Stop Living by One-Size-Fits-All Budgets — and Paying for One-Size-Fits-All Financial Advice

17:48Sean Pyles:Your housing payment is most likely your biggest expense. Make it your most rewarding. Find the card that fits your lifestyle and apply today at joinbuilt.com slash smartmoney. That's J-O-I-N-B-I-L-T dot com slash smartmoney. Make sure to use our URL so they know we sent you. Terms and limitations apply.

18:06Elizabeth Ayoola:Subject to approval and eligibility. Built cards are issued by Column N.A., member FDIC, pursuant to license from MasterCard International Incorporated. We're back and we're answering your money questions to help you make smarter financial decisions. This episode's question comes from a listener's voicemail and here it goes. Hey, Sean and Elizabeth, this is Margaret. And I have a question around fees with investing. I use a financial planner and I know they charge a specific fee according to how much of my money they're managing. But I also know that individual funds that are getting managed have their own fees.

18:47And I also believe if my financial planner is using a broker such as Schwab, there are probably fees coming on there. So I would love to hear a session around this topic of fees. What is a high fee? What is a low fee? What happens when they all come together? And at the end of the day, I'm a firm believer of you get what you pay for. So our high fees, if that's the issue, are you getting the equal amount of value out of paying those high fees? Thank you. Love the show.

19:17Sean Pyles:To help us answer Margaret's question on this episode of the podcast, we are joined by James Bashel, financial advisor with NerdWallet affiliate, NerdWallet Wealth Partners. Hey, James, welcome to Smart Money. Hey, guys. Thanks for having me.

19:28Elizabeth Ayoola:Before we get into the conversation, a quick note from our legal team. We need to say NerdWallet Wealth Partners is the investment advisor and has the ability to discuss investment advice generally subject to the marketing rule under the Advisors Act. This will keep an arm's length distance from the investment related topics for NerdWallet to support its publisher's exemption.

19:49Sean Pyles:Let's hope that people understand what that actually means. Carrying on, James. So to start, I'd love if you could outline the various fee structures that advisors use and how they work. I'm thinking here of assets under management, also known as AUM, and then fee-based and fee-only. So can you give us an outline of those? Also, I should add that there's commission-based. So let's talk about these different options. It's so difficult to navigate because some of those are legal terms and some of them are more colloquial terms. So I think we start top down. There are two standards within the industry.

20:22You've got the fiduciary standard and the suitability standard. And those are important as far as fee only and fee based go. So fee only means that the only fee they're going to charge you is the fee that they quote you. That's the only income that the person's going to be earning.

20:37Sean Pyles:And that could be maybe at an hourly rate or perhaps like per financial plan. I kind of can go into that a little bit. So the way that those fee only can look is a percentage of your assets on the management. So you have$100 ,000, they charge 1%, that'll be$1 ,000 a year. If either a fixed fee, maybe it's, hey, a single planning engagement, it's going to be$3 ,000 and we give you a plan at the end of that. It's exactly what you see is what you get. There is nothing behind the curtain in many ways. That fiduciary standard is the legal obligation to act in your best interest at all times. So there's no conflict of interest.

21:13They have to do what is best for you. The fee-based side is what falls under what they call the suitability standard. And that is more around, is this product suitable for the clients? Not necessarily the best product. And the reason they might not give you the best product is because the advisor might be getting a commission from a third party for that on top of the fee that you're paying them. So in the case of, it can still be a percentage of AUM, right? It can still be 1 % of$100 ,000 plus they might put you in a mutual fund that gets them some kind of commission off the back end.

21:48Sean Pyles:I think a lot of people would hear, oh, an advisor is not recommending the absolute best product for me because they're getting a commission and have some problems with that. But I wonder from a practical standpoint whether it may actually matter that much to a person. If they're getting the product and the advisor is helping them get it and manage their finances, maybe that's the tradeoff for not getting the absolute best product for them. But at the same time, I tend to lean more toward fee only in my firm. That's how I have things structured at an hourly or per plan basis, because I am really wary of any conflict of interest, especially with my work here at NerdWallet.

22:21Sean Pyles:So it gets a little bit thorny. Yeah, 100%. And I think if you go back in history, it's always interesting at a fees level to dig into where and how we got here. The origin of fees was really in the brokerage world where you would get cold call. You think of Wolf of Wall Street or something like that, like someone phones you and wants to sell you a stock or something and they make you a client. And they were earning a fee for every stock they sold as a percentage of the amount you invested. That has morphed through the years into more of an advisory type model. If you think of the Wolf of Wall Street, they definitely weren't acting in the best interests of the people at all times.

22:57There was no fiduciary standard at that time. I mean, maybe there was, but there certainly weren't fiduciaries in that case. We've tended towards fiduciary because there was an inherent conflict of interest when there was a sales benefit through one product over another. That conflict of interest, exactly to your point, might not be a problem if the alternative is not getting any advice at all.

23:18Elizabeth Ayoola:Yeah. Right. And in most cases, I mean, the suitability standard is still strict, right? They're not going to sell a hedge fund to someone who has no risk tolerance. You still aren't allowed to do that. But you might get a situation where they could buy you S &P 500 ETF at three basis points, like 0.03 % is what that looks like, or a mutual fund that tracks the S &P 500 at 1 % fee. That's clearly not in your best interest. They're both going after the same return profile. However, the salesperson or the advisor might be getting a commission by putting you in the more expensive product. That's clearly the conflict of interest you might be dealing with.

24:02Now, in your case, it was a really good point you made. Maybe it's still better than not having any advice. Absolutely. I think that still applies.

24:10Elizabeth Ayoola:Well, James, speaking of fee structures, what might be a high fee and what might be a low fee for each of the structures that we've discussed? That's a really good question. I've dug into this extensively because I always want to make sure that where we are is fair and competitive. And I think we're seeing margin compression across the whole industry, which is inherently good for the consumer. And the reason for that is A, competition, but B, just efficiency.

24:38Sean Pyles:Can you outline what that term means, margin conversion? Yeah, so the fees people are charging are getting smaller and smaller over time. And I think it wouldn't have been unusual to see a fee north of 2 % of AUM 10, 15 years ago, whereas now you'd almost never see that. So it's very difficult to pin down what people are actually charging. Very few people disclose their fees. All fees are quote unquote negotiable, which means often on the regulatory filing, there'll be a fee. But who knows if people are actually paying that fee. There are some pretty good resources online who have tried to aggregate these.

25:16There's one, Advisory HQ is a source that I've gone to a few times, which ranks advisors so they have access to what people are actually charging. Let's talk in two buckets. So we've got the fixed fee side or the hourly side, and then the percentage of AUM side, which is more variable with the amount of assets that we're managing. AUM is assets under management for context. So on the percentage of AUM side, the average fee across all asset levels I've seen quoted is around 1.05%. So what's important about that, James? I think what's important is different asset levels have different complexity.

25:51So higher assets are going to be more complex. So at a total, you expect to pay more fees. Like if you have a$10 million account, you come with a lot more risk and a lot more considerations than someone who has a$100 ,000 account. However, you would be far stretched to say that a$10 million account is proportionately more complex. Like it's not 100 times more complex than a$100 ,000 account. So what you'll see is at the$100 ,000 level, the fee might be 1.2 % of assets under management. So$1 ,200 a year. At the$10 million, you might see it's at 0.5%. So a lower fee is a percentage of the total, but a higher fee in total because it's of the percentage.

26:33And that's a bit mind-boggling to get your head around. But the way I try and explain it is there's an increase in complexity with the amount of assets. However, that complexity increases at a decreasing rate. So it's not linear, the relationship between the amount of assets and amount of complexity.

26:50Sean Pyles:So when a client is shopping around for an advisor and they're considering these different fee structures, when might they prefer maybe fee-based over AUM or fee-only versus fee-based? What do you think they should be thinking about? The reason you're getting a financial advisor is because you need help. And the fee you want to pay needs to be justified by the value you get out. How that fee is calculated is less important than the actual fee you are paying. So a lot of people see the AUM model as, well, my fees are going to go up. The more my assets go up, that's inherently bad. It's like, well, not necessarily because your complexity is going up is the service you're going to receive as a result better, which then justifies the higher fee.

27:33I think what's important on the fixed fee level is often the fixed fees are actually banded by AUM. So you'll see something like$3 ,000 under$500 ,000 in assets, and then$5 ,000 up to a million. And if you double back, they're very similar fee levels to the percentage of AUM. So the preference really lies in certainty. And I think a lot of people like to know how much they're going to pay, which is where the fixed fee makes sense. However, it is quite nice not to renegotiate the fees every single time your assets go up, in which case the AUM makes sense.

28:11Elizabeth Ayoola:Now, let's talk about fees that an advisor might sneak into a contract that might not be necessary. What should people be looking out for here? I think we are in a good regulatory world where there are fewer of those now than there used to be. One thing that I see quite a lot is advisors charging an upfront planning fee and then an ongoing fee thereafter on top of the planning fee. And it seems like you might be paying twice for the same thing. So it's really important to ask the question, what are the bounds within which the fees apply? Which services the planning? Which services the ongoing?

28:48And how can you differentiate them? Just make sure you're not getting charged twice for exactly the same thing.

28:53Sean Pyles:All right. So something our listener didn't ask about, but that I think is really important in this conversation is hiring a properly credentialed advisor. The term financial advisor itself is not actually regulated, which I always find a little bit baffling. And I don't think a lot of folks are truly aware of that. you know, any random social media financial influencer could call themselves a financial advisor. In fact, many do. But being a certified financial planner, a CFP, or a chartered financial analyst, a CFA, or a certified public accountant, a CPA, which you are, James, those are true marks of knowledge and professionalism.

29:25Sean Pyles:So can you talk about why hiring an advisor with a designation, particularly a CFP for financial planning, is important? And of course, full disclosure of my personal bias here is that I am a CFP. Yeah, I think that's a really good question. There are so many letters that go out of people's names. I think it is important to step back and look at the regulatory framework. And that is to be an investment advisor, you do have to pass an exam. It just doesn't have a name. So you have to pass a series 65 exam. No one's got that on their resume, but it is important that they are credentialized to that extent.

30:01The three letters are above and beyond. So this is a differentiating feature. The bar to getting a 65 is much lower than the bar to getting a CFP, CPA, CFA. I think what they show is two things. And I recently wrote the CFP exam, so I've got really good sort of recent knowledge of it. And that is... You passed. Congratulations. I passed. Thank you. Yeah. And the CFP is the most specifically geared towards financial planners. So there are, of course, holes in everything. So you could say some are going to be better than others. But as a broad grounding, it is probably the safest place to go from a branding perspective that you know the person has really done the hard work to understand the nuance and the detail behind their profession.

30:47Sean Pyles:And something else that you alluded to earlier is the fiduciary standard. CFPs have to put their clients' interests ahead of their own. That and the code of ethics that CFPs have to follow, I find to be really compelling from a financial planner and client perspective, you know that this person has your best interest in mind. And sure, there are some shady CFPs out there. That's why they have a regulatory body to catch people who do things that aren't great. But it's just a nice assurance that this person knows what they're talking about and that they are, again, putting your interest out of their own.

31:18Yeah, 100%. And that's that alignment of interests. It's so important that your advisor wants you to succeed. And there's unfortunately, I mean, it's baited into pretty much any service you get in life, but there is so much potential for them to put their own interest ahead of yours. The CFP holds them to a standard that they can't do that, which is really reassuring.

31:39Elizabeth Ayoola:I do have a question for people who don't go for a CFP, and they're typically going to these finance professionals because, as we said, they need help. So how do they know whether this person has their best interests at heart, especially if they don't know much about finances and what the best financial product is? I think experience speaks volumes. So where did the person get trained is so important. Did the person study finance is a pretty good place to start. But secondarily, where have they worked? Look at their LinkedIn profile, look at their website, try and understand their experience because there are actually a lot of very highly qualified and capable people in the industry who don't have three letters after their name.

32:21And the reason for that is they've been in really good training programs, working under really good people.

32:27Sean Pyles:I would also ask for references. If someone is a financial advisor of some sort and they have years of experience, like you were saying, James, see if you can talk with their other clients and just get a feel for how they work. That way you can help vet them in a more holistic way. So I want to pivot a bit because so far we've just been talking about human advisors, but robo-advisors are a big player in the investment space and some folks may be even turning to AI chatbots for financial planning and advisory services. Can you talk about how these more electronic elements fit into planning and maybe what their fees might be compared to human advisors?

33:04If you break up the fees that you would get from a financial advisor, there is a planning piece and then there's often an investment piece. The robo-advisors really just do that second part And so there's not the same rigor of getting to what are your goals and how you're going to achieve them, but they are very well-constructed portfolios that make the process of investing much easier. As a result, if you take a step back, their fees are going to be much lower than a holistic planner's fees. You're getting much less in the service. So I think I said the average fee for financial advisors is around 1 % of assets.

33:39The average fee for a robo-advisor is about 0.25%, So a quarter. ChatGPT is only, or DeepSeek, they're only as good as information you give them. And it's not prompting the right questions of you. Whereas an advisor is going to be asking the right follow-up questions to get to the answer we're looking for. So the depth of answer is going to be somewhat different and probably more tailored to your specific situation.

34:04Elizabeth Ayoola:Margaret says that she's a believer that you get what you pay for when it comes to fees. Now, I'm taking that to mean that higher fees might mean better returns on an investment, for example, but we know that's not always true. Some folks pay advisors to actively manage their investments, regularly buying and selling stocks. But we've seen that this type of investment management often underperforms passive investment, and it's generally more expensive than passive investing. So, James, what are your thoughts on the idea that you get what you pay for? The active versus passive debate at the tail end of your question is so important.

34:38And I think it goes back to some fairly complex financial principles. The reality for us as consumers is that the efficiency of markets by virtue of there being loads of participants in the markets, think of all the big banks, just think just like visualize New York City, like all those tall buildings, all people who are trying to beat the market. It means that all known information is baked into markets. It means it's really difficult to outperform the market on an individual level. There are two really good studies, one by Morningstar and one by the S &P Global Group, that basically track for the last 25 years the performance of active managed portfolios, which means they're buying and selling individual stocks to try and beat the index, versus passive portfolios, which just track the index.

35:26And what they've found is over 10 plus years, over 80 % of the active managers underperform the market. So the fees that you're paying for those mutual funds tends to be the reason they actually underperform the market. So the logical conclusion, just buy the market, which is what we get through ETFs. So that's the first thing. So you don't necessarily get what you pay for. However, this isn't all about investment returns. And that's where it's really important to differentiate. If no one beats the market, being invested is the number one most important principle. But the second thing is the psychological benefit.

36:04And Vanguard's done some really interesting research in this respect. And they talk about three things that people get from being with a financial advisor. They say greater peace of mind, which is huge, fewer negative and more positive emotions. That's really speaking to financial anxiety, like quietening down that negative emotion. And the third thing is getting time back for what matters and outsourcing the job to someone whose single job it is to make sure your finances looked after and gives you more time to go and live your life. So paying the fee does make sense to get those pieces back.

36:35Sean Pyles:That makes me think about how so often with managing your finances or life in general, it's not just about the exact dollars and cents, but what you were getting as like the emotional benefit of it, to your point. can you sleep better at night just because you are paying someone to manage your finances for you for a lot of people the answer is yes and it's worth that cost 100 thank you so much for sharing

36:56Elizabeth Ayoola:all this knowledge on fees james do you have any final thoughts you want to leave with our listeners about how they should navigate the various fees associated with working with a financial advisor and investing i think shopping around is the most important principle so meet multiple people because the fees might look different on paper, but you're probably getting different things. So find the solution that you're looking for and find the best fee for that solution. And that's where you should go. And comparison between similar services is what's going to get you to the best endpoint.

37:28Sean Pyles:Well, James, thanks for coming on and sharing your insights. Yeah, you're welcome. And that's all we have for this episode. Remember, listener, that we are here to answer your money questions. So turn to the nerds and call or text us your questions at 901-730 - 6373. That's 901-730-NERD. You can also email us at podcast at nerdwallet.com. Join us next time to hear us talk with a listener about whether they should sell their house to pay off their $100 ,000 credit card balance. Follow Smart Money on your favorite podcast app, including Spotify, Apple Podcasts, and iHeartRadio to automatically download new episodes.

38:02Elizabeth Ayoola:And here's our brief disclaimer. We are not your financial or investment advisors. This nerdy information is provided for general educational and entertainment purposes, and it might not apply to your specific circumstances. This episode was produced by Tess Viglin, Hillary Georgie helped with editing, Nick Karisimi mixed our audio, and a humongous thank you to NerdWallet's editors for all their help.

38:24Sean Pyles:And with that said, until next time, turn to the nerds.

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