paying for? Things that aren't directly correlated to stock market. Prognostication economy guesses. Things like tax loss harvesting, tax gain harvesting that doesn't get a lot of exposure, retirement planning, real actual retirement planning. I'm talking about fully modeled out Monte Carlos down to the last penny spent on future vacations like detailed planning, not a five minute online calculator that you could do yourself. Real true financial planning, retirement planning that's updated regularly with your life and provides real value tax planning, estate planning, objective insurance discussions. How much do I need? Do I have too much? Do I have too little? Am I paying too much? Am I paying too little? Not this is how much I want to sell you, but actual insurance planning.


Somebody making decisions on employee benefits. My company changed health insurance. How about my 4 0 1 k? Here's a good one. How many of you are paying an advisor a fee to manage the amount of money that they have at their company and you have more money more than that number, sometimes a lot more in your 4 0 1 k at work and there's never a discussion about it. You go there and they talk about your $8,000 Roth because that's what they have control over and they provide no advice, no allocation changes, no value to the $200,000 that you have in your 4 0 1 K. Why might that be? But it would add value if they added that to the discussion. Social security, Medicare, et cetera, et cetera. Cashflow, student loans, new jobs, starting a business, selling a business, vacation house, snowbirding, all the things that come up financially should be planned for and at least be on the table. They're not all going to apply to you every single year. Don't let that be overwhelming. You might only do two this year, but know that the firm can do all of those things when and if they apply to you.


Then you throw in that you still get to outsource the portfolio, so now you don't have to be scared by doing it yourself and you get all these things. Now you're approaching the level of value that warrants the fee that you're paying. All of these things and more are being offered to folks for the same amount of money or less s than what you're already paying for your outdated investment management. The only difference between you and them is you've not yet been exposed to that reality. Therefore, you have outdated expectations. You're still waiting for the pot to brew or worse, you're getting that little splash at the end and don't even bother making a new pot because you got to get out the door. The Keurig of investment management is true financial planning and it is out there and it is worth paying for. If you don't want to D I y, your investments, you'll get much more value added for your fee with a financial planner that has a true service model that shows clearly what you're going to get for your money each year and then can be accountable to that. What does that mean? This is what we provide our clients each year, and it can't just be we're really graded investments. Here's what we do. We meet with everybody in January and we update these things and then in March we do this and then we have a thing here and then we do tax planning this time. This is what we provide. This is a schedule that you can expect


And hold us accountable for because you're paying a lot of money and you should expect it. If you're not interested in the planning, I'm here to tell you, you surely can D I y those investments and save thousands. Building a well diversified portfolio nowadays is as easy as buying a handful of ETFs. It really is. And sure, I think the planner is going to be able to add more value with the taxes and all the other stuff, but if you're just starting out or you feel like you've got all your other finances on lock, don't pay somebody just to have access to investments because you're intimidated or because you have fomo as if they're going to provide this amazing return that you couldn't get on your own. It's just not true. You don't need a subscription to a stock prognosticator that sends you a tip every week. You do not need to know the PE ratio of Tesla or what the fed's decision on interest rate's going to be next week. You don't need to know any of that to build a well-diversified low cost, tax efficient portfolio. Now, that's not super popular amongst people in my business because if they are investment only, they don't have another way to show their value.


So if they believed what I just said is true, they would really have no reason to exist. Definitely no reason for you to pay them. But if you ask a financial planner or if you ask someone that doesn't really have a dog in the fight, I mean Warren Buffett has been saying this for years, and the facts prove it out. So in summary, here's your choices. You do it yourself. If so, you're going to build a diversified portfolio using ETFs, not individual stocks. Keep it simple. Don't get cute. You're going to save a ton of money on feed drag and you'll likely outperform the management style that you were paying for previously. What you don't get there though, is a coach, so just be sure that if you're going to do it yourself, you're the type of person that has the stomach to say, I'm going to believe in this strategy. I'm going to build this thing. I'm going to believe in it through down markets because now you don't have somebody to talk you off the ledge, and that is a big value add that we didn't discuss here yet, that the right advisor can add to you, which is keeping you invested and helping to modify your behavior.


We can go deeper into that in another episode. Do it yourself. Keep it simple. Handful of the right ETFs in conjunction with each other. Save the fees. Option two, outsource it to a true financial planner. Now, what you're going to say that sounds a little self-serving because I own a financial planning business, I'd like to make one thing very clear. I do not believe in and promote financial planning because I own a fee only financial planning business. I own a fee only financial planning business because I believe in financial planning and that slight difference is a big deal. Putting that aside in this scenario, you outsource it, you pay a fee, which you're likely paying right now anyways, you get the portfolio, so now you don't have to open the account at Schwab and you don't have to learn what modern portfolio theory is, and you don't have to. All the things that gave you anxiety when I said do it yourself, how much should we have in small cap? Don't worry about that. You outsource it to somebody else, but you get all the value adds on the tax planning, employee benefits, retirement planning, et cetera. So all the things that we discussed,


You might have to work a little bit to find the right fit,


But again, I think in a modern world, you don't have to have somebody do this locally. You can go out of town, you can go out of state, and with a couple virtual meetings a year with the right firm, you can get all this accomplished. So what are your finances worth to you? What is your money worth to you? If you're intimidated by opening an account yourself? I got it, but don't let learning how to do a zoom call. Be the reason that you're not getting high end financial planning or investment management. I mean, that's ridiculous. There's folks out there, individuals and firms that do this, do it well, and you just have to do a little work to go find the right one, the one that fits your personality, your style. Maybe you're, it may not be me. Maybe you think all this portfolio business is baloney and you want somebody that's got their finger on the pulse of the market. You want all that fancy stuff plus the financial planning. They're out there. Go find the one that fits you that you are most comfortable with. It fits your style, and if you've got to do it virtually, so what?


Go find them. They're out there and you've got to do the work because the big, big companies aren't the ones we're talking about here. They're the ones that want you to give them all your money. They want to charge you a fee, and they hope that you don't call so they can go spend their time golfing or find more people to give them money. They're the ones that have the marketing dollars to be in front of you all the time and solicit you to find the type of firm that I'm talking about here that provides the type of planning regimen that I'm discussing here can do a little work,


And that's why it's okay if they're not local to you. Do some virtual meetings, drive an hour away once a year if you like that face-to-face, big deal, man, people do a lot more for a lot less, but for some reason when it comes to something as important as your investments or your finances, they get complacent and they get comfortable. Well, Jim's always done it and he hasn't stolen our money or anything, so I guess that's, no, it's not good enough anymore. Find out what's out there. Find out what fits you best and take the fact that someone is charging you a fee seriously and make sure that you're getting value for that fee, because before you didn't really have much of a choice. I don't even have access to these investments without going through somebody. Now you do. You're a couple clicks away from doing it for free, so the person on the other side of the desk better be doing more then what your iPhone can do if you're paying them that much money. I hope that gave you a few things to think about and maybe reconsider the way your investments are being managed. If it doesn't look much different than it did 10 years ago, yeah, the account's gone up, but you're still having the same conversations and you're still holding similar mutual funds from X, Y, Z company, you're likely still fumbling around with paper filters, messy grounds, and a cold second cup of coffee. It's time to change your expectations because you're already paying the fee and you deserve more. Thanks for listening.

Outro (25:52):

You are listening to advise with Rick Luchini.

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Content Disclosure: Luchini Financial LLC is a registered investment advisor. This content is provided for informational and educational purposes only and is not intended to be personalized investment advice, nor a recommendation to buy or sell any investment. Luchini Financial works closely with each client to gain a full understanding of their unique situation prior to rendering advice. The information contained herein is derived from numerous sources, which are believed to be reliable, but not formally audited by Luchini Financial. Information may include statements which are time-bound and subject to change without notice or opinions, which may not come to pass. Please consult Luchini Financial with any questions.

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