Make It Last – Ep 99 – How to Find, Calculate, and Control Your Fees During Retirement

April 3, 2019

In this episode Victor goes over some legal and retirement updates – the status of the law which will allow terminally ill patients to have the “right to die” & the status of the Nevada fiduciary law.

The main topic of the episode is retirement fees. Fees in retirement can add up in a hurry, and if you want to make sure you won’t run out of money, you need to keep as much as you can in your portfolio at all times. Today’s episode will help you not only locate your fees and calculate what they are but will teach you how to control those fees.

Make It Last with Victor Medina is hosted by Victor J. Medina, an estate planning and Certified Elder Law Attorney (CELA®) and Certified Financial Planner™ professional (CFP). Through his law firm and independent registered investment advisory company, Victor provides 360º Wealth Protection Strategies for individuals in or nearing retirement.

For more information, visit Medina Law Group or Palante Wealth Advisors.

Click below to read the full transcription…

Announcer:  Welcome to “Make It Last,” helping you keep your legal ducks in a row and your nest egg secure, with your host, Victor Medina, an estate planning and elder law attorney and certified financial planner.

Victor J. Medina:  Hey, everybody! Welcome back to Make It Last. I’m your host, Victor Medina. I’m glad you can join us on this fun and exciting journey through retirement planning, both from a legal and financial perspective. We’ve got a great show for you today. I must talk to you today, in the next couple of segments, about how to control your retirement fees.

I think this is really important because in the whole idea about every penny counting is, it’s difficult to find, calculate and control your fees in retirement. It’s funny, I think, because most people fail to think about the cost of their investments and their financial advice, in the same way that they would consider the cost of other aspects of your life.

My wife will go and shop for deals, just absolute deals, on the same thing across four stores until she gets the best deal. It’s not the same in the investing world.

There’s just people who don’t think about it that way. I think that it’s really, of course, in their best interest to make sure that they’re paying the least amount to get the best that they can get.

The more money that you’ve got in your pocket is, well, just that, much more money. [laughs] You certainly want to keep as much of the money that you have earned as you can. You want to keep as much of the money as you’ve been able to get to grow as you can.

There’s a sweet spot, I think, because you can absolutely get costs of zero. You’re paying nothing for advice and then you will see if you can’t do better by doing that versus doing something else, right? You’ve got to be able to compare and control those and make a smart decision.

This, I think, of course is especially important once you get to your retirement. Once you hit retirement, you are fully in control of 100 percent of your assets even if most of the stuff has been in 401(k)s before or somewhere else. You can now collect all of these and fees add up in a hurry.

You want to make sure that you won’t run out of money. In order to do that, you’ve got to keep as much as you can inside of your retirement nest egg at all times.

Today’s show, it’s not only going to help you locate your fees and calculate what they are, but also teach you how to control them going forward.

Before I get to that, there have been some developments in the news that I want to share with you, especially if you are a New Jersey resident. I know that there are some people who listen to this that are on the border and they are in Pennsylvania. I know that we’ve got some listeners on the podcast that are from across the country.

This is going to be a little bit more New Jersey‑specific. Don’t tune out because I think that the news about this is going to be coming your way soon. These are changes that have come up that are New Jersey‑related.

There’s things that I’ve touched upon in the past. Two new sets of developments around state‑specific laws. One of them has to do with provisions for getting terminally ill patients to be able to end their own lives. The other one has to do with getting fiduciary‑level advice in your state.

Now, before I go too far, I did mention that we do have listeners from across the country. If what you would like to do is share this information or even time‑shift how you listen to this show, remember, of course, that we broadcast this not only live on the radio on Wednesday mornings, 11 o’clock, which could be how you’re listening to it right now.

We also have a podcast version of this. We encourage you to go and subscribe to that. If you go over to the Apple podcast, if you go to Android, if you go to makeitlastradio.com site, you’ll have an opportunity to subscribe to the podcast.

What that will do is that will give you a chance to get all of the prior episodes. You’ll have access to them. You can go ahead and look on the menu. In fact, we’re recently on Spotify as well, which is another one of those streaming services. You can actually sign up for that for free.

If you do that, you can go search for Make It Last with Victor Medina. You’ll be able to see all of the past episodes. I think we’re on episode 99 today. We’re going to break the century mark next week. Really excited about that, almost a full two years into the process. We began just around tax planning day two years ago on 2017.

Anyway, we’ll celebrate that next week. For this week, if you do want not only the past episodes, last 98 of them, as well as getting all of the future episodes delivered to your magical listening device, you can go and do that and subscribe to the podcast. We will love for you to do that.

Listen. Two different rules that have come out, different laws that have been changing. I want to talk about them in this first segment.

Just around last week or so in the assembly in New Jersey, in the Senate, they passed bills that would essentially approving measure and puts New Jersey as the latest state to allow terminally ill people the right to end their own life.

The act is called the Medical Aid in Dying for the Terminally Ill Act. It would allow patients with about six months or less to live to self‑administer life‑ending medication. Already, the governor has said that he would sign the legislation into law and praised the work of the lawmakers in New Jersey to turning the state into a more dignified and empathetic state.

In a statement, the governor said, and I quote, “This measure is about dignity. Allowing terminally ill and dying residents the dignity to make end‑of‑life decisions according to their own conscience is the right thing to do. I look forward to signing the legislation into law.”

By the way, New Jersey has tried for years to pass a right‑to‑die legislation, but efforts dating back to 2012 have failed. There were votes in 2014, 2016. They passed the lower chamber of the legislature, but they were not able to pass in the Senate. This is a big change.

The way it’s going to work is anyone who is seeking life‑ending medication, they’ve got to consult with two doctors who would need to agree that a patient has less than six months to live. They’ve got to make an independent examination and essentially be able to determine that they are terminally ill, no hope of recovery, and that the timeline for that death is six months or less.

The person would have to ask for the medication three times, including one time in writing that would have to be witnessed by two people. After that, the patient would be required to self‑administer the medication. In other words, it’s not going to be something that a doctor is going to…They’re not going to have to be the one that does it.

It’s going to be self‑administered, terminally ill, end‑of‑life scenario. The thing about this is a lot of people wrestle with the idea of this kind of law. They wrestle on it from two different perspectives. One of them is, what if the determination is wrong? What if the doctors are wrong and there were some form of a miracle that would be in the making that would save this person’s life?

The other way to look at it is that ending your life at all, of your own volition, is a wrong act. I’m not saying that. I’m saying that that’s what the people who are looking at this are thinking. I think that most of the time, people who share that perspective do so without ever having to witness someone who is at end of life.

I can speak a little bit about this from the perspective of an elder law attorney, in working with families, a little bit from my own perspective dealing with my grandmother. There is a horrific suffering that happens at end of life. Not everyone has the opportunity to end that suffering. I certainly recognize that there are risks involved in being wrong about whether or not someone is terminally ill.

I certainly see the moral quandary about ending a life. I’m also mindful that there needs to be autonomy, that one of the rights that we should be championing is our right to self‑determine our future. It’s a big thing for me, in a far less serious way, when I think about the direction of my business goals and how I raise my family.

I am a big believer in the opportunity to self‑determine what my future holds. I would certainly feel that way for others. I would feel that way about others’ ability to make decisions about what’s going to happen to them.

I see this as a net plus. That’s my personal opinion on it. That’s not the opinion reflected on the stations that we’re carried. It’s not the opinion of anyone else on my team. It is my personal opinion. I do believe that this is a step forward in a more grace‑filled society, to permit people to do this.

I see the struggle that they go through. If their state of resident doesn’t have this option, and then they’ve got to go get it somewhere else, it’s still a solution elsewhere. I must say I was glad, but I do think that it is a step forward that New Jersey has adopted this.

It’ll be interesting to see how it rolls out. I am certain there will be other news‑worthy events, articles and things like that that will essentially talk about the implementation of this new law ‑‑ how many people took advantage of it, what their various circumstances are?

I knew that one of the people who had been championing this is a woman named Susan Boyce. She has got a terminal lung disease.

Her statement was that, “I am eternally grateful to the bill’s author, Assemblyman John Burzichelli, for tirelessly championing this legislation for nearly seven years, and for every member of the legislature who voted for it, urged Governor Murphy not to wait 45 days, and to sign this bill promptly. I had this option to ensure I don’t have to suffer needlessly at the end of my life.”

I’m going to change gears immediately so fast that it’s going to cause whiplash. I’m going to go from talking about terminal ill disease to talking about what is my favorite subject to talk about, you can all say it together, I think it’s become a drinking game now, fiduciary duty.

As you know, if you are a long‑time listener of this show, first of all, I’m a huge believer in having financial advisors act as fiduciaries whenever they give you advice. I think it’s important that it exists in every single circumstance where you’re going to do it, not just on retirement accounts.

Any discussion that happens to be dealing with giving you advice about your finances should absolutely 100 percent be given under the auspices of a fiduciary relationship. That’s not currently the case, pretty much anywhere.

New Jersey has vowed to introduce a law through its regulatory process that would essentially require everyone who is giving financial advice to be doing so under a fiduciary duty. By the way, if that word doesn’t mean anything to you like, “What is a fiduciary duty?” Let’s set this up just as a reminder, I feel like it’s been a while since I have given this particular stump speech.

A fiduciary has the obligation to put your best interests ahead of their own in giving you advice. Who’s a fiduciary naturally? Naturally, your lawyer is a fiduciary. By every professional responsibility cannon that exists, when you enter into a relationship with a lawyer, that lawyer is your champion, is a person that is looking out for your best interests.

Not only can they do you no harm, they have to actively be working in your best interests. If you’ve got an attorney relationship, that’s what you’re doing. You contrast that with the way that most financial advisors work. Most financial advisors are not fiduciaries.

In fact, when they’re challenged on this, what they will say, although this never makes the news, unless you get your news from a radio show podcast in Central New Jersey called Make It Last.

What doesn’t make the news is that, what they say, is that they are only salespeople. They only facilitate a consumer transaction between the purchase of financial products and the sale of those same products, with no obligation other than to make sure that those products are suitable. That’s the way that most of the financial services are set up.

What has been happening is there have been a series of new laws and regulations that essentially put in place the obligation for that higher duty, that fiduciary duty.

One of the states that is the furthest along in getting this done, because it existed at the federal level, then it went away with the new administration. It was challenged in the courts, and then when the federal government lost the court case, they never pursued it any further, because it wasn’t in line with the current administration’s agenda.

Now, since it’s not really available on the federal side, and politically unpalatable to move that up on the federal side, there are states that are looking to make this happen. One of the states that’s furthest along in this is Nevada.

Nevada has proposed a set of rules that would essentially require all financial advisors to be fiduciaries. In response to that, letters were submitted to the state warning that if fiduciary rules took effect, it would eliminate their ability to do business and in fact they’re proposing to pull out of the state.

Here are the names, hold on your hats now, here are the names of the organizations that say that they are incapable of doing business if they’re held to a fiduciary standard. You ready? Morgan Stanley, Charles Schwab, TD Ameritrade, and Wells Fargo.

What they argue is that the liability and compliance cost associated with an ongoing fiduciary duty would make it essentially impractical for them to offer their services. What they say is that the basic brokerage services favored by low‑and‑middle income investors are the ones that they like. They want these crappier services, which of course is not the case.

Low‑and‑middle income investors very much would like a fiduciary relationship. Don’t listen to these other brokerages that are telling you otherwise. They want an advisor that does this. Morgan Stanley put it this way in their letter, “Absent substantial changes to the proposal, Morgan Stanley will be unable to provide brokerage services to the residents of the state of Nevada.”

They are essentially threatening that they will take their toys and go home if they’re not allowed to play the way that they want to play. The way that they want to play, of course, is unfair. They want to play in a way that allows them to take advantage of their clients.

Well, doesn’t that stink? It clearly stinks. What it shows is the importance of a fiduciary rule.

If in fact, it’s the case that a fiduciary rule would cause these large brokerage companies to be unable to do business in your state, it’s because the way that they have been doing business essentially takes advantage of you, essentially uses their ability to offer things that are less than in your best interest and make a ton of money.

In fact, they’re not going to give up that profit on that. I think it’s very telling. I think it’s very telling when the largest brokerage services conveniently, when it comes down to the law that would require them to change the way they do business, who conveniently say that they’re incapable of doing business, are now called on to the mat.

If you visit with them, they will tell you that they can work in your best interest. They will promise you that they’re looking out for you. When it counts, they’re over there saying, “No, that’s not who we are. We are nothing more than sales people. Do not hold us to a higher standard.”

There was somebody from the Institute of the Fiduciary Standard who gave this quote, “The firm should be congratulated for their honesty. To publicly say their brokers cannot be fiduciaries and put the best interest of their client first advances the discussion and the real fiduciary movement.” I think nothing sums it up any better.

What do you take from this as a casual listener of this show? Require that the people that you work with in managing your money are fiduciaries. Put forth before them the Fiduciary Pledge. Ask them to sign that. You can find it on the Internet and download it. Say, “Listen, are you a fiduciary? Will you act as a fiduciary? Will you put that in writing?”

What you’ll learn is that the majority of people who are independent in this space are, in fact, doing that. They are acting as a fiduciary. When they require to choose that, in the second they choose to, they choose to be fiduciaries because they want to have that kind of relationship with their clients.

For people that are working for the larger companies, they’re actually prohibited from saying it. They can’t. They cannot say that they’re going to work in your best interests. That should be a big signal. Ask for it, require it in any relationship that you have.

By the way, if you’d like a shortcut to that, the way you do that is work with your attorney, who happens to also be a fiduciary, financial advisor, the way that we are.

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Victor:  That will give you an opportunity to make sure that you have somebody who is looking out for your best interest in every facet of your life. Super, super important.

Listen, we’re going to take a quick break. When we come back, we’re going to talk to you about how to control your fees and retirement. This is that sneaky, sneaking thing that can erode how much you have left in your portfolio as you’re planning to live and what you leave behind. You absolutely need to be paying attention to this stuff. Stick with us. We’ll be right back after this quick break.

Announcer:  Imagine if the attorney you trust to protect your legal interests could also be trusted to protect your retirement wealth. One trusted advisor to all fiduciary roles, Victor J. Medina.

Mr. Medina is an estate‑planning and certified elder law attorney with a national reputation. He is also a certified financial planner professional. Through his law firm and independent registered investment advisory company, Mr. Medina provides 360‑degree wealth protection strategies for individuals in or nearing retirement.

His unique approach offers advantages to high‑wealth individuals seeking conservative advice and a professionally managed approach to their retirement wealth.

Learn more. Call 609‑818‑0068. That’s 609‑818‑0068, or listen to the newest episode of Make It Last Radio, Wednesday mornings at 11:00 on 1450 Talk Radio.

Investment advisory services offered through Palante Wealth Advisors, LLC, a New Jersey and Pennsylvania registered investment advisor.

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Victor:  Hey, everybody. Welcome back to Make It Last. I’m going to talk to you today about how to control your fees in retirement.

The question that I have for you, right off the bat, is do you know, to the penny, what you are paying in annual fees for your investments, your retirement account and the advice that you solicit? In my experience, in discussing retirement and investing with clients, I would see that very, very few know just exactly how much money is coming out of their money due to fees, charges and expenses.

A number, by the way, can be quite astounding when you add it all up. How shocked would you be to learn that you had a financial product or vehicle that was costing you up to five percent in annual fees in fact that you didn’t even know it?

What if you thought that the only fee that you were paying was the one percent annual management fee to your advisor, only to find out later that everything the advisor is investing your money in also carries a cost of an additional one percent or more? You would probably be quite surprised.

By the way, you should be nice to yourself if you didn’t know this ahead of time because most people aren’t paying attention to it. With the recent Bull Run from 2009 to, essentially, it was last year, people’s money has been growing. It doesn’t look like there are a ton of fees because, in fact, they’re watching their accounts grow.

The hard part is they don’t know how much more they might have grown if they were essentially paying attention to their fees and getting needless fees out of the way. I’m going to argue, by the way, that even if you think you know exactly how much you’re paying, you probably don’t because so much of it is hidden from you that you probably haven’t seen everything that you need to see.

Again, that’s OK. Today, I’m going to inform you on ways that you can find and calculate your fees, where to look for that information, and what to do when you want to reduce your annual cost.

If you want to accelerate your research into these aspects to your portfolio, what I can encourage you to do is essentially reach out to us. We can help you figure this out.

We have tools in the form of some software that will help you with that. We also have our knowledge and ability to look to your different accounts to help you figure that out.

Again, it is one of those things that you should definitely, definitely look into. In fact, so much show that either one of the top questions that you should be asking your next advisor.

If you want a free report that I have created in order to help you interview your next advisor, what you should do is text the word “Questions,” plural. Text that word, “Questions,” to 609‑554‑5936. That’s 609‑554‑5936.

Text the word “Questions,” and I will send you a free report about the nine questions to ask your advisor. One of those is going to center on fees and how those fees are in there.

By the way, if you just want to jump right to the head of the line and talk to us about that, you’d certainly call our phone number at 609‑818‑0068. That’s 609‑818‑0068, and begin the process of putting together a Make It Last protection plan for yourself in retirement.

Let’s go. If could say, let’s say about $150, by making better choices, would you? I think I know the answer to that. Imagine this.

There’s a recent article in CNNMoney that compared to find two separate funds, one mutual fund and one ETF, subsequently owning those funds for 40 years. There was a $190,000 total cost difference when it was all said and done between the two.

Yes, it’s an example, and you’ve got to hold it for 40 years. If you consider that your retirement could easily be 20 and 30, or for some of you, maybe even 40 years, isn’t it feasible that your costs should be something that you pay attention to regularly?

It’s time to stop overlooking or ignoring your fees, or blindly trusting your financial advisors and assuming they’re investing your money in the most cost‑effective things at all times.

As I said before, it couldn’t be further from the truth, what I said last segment about the advisors not even looking out for your best interest. Here’s where it comes to roost in the way that they juice up the fees that you’re paying in your investments.

You need to price your relationship and your portfolio and determine whether or not you can reduce these costs. If, in the process of doing this, you have more questions for your next advisor, because the one that has been helping you has you and all of these high fees, then you can text the word “Questions” to 609‑554‑5936 in order to get a free report on this.

Let’s get started. There are four categories of fees that you have to pay attention to. The first one are product level fees. Let’s get started here in the conversation.

Before we can talk about the types of products and vehicles you might want to avoid and the alternatives that you can pick from, I think that you need to know about the four kinds of basics fees that you’re going into.

The first one is your product level theme. Another way of saying is the fees that go to the company offering the financial vehicle. To give you an example, you might have an account with Edward Jones.

They might have taken some of your money and invested it into American Funds, a mutual fund in the American Funds. Are you ready for this one? American Funds is Edward Jones. That’s their entity.

They are a mutual fund company. In this case, Edward Jones is simply using their mutual fund product for your client. American Funds, mutual fund, isn’t free to invest in. It charges an annual expense, that’s the first one.

It charges a commission that is paid to the salesperson who put you in it, it charges trading costs in the interior operations of that, and something called a 12b‑1 fees.

These are all examples of one product that you put your money into, and the fee that the company offering that product charges. I’m going to be pretty harsh here because you relied on this financial advisor to recommend that particular investment. Unless they are fiduciary, and no one at Edward Jones is a fiduciary. They’re all brokers.

Unless they’re a fiduciary, they have no obligation to have to disclose to you how much they are being paid for recommending this, how much more they are getting for this, whether or not there are any alternatives that you could have been invested in. They’re not obligated to tell you this. This is at the product level.

It is difficult to find 100 percent of the information in here, but it is possible to get the stated annual operating expense because that is a publicly disclosed piece of information. We just have to have a piece of software that does that. That does it for all of the mutual funds, ETFs, Real Estate Investment Funds, anything that is a publicly registered securities that just draws that information in.

We can do that. You can do that, too. Just put in the ticker symbol of your investment and the word operating expense. It will probably pull up a search result that will tell you what the annual expense is. Don’t be surprised if it’s one percent or more.

The next level of fees are custodian level fees. Custodian level fees are typically the smallest of the fee categories, but it’s important to note.

For instance, if you have a TD Ameritrade account, and you hold the American Funds mutual fund inside of it, not only are you paying American Funds, just like we talked about, but you’re also paying TD Ameritrade because they are the ones administering and holding your investment account for you.

The custodian is typically going to charge two types of fees. One would be an annual maintenance fee. Not all custodians charge this. It could be something as little as $30 annually.

The other fee that they’re going to charge you is what it costs to trade, buy, sell, or do anything that you want with your investments. Essentially when you sell and buy a fund, they’re going to charge you to sell the fund and then charge you again to buy something new. Those are what we call trading costs or ticket charges.

The custodian is going to charge this one in two ways. Either they’ll charge them on a per transaction basis, which is one way to do that. You can look at a number that they’re going to charge to do that, or in the alternative, they are going to charge a base‑hold fee based on the amount of assets that you hold.

If you have a lot of trading that’s going on in the account, it might be more beneficial to do that under what they call Asset‑Based Pricing because it’ll be less expensive, but the advisor should be looking at that. I know that when we do this, we’ve got a calculator that basically looks at the value of the account, the number of funds that are going to be held in the portfolio.

Typically, somebody with more money can afford a little bit more diversification and handle the trading costs that are in there, and the number of anticipated trades. At the end of that, there’s an answer, which way to do it. Those are the custodial level fees.

The next one are advisory fees. Advisory fees may or may not be part of your solution. You’re only going to pay an advisory fee if you work with an advisor, or a broker who’s licensed to charge a fee for their advice.

Notice what I said. I didn’t say that you’re going to pay the advisory fee whether or not you have an advisor. You’re going to pay the fee whether or not you’re working with an advisor who is authorized or licensed to charge a fee. Not all of them are.

There are a whole host of “advisors” who are nothing more than insurance agents. The insurance agents are not permitted to charge a fee for their investment advice. They would have to be investment advisors to do that. I think this is an important point because it speaks to, first of all, are they even capable of offering you all of the investments that are out there?

Similarly, it speaks to the idea that they’re going to be paid a certain way. They don’t necessarily have to hold out to you that they’re not capable of being paid another way. It’s just going to look like it’s part of the same solution. These people are not holistic fiduciary advisors. By definition, if they can’t charge an investment advisement fee, they are not fiduciaries.

Let’s assume for a second that you are working with an advisor who’s licensed or a broker, by the way, because broker can do this too. Brokers are the people we want to stay away from, also.

Let’s say that you’re working with one of these people that is licensed to charge a fee.

You might have an advisor charging you 0.5, 2 percent a year, 1.25 based on the total amount of money that you have under their care. Again, this is on top of the product fees and on top of the custodial fees. We do, in our practice, charge a fee for assets under advisement or assets under management.

In order to justify that fee, we’ve got to bring value. You’ve got to be paying for something. It shouldn’t just be paying for investment management. It should be that you’re paying for more. More advice that the nature of the relationship is that it gives you more for what you’re paying than what you could get by doing it on your own.

Again, advisory fees, fee number three, a fee on top of product fees and custodial fees. The last type of fee or what we call commissions or loads. This depends on the kind of advisor that you have because they may be licensed to make commissions or collect what they call loads from the investments that they recommend you put your money to.

Let’s go back to our favor, American Funds mutual funds. Most of those funds are what they call A‑shares, which means that when your advisor puts $100,000 into the mutual fund, they might make 5.75 percent or more, give or take, upfront on what they call a sales load. It’s a commission that they get to collect.

You invest in $100,000 and they get 5.75 percent of it. Therefore, your initial investment starts at $94,250. That’s regardless, by the way, of whether or not that investment goes up or down. One important thing here to remember is that there are certain kinds of advisors, advisory practices and sales people that are licensed to incorporate all four levels of fees into your mix.

You can have an advisor who uses loaded mutual funds, collects a commission from them, also charges you a one percent annual management fee, and by the way, works for a company that shares the annual expenses, and so it will be one charges back to the sales person because the brokerage house owns the mutual funds. Those are a lot of fees. There are a lot of fees.

There are two financial vehicles that are high with fees. I see this fee problem occur most frequently in these two investment vehicles. I want to let you know about them so you can steer clear of them. One of them are actively managed mutual funds, and the other are variable annuities. Let’s go over both of those so you understand what to be looking for.

An actively managed mutual fund is one type of mutual fund. The other ones are what we call passive or evidenced‑based mutual fund. This is, by the way, separate than an index fund. An index is passive but it’s tracking something that set in. It’s been a whole other show. I think what I wanted to show is go talking about this. Let’s just talk about the actively managed one.

These are funds that are being managed by an internal mutual fund manager or a team of people. They have a benchmark. Meaning, that they are comparing their funds and their internal investments to a market index. Let’s say the S&P 500, for example.

Their goal every year is to manage the fund which is to say to buy and to sell within the fund securities that will beat or out‑perform the market benchmark that they have. If the S&P goes up 22 percent, they want to go up 22.1 percent or more. If the market goes down 15 percent, they don’t want to lose any more than 14.99 percent.

For this more active management, they are going to charge an annual operating expense which is also known as an expense ratio. According to a recent article written by Forbes, a contributor named Chris Moore, the annual average expense ratio for these types of funds are one percent. On top of that, they have an annual transaction cost of 1.44 percent.

If you consider that a lot of actively managed funds are also what they call A‑share or loaded funds, you are probably paying a commission on top of this annual expense cost that’s internal to it.

Look, I’m pretty easy going. I can be convinced to do this, but you’ve got to justify that cost in performance. In other words, I’m willing to pay on my client’s behalf, on my own behalf. I’m willing to pay more if I get more. The problem is, it usually doesn’t.

2016, there was an article by a gentleman named Matthew Frankel from The Motley Fool. He reported that 66 percent of actively managed mutual funds failed to beat their respective benchmarks. More than that, fewer than eight percent of large cap active mutual fund managers were able to beat their benchmark index over the past 15 years.

What is it telling you? It doesn’t work, or more accurately, it works far less frequently than it doesn’t. Does it happen? Sure. Can you identify which of the active managers are going to be the ones that are going to beat out their benchmarks? Quick hand, I can’t.

There’s no way to predict it. You cannot use any metric that will tell you that this person is likelier to outperform their index this year than any other year going forward. Past history is no indication of that. By the way, the numbers simply suggest the vast majority of them will not.

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Victor:  That is a fairly compelling case for why you should be avoiding actively managed mutual funds. The expense isn’t there, the return isn’t there. Run away from these things. Go where the evidence suggest that you should, which is the way that we do the investing.

Listen, I’m long on a break here. I will be right back. We will finish up with the variable annuity discussion, and how you can control your costs. Stick with us. We’ll be right back after this quick break.

Announcer:  Life is better when you have your legal ducks in a row, and one area attorney can help you get your financial ducks in a row as well. Victor J. Medina fills dual fiduciary roles, an estate planning, certified elder law attorney and also a credentialed, certified financial planner professional.

Through his law practice and independent registered investment advisory company, Mr. Medina serves high‑wealth individuals seeking conservative advice, and a professionally‑managed approach to retirement wealth management.

Learn more about Victor’s 360‑degree wealth protection strategies. Call 609‑818‑0068. That’s 609 818‑0068, or listen to the newest episode of Make It Last radio, Wednesday mornings at 11:00 on 1450 Talk Radio.

Investment advisory services offered through Palante Wealth Advisors, LLC, a New Jersey and Pennsylvania registered investment advisor.

Victor:  Hey, everybody. Welcome back to Make It Last. I’m talking to you today about different fees and how to control these fees in retirement. We talked about the four major fees that are there. We can talk about the product‑level fees, custodian fees, advisor‑level fees, and commissions or loads.

I took some time in the last segment to tell you why out of two investment vehicles, actively managed funds are ones to avoid because they’ve got high fees.

I’m going to talk about the other one which are variable annuities. I wrote a book called “Ensuring Your Nest Egg Is Around As Long As You Are,” chapter 8, I think, is called “Variable Annuities Discourage Of The Earth.”

When I submitted that to my editor/publisher, they said, “Are you sure you want to title this chapter this way?” I said, “No.” I said, “I wanted to use stronger language, but I wasn’t sure that you would let me.” The publisher laughed and let it through. Anyway, don’t like variable annuities.

Variable annuities can be a flow of fees. A variable annuity, essentially by the way, is an insurance contract. You insert your money into that and then the money is inserted in what they call sub‑accounts.

The sub‑accounts are typically invested in mutual funds. Most of the time, they’re actively managed. We know what we think about that, so all of the rules go for that.

In addition to that, the mutual funds that are offered inside of the insurance contract are often proprietary. That means that they are funds that are offered just so that insurance company and just to be invested in the variable annuities.

The world of investments that you can choose inside of the variable annuities is narrow. There are not a lot of them. Because there aren’t a lot of them, and because they are ones that are either owned by or in a strong contractual affiliation with the insurance company, the fees on that tend to be high.

You are captive. Why shouldn’t they charge you more money? You can’t go anywhere. They won’t have fees that are on top of that.

In addition to the fees for the sub‑accounts which, by the way, thankfully, you can look those up. Because the investments in the variable annuity is a security, that has to be registered. You can look it up by doing a same sort of search online looking for expense ratio.

You can figure out how much you’re going to be paying on that. On top of the fees, there is something called a mortality and expense charge. That’s usually about one percent. It’s the charge that the life insurance issues, essentially, because it’s a life insurance contract. That’s for them to make some money.

Then come the riders. You call these bells and whistles. They’re special enhancements, but they come with a cost. Anytime somebody sold you a variable annuity, they gave you some form of a promise.

They promise that your income benefit was going to increase on a guaranteed basis for six percent a year, or that your death benefit was going to be something that they could guarantee, or they have a long‑term care rider, or they have more of those.

They have multiple, not just one. They gave you all three, and you said, “Awesome. Let’s do this. Let’s do all three of these.” Not understanding that each one of them comes with a charge.

It gets a little bit more insidious than that. What happens is that the charges aren’t reflected in those benefit basis that you see. When you see the statement, there were a lot of numbers on those statements.

There’s a benefit base guaranteed, withdrawal base guaranteed, death benefit base, and those numbers can be increasing. Your cash value, your money, that’s the thing that’s getting the charge. That’s the thing that has variability built in so that you essentially are having that money come out of your account, that your money can fluctuate up and down.

By the way, those investments that your sub‑accounting, no guarantee of any principal on that. The said investments, they can go down.

Here I have to read a disclaimer. “Annuities are insurance contracts, largely designed for retirement, other long‑term needs. They provide guarantees of principal and credited interest subject to surrender charges. Annuity guarantees and protections are backed by the financial strength and claims‑paying ability of the insuring insurer.

Annuities are not a deposit nor are they insured by any bank, FDIC, NCUA, or any federal government agency. Annuities might have guarantees and promises. They’re all going to be based on the strength of the company and that ability to pay out their claims.”

Let’s go ahead and talk about alternatives that cost less. We’re going to have to go really quickly here because I only have about five minutes left in the show. How do you fix it? You got to know about alternatives.

Passively invested or index mutual funds and ETFs are similar in some ways to active mutual funds, because they’re still a diversified basket of securities, but they cost way less on average than actively mutual funds. For one simple reason, they’re not actively managed.

There’s not stuff that are being sold and bought all the time. They will be more strategic about what they’re doing, more long‑term based. They’re not trying to outperform the benchmark. They’re just mirroring an existing index or a plan that is not about trading, buying and selling a whole bunch of stuff in and out.

Another alternative, by the way, and this one, too, a variable annuity is a fixed indexed annuity. This is an alternative because if you buy an annuity, you should be thinking about this, in my opinion by the way. You should be thinking this either as income replacement or you should be thinking about it as a principal protection tool.

You have to be focusing on the efficiency of the money that you are inserting into that contract. If fixed annuity doesn’t put your money into sub‑accounts and into the stock market, they protect your money from all downside offering you a fixed return.

A fixed indexed annuity, again, doesn’t put your money in any sub‑accounts, doesn’t subject to variability, but it is an index‑linked return. The growth potential here, by the way, is going to be lower than the variable annuity. By the way, it’s also going to be lower to the stock market. It is an alternative to that.

The difference though is that you are trading out higher fees for low or no fees. The most that I have ever seen on a fee for an income rider for a fixed account, total fees in is one percent, it’s 0.95 or something like that. That’s the worst that I have ever seen.

The majority of these come with zero fees. That’s better than the variable annuity with three to five percent. If you ever come and visit us and you have a variable annuity, I might take you through our variable annuity questionnaire, which is when we get on the phone with the insurance company and ask a series of questions about the contract.

You could read the questions. I’ll just sit there. Give you the form, you can read the questions. It’s amazing, amazing, how much we learn about that. The last alternative is going into stocks directly. That’s the most cost‑effective way to invest.

You buy stocks, you buy your equities directly, no annual cost, no fees. The only thing you have to do is pay the trading costs to buy and sell when you make trades or when your advisor makes the trades.

Now, don’t get ahead of yourself because you might be thinking, “Well, why don’t I just go buy all stocks, ETFs, index mutual funds, fire my advisor, and find the cheapest custodian, and call it a day?”

You’re welcome to try that. There’s nothing preventing you. I wish you the best of luck, I honestly do, if you feel that you have enough time, knowledge and desire, confidence to handle your retirement portfolio.

Remember, the market lost 38 percent in 2008, so did the index funds that were in the large cap assets. No one was held immune if you were in those markets. Instead of bailing on professional help, I want you to consider or reconsider what you’re getting out of the dollars that you’re paying.

As I said earlier, when we were talking about advisor fees, basically, any of these fees, you want to make sure that you are getting value for what you’re paying. You need to be getting more out of the relationship than you’re putting into it.

Certainly, you’re not getting more out of an actively managed mutual fund than what you’re putting into it. You’re not getting anything more out of a variable annuity than what you’re putting into it. What you might be getting in the advisor fee is avoiding some of the product side, higher fees.

There are ways to select better investments and the value that they’re bringing. You want to make sure that you know what the advisors are charging you. Are they charging you no management fee, but they have all loaded mutual funds that are commissionable? A management fee, but no loaded funds? A management fee plus loaded funds?

You want to identify who you’re working with, determining how much you pay them in commissions and management fee. Essentially, figuring out what that cost is. Write down all the services, advice, and just flat out benefit that you get from working for your advisor.

What do they do for you? Are they your go‑to for all things financial today, answer questions regarding taxes or estate planning? Do they know enough to answer those questions? Do they help you create a written financial plan? How often do you meet with them? How often can you meet with them? What other services do they provide?

What you need at the end is essentially a pro and con list that says it’s worth paying these fees to get something out of it. I’ve made the case that you should shrink down your custodian fees. I’ve made the case that you should limit the amount of load or commissions that are there, especially if you’re getting charged an advisory fee.

Your product level fee should be low. I think that you should pay an advisor fee because I think that you should get professional help with your retirement planning. You may think the same way at the end of the day. What you get out of it needs to be worth more than the advisor’s fee.

I blew the ending. I was [inaudible 52:29] all up to that, like completely did not stick the ending on that. You need to get more out of the relationship than you are paying, at the end of the day. If you want to learn more about this, if you want to ask more questions, again, one of things you can do is you can certainly contact us.

You can call us at 609‑818‑0068, but you can also get a free report that I’ve written. Text the word “Questions” to 609‑554‑5936. That’s “Questions” to 609‑554‑5936, and get the nine questions you should ask your advisor. That will help you get it on your way.

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Victor:  This has been my immense pleasure. I hope it’s been a good one for you, too. We will catch you next week on Make It Last, where we help you keep your legal ducks in a row and your financial nest egg secure. Thanks for being our guest. Catch you next time. Bye‑bye.

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Insurance guarantees are backed by the financial strength and claims‑paying abilities of the issuing carrier.

This radio show is intended for informational purposes only. It is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual situation.

The host of this show is not affiliated with, or endorsed by, the US Government or any governmental agency. The information and opinions contained herein provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed.

 

 

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