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

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

If you have any questions or would like more information, reach out to us at https://symmetrypartners.com/contact-us/

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Symmetry Partners, LLC, is an investment advisory firm registered with the Securities and Exchange Commission. The firm only transacts business in states where it is properly registered, excluded or exempted from registration requirements. Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. No one should assume that future performance of any specific investment, investment strategy, product or non-investment related content made reference to directly or indirectly in this material will be profitable. As with any investment strategy, there is the possibility of profitability as well as loss.

Due to various factors, including changing market conditions and/or applicable laws, the content may not be reflective of current opinions or positions.

 

Please note the material is provided for educational and background use only. Moreover, you should not assume that any discussion or information contained in this material serves as the receipt of, or as a substitute for, personalized investment advice.

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Hello and welcome to Unfiltered Finance. This is your host, Tom Romano.

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And thank you all for joining us for, uh, this edition.

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Today we're gonna talk about something that I think, uh,

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weighs on a lot of investors' minds. Um, there, there tends to be, uh,

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somewhat of a lack of transparency on this topic in the industry.

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And the topic is, is fees and all fees associated with investing.

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We have the perfect guest for us here today. Uh, JT Lavery, uh,

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longtime coworker and friend of mine.

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He's the Associate Director of National Sales at Symmetry Partners. Jt,

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thanks for joining us here,

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Tom. Thanks for having me. Appreciate it. So,

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Jt, tell us a little bit about, about your background, um,

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working with advisors.

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I've been working with advisors, Tom, for about 23 years now, kind of in,

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in different facets. Uh, I started off on the service side of things at a, at a,

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at a major mutual fund company up in Boston, answering phones and, and,

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you know, trying to solve problems. And I, you know,

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transitioned over to the sales side, uh, a few years after that. So I have a,

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you know, pretty good background working with advisors that were more on the,

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uh, commission side of things,

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as well as advisors that are on the fee-based side of things. For

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Our listeners, um, describe the difference between the two because I,

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I think a lot of folks out there don't know if they're paying fees or

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commissions, and,

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and I've heard many times talking to investors that they don't think they pay

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anything. Mm-hmm.

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Yeah. So, uh, you know, commissions are paid out, uh, by,

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let's say a mutual fund company.

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They will pay out a commission to the advisor who sells that particular mutual

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fund to, uh, to their client.

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And it's could be paid out in a very various of different ways. Um, you know,

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if it's a shares, it'll be an upfront sales charge, B shares,

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which don't even think is even a thing anymore.

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It was a contingent deferred sales charge. There was no upfront sales charge,

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but it was a declining sales charge As time goes on and you,

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and you were to sell that particular holding, you know, the,

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the sales charge would be reduced. And then you also had c shares that were,

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you know, about a 1%, you know, uh, uh, trail that would, uh,

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that would pay out to the advisors.

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And those are paid through various fees that are within the mutual funds that

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the mutual fund companies, uh, structure around, you know,

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marketing of their particular products as well as, um,

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as selling those particular products,

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verse the fee side of things where it's advisors are just simply charging a fee

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for their advice. They're advising their clients on what they should be doing.

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Um, there's often, there's more than just, um, more advice,

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more than just advice that goes into it. It's, you know, financial planning,

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holistic planning and things like that. But it's generally a,

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a fee that's fully disclosed that they, that they pay.

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And the way most advisors will structure their fees,

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they'll structure 'em in such a manner that the more money you have, uh,

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you'll start to see those fees actually go down. So

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What I'm hearing you say, it sounds like, and I think the,

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you said contingent deferred sales charge, right?

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If if you're earning a commission, that is a, it's a sales charge, correct?

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Right. Whereas, uh, fee for advice is exactly that,

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right? It's a fee for, for giving advice so that it's not necessarily a,

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a sales charge. Um,

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why do you think it's important for investors to know the difference between the

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two? Well,

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It's important for them to know the difference. It's,

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I think it's just important for them to know what they're, what they're getting.

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First of all, commissions. You can say that there's, you know,

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conflicts of interest perhaps. Are they getting sold something that,

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that has a higher commission that, that, you know,

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the advisor's gonna get paid more money on, you know, verse, you know,

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they always say, you know,

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a fee-based advisor usually will generally sort of align themselves with the

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client, let's say, on the, on the same side of the table, so to speak. They're,

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they're, they're going in as a team, we're here to, you know, you got your,

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you want to get from point A to point B,

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let's figure out the best way to do that,

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and then we'll put you in the appropriate investments. And, you know,

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because they're not, you know, getting any commissions, you know,

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generally speaking, there's a, I think,

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a certain comfort level knowing that the investment solution's gonna be right

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for them.

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No, that, that's a really great explanation. And you know, this,

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this podcast where, where our advocates of,

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of financial advisors and financial advice,

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I've said many times before that I always get asked, you know, what's a,

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what's a great stock tip? What's a great tip? What's some advice for investing?

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And my advice is always work with a, a fee advisor,

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because that advice is extremely valuable.

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What are you seeing the average on the fee based side average advisory fees in

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the industry? What should investors, what should they know about advisory fees?

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Um, just generally? Yeah, generally,

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Generally speaking, I would, I would say that the, you know,

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the average fee probably comes in around 1%. Um, you know, we see, you know,

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just on our, on ourt here at Symmetry,

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I think the average advisory fee is somewhere around 97 basis points,

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if I'm not mistaken.

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And so we'll see advisors charge as little as maybe 60 or 50 basis points,

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and we'll see advisors charge, you know, as, as high as 125 basis points.

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It's hard to say what's right. It's, what it comes down to is, you know,

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your comfort level and what you're getting for those services.

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Some advisors will, uh, will charge, let's say lower basis points,

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but they'll also charge on top of that for other services, like, let's say,

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financial planning. Okay.

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Whereas some advisors will charge 125 basis points and let's say maybe financial

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planning's included in that. And so it's always good to know, you know,

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you know, not only what you're paying,

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but also what you're getting for that particular price or that fee that you're

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paying. Okay.

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So these are a couple things that I kind of want to dive into a little bit.

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First and foremost, I think, you know,

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it's not fair to talk about price and fees without talking about value, right?

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Right.

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And so I think that you are going to see varying degrees of fees across the

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board, depending on, on, on the advisor's value proposition,

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1% that we've seen that fee, that that really hasn't changed. Mm-hmm. Right?

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Mm-hmm. Um, we, we do hear a lot about price compression in the industry, but I,

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I think when it comes to the, the financial advisor's compensation,

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and I would argue that the financial advisor is the, uh,

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most valuable person in the value chain. Mm-hmm. That fee hasn't changed,

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but investors are looking more for, from their advisors. So there's some,

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there's some margin compression there, right?

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Yeah. The advisor, you know, uh,

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clients are becoming more savvy conversation around fees. It's,

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it's out in the open, right? You see 'em on commercials all the time,

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whether it's Schwab or Fidelity or Vanguard, you know, talking about, you know,

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low fees. So, uh, it's out there and clients are well aware of that.

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And so they're starting to ask questions,

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they're starting to ask what they're getting for, for that particular fee.

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But at the end of the day, you know, you know, it's,

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it's only an issue in the absence of value, you know,

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so if the advisor's providing value and they see that and they know that, then,

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you know, generally speaking,

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clients tend to be comfortable with what they're paying.

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Certainly, certainly. What are you, you know, the advisors that are charging 1%,

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what are the typical types of services that you see advisors performing for,

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for that fee to add value to the equation?

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That's a great question. You know, we, we kind of see,

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we see a lot of advisors that are rolling financial planning into their fee.

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You know, we, we, we see that there's, um,

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there's a lot of advisors that actually have a, a, um, what I would say,

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a very big financial planning focus. So they'll charge for financial plans,

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and they may do some advisory business along the way, uh,

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just to help out clients. And so they'll, you know,

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they may charge maybe a little less, maybe around 80 basis points,

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80 to 90 basis points, kind of what we're seeing there.

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Okay. That makes a lot of sense. I, I,

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I think that the value proposition for the advisors actually shifted quite a bit

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over the years. You know, you and I have talked, um, a lot about this and,

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you know,

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there was a time where the value proposition was thought to be returned. Mm-hmm.

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I'll pay you a higher fee for higher rates of return. And is that the case? No,

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because

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It's, you know, I, I think the, the juries, you know, come in, in terms of,

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of returns and in terms of what types of investments you should be in. I mean,

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right now, I mean,

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you're seeing huge outflows from going from what I would say traditional active

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to more traditional passive types of investing. And so I think the, the,

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the main role for the advisor is just really being that behavioral coach. Uh,

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when we're left to our own devices, we don't make,

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we necessarily don't make the best decisions, uh, when it comes to investing.

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We, we get very emotional about our, our money and when, when markets are down,

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we, we tend to hit, you know, hit the panic button and sell,

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and that's the wrong time to sell. And so, um, you know, when you look at the,

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like, industry studies that are out there, I mean, the vanguard's out, you know,

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advisor Alpha is a big one, shows that, you know,

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working with a financial advisor, you can, um, you know,

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capture about 300 basis points extra just by working with a financial advisor.

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And they actually attribute most of that to,

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but I think about half of that to behavioral coaching. Sure.

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And the, um, just for our listeners out there,

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the advisors Alpha study that was done by, uh, Vanguard,

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I believe it's a paper that they put out in conjunction with,

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with the Spectrum group. And,

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and it does show that investors who tend to work with financial advisors tend to

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have better performance,

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but it doesn't necessarily mean that the advisors tinkering with the portfolio.

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The value proposition, to your point, is coaching. It's competent,

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it's communication. It, it's, it's these things that help the investor, uh,

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whether the good times and the bad. And, and,

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and providing that sort of foundation,

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helping the investor stay the course really is the, the secret to,

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to having a successful investment experience. I

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Think it's also important to add that I think a lot of advisors now, you know,

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there is sort of a, a paradigm shift.

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It's not necessarily the returns that I can generate for you. Um, it's,

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it's the other things that I can do for you, um,

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because they know that they're not portfolio manager. Mm-hmm. You know, they're,

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you know, they're,

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they're running their own business and that business is helping people.

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And if they're spending all their time trying to figure out what the best stock

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is, they're, they're probably gonna miss the boat on, you know,

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helping their clients, you know, with their financial planning and,

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and meeting their, you know, their financial goals over time. Sure,

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Sure. So, you know, we talked a lot about the advisor compensation,

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and I kind of wanna revert back because, you know, the topic today is fees.

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Mm-hmm. It's not just advisory fees.

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There are a number of other fees associated with investing.

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You talked a little bit about the ahas, B shares and CS shares,

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which are typically sales charges for mutual funds,

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but there are no load mutual funds out there. There are. Correct. And, uh,

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what that means is there, there isn't a, a sales charge per se,

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but that doesn't mean that they're for free. Correct. Correct.

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Nothing's for free.

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Right.

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So talk to us a little bit about the costs that are associated with investing in

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something that, that, that no load or doesn't have a, a sales charge. Sure.

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Yeah.

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There's a couple costs to think about. You know, there's, I always refer to it,

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you know, the cost of investing, right? There's, there's gonna be, you know,

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some cost to, you know, running a portfolio. I mean,

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that's where your expense ratios come in, which is the really, it's the,

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the cost of running that particular, let's say, mutual fund if,

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whether it's a no load or, or a loaded mutual fund. I mean,

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those are things like, you know, trading costs, management fees, um,

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things of that nature. There's also, um, you know,

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custody fees that you have to think about, you know, what, uh,

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what custodian is gonna be housing those, those, um,

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those assets for you and what that pay structure looks like. I mean, we see,

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you know, uh, some custodians that'll do a flat, you know, flat rate fee,

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and we see some that'll have more of a tiered structure.

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So the more that you give them the, the lower that fee will come down. Again,

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there's, you know, certain services that are,

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that are provided by the custodian that you may seem are valuable.

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So maybe paying 15 basis points is worth it,

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and you may not see any value in that. And, and paying something like, you know,

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five or seven basis points maybe more, more suited.

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But those are all sort of what I would say in the category of just the cost of

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investing.

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Sure. Sure. And, and when you're looking at investment vehicles,

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mutual funds mm-hmm. ETFs,

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those expense ratios that comprise some of those costs,

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what are you seeing on average out there, and are those fees coming down? Uh,

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They are coming down, I pulled some numbers, you know, looking at just on,

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on averages, the, you know,

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the average expense ratio for a large cap mutual fund,

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about 86 basis points on the small cap side, it's averaging around, you know,

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1.4%. You know, so again, those are the averages. So you,

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you do see some mutual funds that can be as high as a, you know,

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north of a hundred and twenty five hundred thirty basis points.

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And then you can see some that are just a couple of basis points, you know,

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two basis points, five basis points for, you know, just a simple, uh,

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index tracking strategy. Okay. So

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You said a couple things there that I find interesting. First and foremost, uh,

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the asset class matters, right? Mm-hmm. Large cap versus small cap.

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And I think it would make sense that smaller cap stocks,

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smaller stocks are probably more costly to, to manage and maintain.

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So you'd expect higher expense

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Ratio, right? Yeah. And to trade 'em, it's harder to get access to 'em.

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Yeah. And we see the same thing in, in liquid alternatives.

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Like those alternative strategies tend to be a little pricey. Um,

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so the asset class matters. We are believers of global diversification,

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so having a little bit of all of those asset classes I think makes a lot of

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sense. Correct. Um,

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but you also mentioned something that I kind of want to dive into a little bit.

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You know, 86 basis points on average for large cap mutual fund.

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But you said you can get asset class exposures with index funds for just a

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couple of basis points, correct? Or hundredth of a percent. Mm-hmm. Why is that?

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Uh, I think it comes down to, you know, activity.

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The more active a strategy is you're, you're gonna see, you know, more turnover,

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that's more trading, and that's gonna, you know,

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cause the expense ratios to be a little bit higher than a more passive

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portfolio. Let's just, let's, let's just say tracking the s and p 500.

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Sure.

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So someone who is trying to attempt to outperform the s and p

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500 will do so by buying and selling Correct. Creating activity,

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raising costs, also taxes. Mm-hmm.

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Whereas simply buying and holding an index of the s and p 500,

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obviously is going to not only be less costly, but also more tax efficient.

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Correct.

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And it's also important to know what you're, what you're buying.

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There's a lot of people out there who, who believe in active management.

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They think that that,

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that there is alpha out there that a portfolio manager can provide,

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and in order to capture that alpha,

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they're willing to pay the extra expenses for that. So if you,

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if you know that going into it, then knowledge is king. Right? So,

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so you're okay with that. It's the people that don't understand that,

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that are in a portfolio, let's say a 401K plan, for example,

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you go into the menu, you,

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most people are probably gonna look at what their historical returns are,

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and they're gonna probably make a decision based off of past performance not

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knowing what, what's under the underlying securities or,

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or what the strategy is behind the individual mutual fund.

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And they could be paying, you know,

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higher fees and not knowing really what they're paying or why they're paying it.

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Yeah.

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And it, and it's important, right? At the end of the day,

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what you pay in fees comes off the top of what your return is. And over time,

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that can be substantial. We say lot on this podcast, you know, we,

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we can't control the markets, we can't control asset allocation,

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we can't control costs, and we can't control taxes. And we, we,

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we educate our listeners that, hey, focus on things you can control. Mm-hmm.

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Right? And so fees do matter at the end of the day.

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And I think there's been a lot of studies out there, if I'm not mistaken,

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Morningstar had one not too long ago that says,

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one of the key indicators of a mutual fund's performance is the expense ratio.

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The lower the fee, the greater likelihood it's gonna perform well. Yeah. Well

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Think about this. So in, in keeping with that,

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if you are in a mutual fund that has a 1% expense ratio and that mutual fund

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returned 5%,

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you're automatically giving up 20% and you're giving that back to the,

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to the fund company, right?

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501 is four. Exactly.

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Just, you know, basic math right there. Mm-hmm. So there, there, there is,

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you know, fees do matter and they do erode, you know,

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performance particularly over time. Uh,

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I got a couple other examples here I can share with you. You know, please just,

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you know, keeping things simple, you know,

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a hundred thousand dollars investment over 20 years, um,

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assuming a 6% rate of return in a mutual fund that has a 1% expense ratio,

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forget about, you know, custody,

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forget about advisory fees and all that other stuff,

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just straight up just investing in a one per, in a mutual fund that's, uh, 1%,

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uh, at the end of that 20 years, you know, you'll end up with a,

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a gross return of $320,713 and 55 cents.

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Take a look at the cost of fees.

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The cost of fees of that are actually $55 $383 and 78 cents.

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So you're gonna end up, uh, at the, in your account at the end of the day,

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after 20 years with, uh,

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$265,329 and 77 cents.

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And that's if you're invested in a, a, a mutual fund that has, you know,

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expense ratio 1%. And some people look at that and they say, that's great.

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That's that, that's a good return over 20 years. I'll take that.

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When you compare that, everything else being equal, but it's invested. Now in a,

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in a mutual fund that has an expense ratio of, uh, 25 basis points, again,

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a hundred thousand dollars over 20 years, 6% rate of return. The end of that,

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you, you,

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you still end up with the $320,713 55 cents,

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uh, on the gross end. But on the net,

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what you end up with is $305,919 and 75 cents.

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And so that's a cost, cost of fees there of 14,

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do $14,793 and 80 cents.

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So that's a significant difference ends up in your pocket. That's,

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That's, that's, that's massive. And we,

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we told our listeners there wouldn't be any math, but, uh, no, that, that,

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that is very true. But the thing is fees,

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it's part of investing like anything else. Mm-hmm. Right. They're,

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they're there. And I think it's important for investors to know,

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one of the things, uh, I read an article many years ago,

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and I think it's still prevalent and it's the notion of transparency, right?

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And, and, and what this article did, it was from,

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from State Street Global Advisors partnering with, uh, Wharton.

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And they interviewed a number of investors, um, about fees and,

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and their sentiments around fees.

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And what that study showed us was, it's not so much the,

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the level of the fee as they just wanted to know what it is.

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And why do you think there's such a lack of transparency with,

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with costs in this industry?

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I just think it's easy to, it's easy to bury. That's

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Unfortunate.

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You know, I think, and, and I think that's, that's,

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that's starting to change a little bit. I know we see it in our business,

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you know, and one of the things that,

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that we always kind of pride ourselves on are full transparency on fees,

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you know? But if you can look,

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if you can look less expensive than your competitor,

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then you feel that's gonna give you a competitive advantage. And so, you know,

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so it's,

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it's unfortunately I would say it's not uncommon for investment companies or

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other providers to, you know, kind of, you know,

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bury their fees or sort of hide them within, you know, the structure of their,

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of their, um, of their costs.

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Well, I think you, you said it best, right? In in, if there's value,

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the fees don't matter. Correct. Right. If you're getting what you're paying for.

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And so I think that there's a notion of a lot of advisors out there not wanting

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to talk about fees,

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cuz they might not be confident in their own value proposition. However,

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there are a lot of advisors that you and I work with on a daily basis that

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they're very upfront with what their cost structure is.

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They're very upfront with the fees are of the underlying investments,

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and they bring that transparent to the table because they have a very strong

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value proposition of their

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Clients. Yep. Yeah. They'll have it on their website, they'll have their,

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their fee, you know, their fee schedule on there along with, you know, the,

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the various services that they charge and, you know,

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whether you feel it's high or whether you feel it's low, at the end of the day,

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it's up to you to decide what's best for you. But at least you know,

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you have that full disclosure. Um, so you can make the,

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the best decision possible. Certainly,

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Certainly. So if, if our listeners are out there looking for a,

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a financial advisor, you know,

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some of the things that I'm hearing you say that they should be looking for is,

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is the advisor using a commission-based mo a commission-based model or a

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fee-based model? Mm-hmm. Are they, uh,

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transparent with their compensation and uh,

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are they transparent with their value proposition? Correct. Is,

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is there anything else that, that you would add to that?

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Um, just knowing what services you're gonna get. You know, I think, you know,

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time and time again, we, he,

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we hear stories that client felt that they were gonna get something from an

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advisor that they're,

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they're just not getting and they end up firing that advisor. You know,

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so knowing what you're gonna get from that advisor, and, and some advisors,

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again, they'll have this right on their website or they'll have it on that first

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consultation that they talk to. They'll tell you, Hey, look, you're gonna get,

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you know, four, you know, four meetings a year.

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You're gonna get six phone calls, you know, from me a year and,

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and here's my cell phone number. If there's ever an emergency for something,

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you know, give me a call. And then there's other advisors that'll say, you know,

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I'll meet you with you twice a year and we'll review your portfolio and if

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everything looks good, then we'll, I'll talk to you in six months.

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And if you're okay with that,

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and you at least you know that going into the relationship, I think where,

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where people get burned is they,

400
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they think they're gonna get more outta the relationship than they're getting.

401
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And a lot of times it's just slimy cuz of lack of transparency.

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

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

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

405
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At the end of the day anyway, so Absolutely.

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

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to remember that as you're looking for a financial advisor, it's a,

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you think of it as a, a mutual interview. It's, it's, you know, they're,

409
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they're looking to see if you're gonna be a good client for them,

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just like you're looking to see if they're gonna be a good advisor for you.

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And so it's important that, that, uh, that a, your values are aligned.

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It's important to look for that full transparency,

413
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but it's also important that it's, you know, somebody that you can connect with.

414
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Absolutely. Absolutely. And, um, every investor's unique. Mm-hmm.

415
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And every advisor's unique in, in trying to find that match,

416
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I think is very important. So for our listeners out there, uh,

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those that might be looking for financial advisor,

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make sure that you're getting, uh, transparency into costs.

419
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Make sure you're getting transparency into value proposition.

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Make sure that you're using someone who is maybe not necessarily earning sales,

421
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uh, charges or sales commissions, uh, but actually giving fee for advice,

422
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which eliminates conflicts of interest. Um, and so I think that's, there's a,

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there's a lot there for our listeners to digest. JT, I want to thank you for,

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for joining us here today. It's been a pleasure talking to

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You. This has been a great time. We gotta do this more often.

426
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Absolutely. We'd love to have you back on the show. Uh, so in closing,

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I wanna thank the listeners for, for chiming into this, uh, podcast. And, uh,

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we'll get you at the next one. And, uh,

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for those of you who are looking for our, some of our previous episodes, uh,

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you can find them wherever you're currently finding your podcast.

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So thank you so much for your time and, uh, I'll see you at the next one.

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Symmetry Partners llc,

433
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it's an investment advisor firm registered with the Securities and Exchange

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

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

436
00:21:13.720 --> 00:21:16.760
excluded or exempted from registration requirements.

437
00:21:17.160 --> 00:21:21.720
Registration of an investment advisor does not imply any specific level of skill

438
00:21:21.740 --> 00:21:26.240
or training and does not constitute an endorsement of the firm by the

439
00:21:26.240 --> 00:21:26.940
commission.

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

441
00:21:30.290 --> 00:21:32.560
investment strategy, product,

442
00:21:33.060 --> 00:21:37.320
or non-investment related content made reference to directly or indirectly in

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this material will be profitable. As with any investment strategy,

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there is the possibility of profitability as well as loss due to various

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factors including changing market conditions and or applicable laws.

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The content may not be reflective of current opinions or positions.

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Please note the material is provided for educational and background use only.

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Moreover,

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you should not assume that any discussion or information contained in this

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material serves as the receipt of or as a substitute for

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personalized investment advice.