119: What Your Financial Advisor Won’t Tell You

0:00When you walk into a Burlington, you're walking into amazing prices and great gifts. That's main character energy. Because at Burlington, the holiday savings aren't the only things turning heads. Discover quality finds and perfect presents for everyone on your list, even those who are hard to shop for. Toys and jewelry to new beauty brands and styles, these gifts go seamlessly from our stores to under your tree. Seriously, with these savings, why shop anywhere else? Burlington Deals Brands Wow If we knew more about our sleep, what would we do differently? Would we go to bed at a consistent time or take steps to reduce interruptions to our sleep?

0:37With the all-new Sleep Score, Apple Watch measures your bedtime consistency, interruptions, and sleep duration. Then, every morning it combines these factors into an easy-to-understand score from 1 to 100. So you'll know how to take the quality of your sleep from good to excellent. Introducing the new Sleep Score on Apple Watch. iPhone 11 or later required. Hey, everyone, and welcome back to the Rich Habits Podcast, a top 10 business podcast on Spotify brought to you by public.com. Before we jump into the normal intro of the show, I want to give a quick shout out to our friend Sammy Cohen, who recently launched her own podcast called Social Currency with Sammy Cohen.

1:18Essentially, what she does is unpack stories at the intersection of culture and money and business and trends and everything like that. So go give her podcast a listen. They just did an awesome episode with Brian Kelly, who's the points guy. So major shout out to Sammy Cohen for her awesome new show. Love what they're doing over there. Now, with that being said, my name's Austin. I'm joined by my co-host, Robert Croak, and this is the Rich Habits Podcast. Robert is a seasoned entrepreneur in his 50s with lifetime revenues of over 300 million. And I'm an entrepreneur in my late 20s with a background in finance and economics.

1:50Since quitting my full-time job in corporate finance a few years ago, I've built a seven-figure media business and actively advise some of the most well-known fintech companies around the world. Now, as the show name might suggest, every episode, we talk about rich habits as they relate to business, finance, and mindset. However, we try and bring you two unique perspectives, one from an industry veteran, which is Robert, and the other, myself, someone who's still in the process of building wealth and figuring it all out. So Robert, what are we going to be talking about in today's episode? In this episode of the Rich Habits Podcast, we're going to finally break down all the myths and misunderstandings of having a financial advisor.

2:28By the end of this episode, you'll have a complete understanding of what these people do, how they make their money, and how you can avoid the most common pitfalls and traps that they use to extract hundreds of thousands of dollars from your investments over time to line their own pockets. You know, I think everyone building wealth should have a financial advisor. And in this episode is all about helping you understand the differences between a good one and the bad ones and the damage that can be done if you choose the wrong one. So choose wisely. Choose wisely. This episode is going to be awesome because we've talked about financial advisors a lot on the show, but we've never really took the time to walk everyone through what they do, how they make money, as well as what to avoid when choosing a financial advisor.

3:17So that's what we're going to be talking about in this episode. Robert, kick us off with the first misunderstanding as it relates to financial advisors. The first misunderstanding is suitability versus fiduciary standards. And what does that mean? You know, many advisors, specifically those working for popular brokers like Morgan Stanley, Edward Jones, and many others, as well as big insurance companies, operate under what's called a suitability standard. And this means they must recommend financial products that are quote unquote suitable for their client's financial situation, goals and risk tolerances, but not necessarily the client's best option.

3:57So remember that very, very important suitability. So for example, an advisor might recommend a high cost mutual fund with a 5 % front loaded fee as an investment for you because it meets your basic suitability standards. Even if a low cost index fund like VOO that Austin and I talk about all the time has a much lower expense ratio of 0.03 and performs better over time. This standard allows advisors to prioritize financial products that pay higher commissions to them or align with firm partnerships, creating a conflict of interest for all of you. So make sure you guys are taking notes on this episode.

4:39This is going to be a lot to digest, but very, very important. On the other hand, fiduciary advisors are legally obligated to act in the client's best interest at all times. They must prioritize options that maximize the client's outcomes, disclose conflicts, and avoid recommendations that benefit them more than it benefits you. However, about only 15 to 20 % of financial advisors are fiduciaries. So make sure if you're hunting around looking for a financial advisor, you understand what these terms mean and you flush out if they're truly acting as a fiduciary. To find them, look for advisors with certified financial planner or registered investment advisors designation in their title or on their website.

5:27Very easy to find. And if it's hard to find, it means they're not a fiduciary. So keep an eye out for that. So to summarize, you've got the suitability and the fiduciary. The suitability operates under the suitability standard, which means they recommend financial products that are suitable, but not always the best option. where the fiduciary advisors are legally obligated to act in their client's best interest at all times, no matter what. So I appreciate that breakdown, Robert. And I want to give you guys a few examples of some of these misaligned incentives, right? So advisors at banks, brokerages, or large firms, again, Morgan Stanley, Merrill Lynch, Edward Jones, they may be incentivized to recommend proprietary funds or products developed by their own employers.

6:10These products often carry higher fees like 1 to 1.5 % expense ratio than a third-party alternative like what Robert and I talk about, like a Vanguard or a Fidelity ETF that is a 0.03 or 0.04 % expense ratio. You're paying 10, 20, 30, 40, 50, 100 times more money in fees to invest in the same things. That doesn't make any sense. So some of these firms like Morgan Stanley or Merrill Lynch or Edward Jones might set sales quotas for their financial advisors and maybe even offer bonuses for promoting these in-house products, which lead advisors to say, I think we instead should put our clients over here.

6:51You know, it's the same holdings, but the fees are a little bit higher, whatever. It'll be fine. That's not good. We do not like suitable. We want fiduciary. Commission-based advisors can also earn payouts for selling products like annuities, life insurance, or some of those mutual funds that Robert alluded to that have a bunch of fees. A good example of this is annuities, right? Someone might go out and buy a$100 ,000 variable annuity, and that person that sold it to them, right, that financial advisor, would earn a 5 % to 7 % commission up front. That's thousands of dollars in fees right off the top.

7:24while maybe recommending a low-cost index fund like VOO would earn them nothing. So they're not going to recommend that. So just be careful. Make sure you understand the difference between the suitability standard and the fiduciary standard. Yeah, it's just so important because I feel like so many people, when they're looking for an advisor, they're trying to get wealth management. They just really worry about the person liking them or they got a reference from somebody on this person and they kind of glean over the importance of understanding all of these terms and fee structures. And I always try to relate it to if you're going to the hospital for an important surgery, would you ever just take one reference, one opinion?

8:06I don't think you would. You would get two or three opinions. Just like when you go buy a car, you're going to go to multiple dealerships. You're going to call around on multiple models. Yet people will take their entire life savings and dump it to a guy in an office on a corner without even understanding what is his performance been? What are the fees? How do they make their money? And asking all of the tough questions. And this comes up every day in my life when I'm helping people. And it's just so important to understand, ask the tough questions. This person doesn't need to be somebody that your best friend or your golfing buddy or a friend of the family.

8:41It is all about who is going to perform the best to help you grow your wealth. So let's now jump into the second misunderstanding about financial advisors, which Robert sort of alluded to here, and that is the fee structures and how these financial advisors actually make their money. So there are three common fee structures when it comes to these advisors, and we're going to dig into each of them, starting with the first one, which is the most common, percent of assets under management. This is where an advisor would charge a percentage of a client's portfolio, typically 1 % to 2 % per year, in the form of a fee.

9:17Now, these fees are automatically deducted monthly, quarterly, biannually, sometimes once a year, but they are invisible to the clients. Advisors may present this as the standard, but they rarely highlight how much it could compound over decades, significantly reducing returns. So here's an example. Just so we're on the same page about assets under management, if you had$500 ,000 invested with an advisor at a 1 % fee, you are paying that advisor$5 ,000 per year in the form of a fee to manage your money. So let's say you took the same$500 ,000 and it was going to get invested in the S &P 500 and earn 6%, conservatively speaking, over the next 20 years.

10:01With no fees, right, just invested into VOO, this grows to about$1.6 million, assuming compound interest, all the fun stuff that comes with the stock market. But with a 1 % AUM fee, the effective rate drops from 6 % to 5%, which means your$1.6 million is now only 1.33, which means you lose$270 ,000 to fees over that 20-year period of time. And that's assuming you invest into low-cost funds. Let's say that the advisor takes a 1 % fee and they put you in a mutual fund that's also a 1 % fee or a proprietary fund that's a 1 % fee. Now you're paying 2 % a year to have your money invested, which means that$270 ,000 can balloon to$400 ,000 or$450 ,000 over the same period of time, taking your$1.6 million sort of North Star down to$1.2 or$1.1 million, right?

10:58We're talking hundreds of thousands of dollars paid out in fees over a couple decades, when in actuality, if you just put your money in the S &P 500 on your own, you wouldn't have to pay these types of fees. So that sounds really bleak and really terrible when you think about how much the fees add up over a 20-year period. But I want to look at it from a different perspective because I think the number one understanding everyone needs to have, if you took that$270 ,000 in fees over 20 years and you broke it down, it would be about$1 ,000 a month you'd be paying, hopefully, to this fiduciary that's charging you 1 % or less on your money, the assets under management, as Austin alluded to.

11:40So it's important to understand it sounds horrific, but at the end of the day, you have to ask yourself this very, very important question. Over that 20-year span, to decide whether you should have this fiduciary, have this wealth advisor or not, are you going to make the time to learn, stay up on the markets, stay on top of your money, and make sure that you perform as well as you would with help from a fiduciary? Because the assumption would be this fiduciary if doing their job correctly and not doing what a non-fiduciary would do. And that is putting you in good low cost ETFs, putting you in the right products so you outperform the benchmarks of the market.

12:20So I want to make sure you understand that clearly. I'm on both sides. I don't need a financial advisor. Austin doesn't need a financial advisor, but we do this every day for a living. For someone that has kids and hobbies in a boat and a lake house and is busy, you might want to consider having a financial advisor. And that is why this episode could make or break your financial future because we're breaking down every aspect of it to understand the importance of it. Because you have to look at it this way. The more complex your life becomes, the more important it is to make sure that you have proper structure and that you work with a fiduciary if you choose to because you want to make the fees worth it.

13:02You want to make sure you're outperforming those benchmarks and they're helping you with all of your structures because that's one key thing a fiduciary should do. Teach you about trust. What's a revocable trust? What's an irrevocable trust? Should you have a holding company for your real estate? All of these things come into play if you have a good fiduciary advisor. So just make sure you understand the fees and why it is important to either have or not have with a fiduciary because these fees can eat you alive if it's not worth it. So I hope this helps break it down. Yeah, if you're gonna be investing into low-cost index funds and ETFs for 10, 15, 20, 30 years and you are in your wealth building journey, building your base and trying to become a millionaire, you probably don't need any sort of financial advisor to take a percent of assets under management, assuming you're just gonna do the bare minimum and ride the wave of the stock market.

13:57But to Robert's point, if you're a small business owner, you've got some rental properties, you need a CPA, yeah, you need all these other different things figured out, then working with the right fiduciary financial advisor could be really beneficial. And speaking of commissions, Robert, that's actually the next point here I wanted to make, which were some of these commission-based fees. Because there are advisors out there that are earning commissions by selling you specific financial products. They have relationships with the mutual funds. They've got relationships with the annuities and the insurance policies.

14:25For example, a mutual fund might carry a 5 % front-end loaded fee, which means again,$100 ,000 invested into this great mutual fund that your financial advisor put you in could mean a$5 ,000 fee right off the top before your money is even invested. This model is really common among advisors tied to brokerages or insurance companies. So think Merrill Lynch, Morgan Stanley, Edward Jones, things of that nature. Now, the best way to pay a financial advisor, in my opinion, are the flat fees and the hourly fees. These advisors are out here charging a fixed rate, if it's$1 ,000 or$5 ,000 or$10 ,000 for a financial plan or an hourly rate at$100 or$250 or$400 an hour.

15:06And they do this because it's a lot more transparent. They're not actual custodians of your assets, right? They're just literally telling you what to do with your money because they are certified and they can give you that advice. They're not taking your money and investing it on your behalf. They're not doing any of that, but they're giving you the play-by-play as to what you should be doing. And we actually have a friend, Jeremy Schneider. He started Hello Nectarine. It's a flat fee financial advisor platform. You just type in the advice you're looking for and how much you want to pay per hour, connects you with real financial fiduciary advisors all around the country to give you that advice.

15:37If you don't want to actually have your money invested with someone, but just looking for some advice or financial plan for what to do in your specific situation. Yeah. And I love the flat fee, hourly fee structure for a lot of people, especially if they have smaller portfolios and just getting started out may not qualify to get a full fiduciary backing and sign up with someone because they can do that. They can find somebody that charges$150,$175 an hour to help guide them through some of the more difficult topics that they might be facing while building their wealth. So I really like this structure because a lot of people will just rely on some random person or they'll hire a lawyer to tell them what to do.

16:17And most lawyers just aren't very good with money and aren't very knowledgeable unless they're financially based lawyers. So just be careful where you get your advice from because there's a lot of bad advice out there. You understand that or you wouldn't be following the Rich Habits podcast. That's why you're here. And we are here to break all this down to help you make better decisions. So let's get into misunderstanding number three, types of investment products pushed by advisors, aka what you're actually investing in. And this is where it gets really ugly for people that don't understand what they're getting themselves into.

16:51And the fact that these advisors don't have their best interest in mind with these products. There's a handful of investment types. So if you have an advisor you're working with right now, I need you to take out your pen and paper, write these down and make sure you're not participating in these. Actively manage mutual funds. These funds aim to outperform the markets through active stock picking or market timing. and you know how Austin and I feel about anyone trying to time the market. These do come with a very high expense ratio, typically 1 % to 2 % annually. And according to the S &P's global report, 80 % to 90%, 80 % to 90 % of actively managed funds underperform their benchmarks over a 10-year period, meaning that these clients, possibly you, pay more for worse returns.

17:40So make sure you understand this. Please, please take notes. You always hear Austin and I say it's better off to just go out and buy these low-cost funds like VOO, QQQ, VUG, stuff like that, over these crazy high-fee funds that generally underperform the markets. And advisors might push these funds because they generate higher commissions or revenue-sharing agreements with the fund operators themselves. Oh, my gosh. That just makes me sick, Robert. Me too. Something else that makes me sick are these annuities. I see people buying annuities as if they need them. It's crazy stuff. So these are insurance-based products that promise a guaranteed income, often marketed as a solution for retirement security.

18:23However, they carry high fees, normally 2 % to 3 % per year. They have very complex terms, and they have surrender charges, which means you pay a 5 % to 10 % fee if you withdraw within the first 7 % to 10 years of your investment. Variable annuities in particular tie returns to market performance while layering on these additional costs like mortality and expense fees and things like that, guys. Advisors are going to be earning commissions of 5%, 6%, 7 % up front on these products and these annuities. So this incentivizes them to recommend them even when there are simpler options out there, like what Robert and I talk about, a well-diversified portfolio that's going to go up and down and to the right over a long period of time.

19:05And if you're someone who is in retirement and you're looking for some of this fixed income, Work with a fiduciary advisor that's going to help you build a diversified portfolio from scratch with bonds and stocks and dividend, all the other ETFs we talk about in different specific equities that are going to allow you to ride the wave without too much volatility, which is why you'd buy an annuity in the first place. So now let's get into our last one, proprietary funds. These are a joke as well, in my opinion. Some advisors, especially those tied to large banks or brokerages, push these in-house funds created by their firm.

19:39And these funds often have higher fees, sometimes up to 1.5 % expense ratios, and may lack the performance or diversification of a broader market index fund like Austin and I talk about all the time. So for example, a proprietary fund might focus on a narrow sector, increasing risk while also charging more than a low-cost ETF like the Vanguard Total Bond Market Fund ETF, which has an expense ratio of 0.03. So these funds benefit the firm's bottom line, but again, may not serve you the client's long-term goals correctly. I looked at someone's portfolio yesterday. They asked me to take a peruse around it, and I couldn't believe, and I'm not going to name names, very big company, had them 35 % of their portfolio in bonds.

20:32And anyone that knows anything would think that is ridiculous. And right next to it, they had 32 % of this person's portfolio in international funds, which again have underperformed the U.S. markets by a mile over the last five to 10 years. And that is why you need to understand what are you investing in? What are the fee structures? And really ask all the hard questions with these people, because we want to make sure you're in the right place, You pick the right fiduciary, and your money is working as hard for you as you work to get it. Yeah, I'm just looking over here, Robert. I came up with the idea, speaking of proprietary funds, of a J.P.

21:11Morgan growth fund. I bet they have one. I Googled it. They do. It's called the J.P. Morgan Large Cap Growth Fund, and the expense ratio is 0.75 % per year. Instead of putting your money into something that's going to charge you nearly 1 % as a fee every single year, Go put it instead in VUG and pay 0.04 % instead for very similar performance, right? That's what we're talking about. Putting your money into a proprietary, yeah, welcome to the JP Morgan or the whatever the heck fund, right? Like it's wild. Okay. So proprietary funds, they exist. It's a crazy world out there. But listen, guys, understanding all of the nuances as it relates to financial advisors, how they make money, where they put your money, the different types of obligations they have between the suitability standard, the fiduciary standard, everything in between is how you can win with money.

22:00I wanna make sure everyone listening understands that we don't hate financial advisors. We actually think you should be working with them in a proper, responsible way, but you need to understand how the fees are gonna impact you over your lifetime. And if those fees are even necessary in the first place because you wanna just put your money in the S &P 500. Make sure that you're making the right choices for yourself. And the easiest way to do that is by having full information, which is what we try and do with this podcast. Yeah, 100%. We are just here to lay out the groundwork and make sure all of you are getting as much of the money in your pockets and not someone else's.

22:35Now, before we jump into our Q &A section of the episode, let's take a moment to hear from our sponsor, Masterworks. Robert, we're in a really weird place. Tariffs and trade deals are still being worked out. The S &P 500 is now flat for the year, and it kind of feels like we're floating and not in a good way. I was looking at some research and I saw a report from State Street a few days ago that caught my eye. It actually lines up with a lot of stuff we're talking about, specifically as it relates to alternative assets. It said that half of financial advisors, very timely for this episode, are now allocating to alternative investment strategies to manage portfolio risk for their clients.

23:10And over two thirds of millennials are now investing into alternatives. That's over 66%. Now these advisors are saying they're diversifying with alternatives because they want to reduce exposure to public markets and find alternative sources of returns. Now, when it comes to alternative assets, there's a ton of investment options out there, but why don't you tell them about something that we've been using for a while? Yes, definitely Masterworks. And obviously, we're not art experts, but that's kind of the point. We've both been using Masterworks' art investing platform to diversify our portfolios for five years or so now because it's easy to do and you don't need to have an art history degree or follow along what's trending in the art world right at that time and still do really well.

23:51That's right. Both of us invest with Masterworks, the sponsor of today's episode. And we've even interviewed their founder and CEO, Scott Lynn, on the show. With Masterworks, you don't need to spend millions to invest in multi-million dollar art. They've offered investments in almost 500 works to date with over$1.2 billion in invested capital. They've also exited 23 works so far with investors realizing annualized net returns, including 17.6%, 17.8%, and 21.5 % on those works held longer than one year. So join over 1 million Masterworks users at masterworks.art forward slash rich habits. Masterworks.art slash rich habits, which is also in the show notes of this episode.

24:38As with any investment, past performance is not indicative of future returns. Investing involves risk. Sell returns are not inclusive of unsold works. Important regulation A disclosures can be found at masterworks.com slash CD. Shout out Masterworks. We love their platform. All right, let's jump to our first question coming from Anthony on Instagram. If you want to ask us a question, email us at richhabitspodcast at gmail.com or DM us a question on Instagram at richhabitspodcast. So Anthony says, hey guys, my name's Anthony. I'm 21 and I work in Citrus County, Florida as a utility technician for the county.

25:11I make$19.80 an hour and I work 40 hours every week. I'd love to start investing. I have an investment retirement account through the Florida Retirement System as one of the employee benefits, but I would like to be more proactive about investing on my own. I'm currently struggling with saving money, but because of you all, I recently made an expense list and I cut out all of the non-essential subscriptions that I don't use and I've been working on a few other things to better my budgeting. After I finally get myself financially squared away, how would you guys recommend I begin my investment journey?

25:41I love this question, Anthony. Thanks for submitting it. You're 21 years old. You're thinking like an investor. You're not thinking like a consumer. And that is the number one step in building financial freedom is getting that mindset shift. What I would do day one, you already have the Florida Retirement System account. That is great. You can start investing in there when you get moving. But I would open an account with public.com, the sponsor of our show here today, because of the fact that they have all the best tools right inside a public account. You could start out by getting your Roth IRA set up, which you haven't mentioned that you have as of yet.

26:17I would do that and get some money going to those low cost funds we talk about, like VOO, VUG, QQQ. Secondarily, I'd probably get some money, even if it was only$100 a month, invested in some cryptocurrency like Bitcoin, Ethereum, maybe Chainlink and XRP. I would do that as well. But then also, as you get more and more money going, you could also have some money in their high-yield savings account. It's called a high-yield cash account in public. And right now, it pays higher than almost all of these accounts in the industry. I think it's at 4.1 % as of the filming of this show. So that's where I would start for anyone out there that's just getting started.