New Fees & New 401(k) Rules

Transcript

Speaker 1 (00:02):

Welcome to the Retirement Wealth Podcast. Our goal is to help those retired or soon to be retired investors make more informed financial decisions and live an enjoyable retirement. Our host, Mike Lester, is the founder and CEO of Talon Wealth Management. Mike is an investment advisor representative of Retirement Wealth Advisors, Inc., an SEC registered investment advisor. Thanks for joining us today and let’s get started.

Interviewer (00:31):

We got to be careful. We got to watch out for the gotchas out there. One of the largest US hotel owners is taking a cue from the airline industry and experimenting with a new strategy, charging guests for most services and amenities. Yep, more fees. The CEO of a company called MCR tells Fox Business that roughly a dozen of his company’s hotels, a guest can get an early check-in, but it’s going to cost about 20 bucks. And there’s a similar fee for a late checkout. Using the pool might not be a charge on a weekday in the morning, but it could cost you $25 on a hot weekend. I get it and I’m also frustrated by it because I know that travel and tourism has been hit so hard.

Mike Lester (01:16):

Well, and what strikes me about those fees is those are kind of surprise fees, right? When you go online to book your hotel, you see the rate and you book it based on, “Well, that seems reasonable. A nice hotel, I’ll pay that rate.” But then after you get there, they’re like, “Oh yeah, gee whiz. If you want to use the pool, that’s another $25.” I think that’s what people don’t like about it. If you’re really upfront about whatever fees, or if you’re really upfront about what’s going to cost you, it’s not a big deal because you don’t feel like you got taken advantage of. But when you’re dealing with something that has fees that you didn’t know about or fees that somebody didn’t disclose to you, then it’s pretty irritating, right?

Interviewer (01:50):

You get angry.

Mike Lester (01:51):

You get angry. And this happens when it comes to investment accounts a lot of times. Because whether it’s an advertisement for an investment, or whether it’s an advisor promoting an investment, it’s their nature sometimes to highlight the positives and be like, “Oh, well, look at what this return was over the past 10 years,” and “Hey, you should go ahead and invest in this.”

Mike Lester (02:11):

Well, okay. First of all, that’s not telling the whole story. Second, what’s the downside to it? Well, the downside to a lot of investments out there, even though they aren’t necessarily disclosed in a way that’s really easy for an investor to understand is a big part of the problem. I mean, one thing that pops out for me would be fund fees. If you go and invest in a fund, which a lot of people are, whether it’s through a 401(k) account, or whether its through an advisor, or whether you’re doing it on your own, but imagine a fund company, whether that’s Fidelity or Vanguard or T Rowe, I mean, just pick a company, they don’t do it for free, right? So, and that’s fine.

Interviewer (02:49):

And nor should they, I mean let’s be real.

Mike Lester (02:50):

Nor should they, why would they be in business? I mean, these aren’t charitable organizations, these are businesses and they’re doing investments to help grow money for our clients. But if somebody doesn’t tell you what the actual fund cost is, that’s an issue. Not because there’s a fund cost, but because, well, if there were two investments out there and both of them had basically the same average rate of return, but one of them fund costs was half the cost of the other one. Which one would you pick? You’d pick the one that [crosstalk 00:03:14].

Interviewer (03:14):

You don’t even have to ask. Of course.

Mike Lester (03:16):

So the details are important. The other thing that you need to know is if you’ve hired a financial advisor, what fee are they charging to be your financial advisor? Because if somebody is not disclosing that fee, and by the way, advisors are required to disclose the fee, but it doesn’t necessarily always come out in conversation, but let’s just say that they did and they said, “Well, our fee is 1% to work with us.” Okay, great. 1%. Well then, so what’s the average rate of return net of the fee I’m paying you on your recommendation over the past… 10 years, isn’t a good number anymore, because they’ve pretty much been good years, but full market cycle. I’d want to know that.

Mike Lester (03:52):

Good years, bad years. What’s your average net of your fee. And is that better than something I could just go to go do on my own? Because if it’s not, why would you hire an advisor if net of their fees the average rate of return is less than if you just went and did something by yourself. So, it’s the advisor fee, but then there’s a fund fee. And then also I see this, and this is a bolt on that is kind of interesting, sort of ties back to this, this idea of hotels going, “Oh, well, gee whiz, if you want to use a swimming pool, it’s going to be $25.” Kind of thing.

Mike Lester (04:19):

I hear this and it makes my hair stand up in the back of my neck when I hear it. But we’ll talk to individually. While I have an advisor, but the advisor, I go into their office every year and they charged me a planning fee. I’m like, so you’re going to pay a planning fee on top of the fee that your other fees that you’re paying. They should be doing these plans. I mean, if you’re their client, that plan, I mean, that’s their job, is to do the planning for you, not do a plan and then bolt on another fee for the plan.

Interviewer (04:45):

Is that why you always mentioned that the complete financial plan is a $1,500 value because you don’t charge that, but other people do?

Mike Lester (04:51):

Yeah. So there’s different ways that advisors can make money. One is just the charge planning fees. And so the average fee for a plan is about $1,500. And basically you say, “Hey, put together a financial plan for me.” The advisor puts together a financial plan. You write them a check for $1,500. You get the plan. If you want to get the plan updated next year, it’s $1,500 more. Or there are companies who do planning, but then also charge fees to manage the portfolio. Listen, I’m not knocking those advisors. I mean, that’s how they run their business, but that’s not how we run Talon Wealth Management.

Interviewer (05:23):

We talk a lot on the show here, Mike, about 401(k) plans and the best way to manage those funds when we leave our jobs. Should my money stay in the 401(k) or should I roll my money into an IRA? As if those weren’t hard enough questions to answer as average Americans that are not financial advisors, the US department of labor has issued new rules that will soon affect those decisions. You and I looked at some of this information before today’s show, a lot of it was French to me, but tell us about some of the new rules and what you’re doing day to day to make sure that your clients are aware, know about these changes in the rules and make sure they navigate them properly.

Mike Lester (06:05):

I think our clients would be a little bit interested in the rules, but it’s just something that usually isn’t presented in a way that would translate to clients as much as it should. So what I really, really like about the rules and I’m completely in favor of this is to simplify it. They’re going after financial advisors that sell products in order to get kickbacks and basically benefit from, so-

Interviewer (06:31):

So the annuity slinger situation is happening.

Mike Lester (06:33):

That would be part of it. Yeah. That would be one example. Yeah. We’ve mentioned them before. The annuity slingers, right? So imagine a situation where there’s an advisor out there and that advisor knows that if they put $5 million into a particular company’s annuity products, they’re going to get a free trip to Hawaii, right? For them and their wife, all expenses paid, massages. I mean, whatever you want to do. And so what are the odds that advisor goes, “Well, gee whiz, I could pretty much do anything I want. Let me try to talk people into this insurance product.” So that happens quite a bit and-

Interviewer (07:10):

That’s kind of not cool. I don’t appreciate that.

Mike Lester (07:12):

It’s not super cool. Well, here’s the thing they’re doing this, but it doesn’t get disclosed to the clients or the prospect. All the prospect heard is, “Well, hey, listen, if you put your investment in this product, you get started in market participation, no risk of loss. So by the way, you get guaranteed income for life.” I mean, they hear that part of it, but the advisor isn’t required to say, “Hey, by the way, if I can get enough people to get enough of this product, I get to go to Hawaii.” So remember you told your girl scout story, you got to go to the free trip because you sold [crosstalk 00:07:40].

Mike Lester (07:41):

Free trip. So it’s free trips. And so it’s a problem. So what they’re looking to do and the language here, [inaudible 00:07:46] I have to read it, but prohibit advisers from receiving payments from third party investment companies, i.e., insurance companies, or maybe something else that create conflicts of interest when dispensing rollover guidance. So this goes to retirement accounts. So it’s your 401(k) and this advisor says, “Hey, listen, why don’t you roll your money into an IRA annuity account?” Well, that company that you’re rolling the IRA over to might be offering the benefits to this advisor. It could be a trip. It could be this. I mean, it could be a lot of things. And so they’re looking to create an issue where they can’t do that in right now. I personally think that’s a fantastic thing, but I also know there’s a lot of advisors out there they’re going to be pretty disappointed.

Interviewer (08:28):

Because they’re not going to Hawaii as much.

Mike Lester (08:29):

Because they’re not going to Hawaii. Yeah. I knew a guy. I thought this was great. It was an advisor. He’s a fiduciary like us. And so fiduciary just means we have to put our client’s best needs ahead of-

Interviewer (08:38):

Hawaii.

Mike Lester (08:39):

Ahead of Hawaii. Yeah. I can’t be like, “Well, I want to go to Hawaii. So you need to be in this one.” So that’s our job, but he did the same thing. And so what’s happening is, and financial advisors know this, but obviously clients or investors don’t know this. If you own a financial practice, these companies mail you, little mailers all the time. And it’s like, “Hey, come to Hawaii. Hey, come to here. Hey, go to Costa Rica. Hey, go to…” I mean, I’ve seen ones that were like China. This crazy, crazy, all expense paid trips. And what this advisor did was he collected all of them that he had that would come to him and he put them on a bulletin board so that when people came in the office, he could just point to it. And he basically would be like, “That’s what my competition is doing. They’re going on these trips. I’m not doing that.”

Interviewer (09:19):

And that’s smart.

Mike Lester (09:20):

It was kind of neat. Yeah.

Interviewer (09:20):

Very transparent.

Mike Lester (09:22):

But anyway, this is a good thing for investors, particularly people in retirement or close to it, it’s intended to help protect you from advisors who maybe don’t have your best interests at heart. And this goes back to the conversation for work with a fiduciary, but then also be careful about products, right? So fiduciaries are supposed to put your needs out of their own, but at the same time, there are fiduciaries out there or people who call themselves fiduciaries that every time they write a financial plan for you or make an investment recommendation, sometimes seriously, you mentioned an annuity, there’s an annuity tied to it, or some other product tied to it. Be careful because typically those products have some benefits to that advisor. Maybe it’s a trip or something on the backend. So ask yourself, is it right for me or is it right for my advisor? And go from there. I appreciate sitting down with individuals and just having a conversation about all of the investment options that are available to them, helping individuals make informed decisions, because then you’re confident in the decision and ultimately it’s going to be the right thing.

Speaker 1 (10:22):

If you would like to have a comprehensive financial plan and an analysis of your current portfolio, go ahead and visit our website @retirement.tips forward slash plan. And we can do that for you complimentary. Thanks so much for joining us on today’s show. Be sure to subscribe to our podcast. Visit our website @retirement.tips for more free retirement planning and investment resources. Thanks for tuning into today’s show and we’ll see you next time on the Retirement Wealth Podcast. Exposure to ideas and financial vehicles discussed should not be considered investment advice or recommendation to buy or sell any financial vehicle. This information should not be considered tax or legal advice. Individuals should consult with professionals specializing in the fields of tax legal accounting or investments regarding the applicability of this information to their situation. Past performance is not a guarantee of future results. Investments may fluctuate And when redeemed maybe worth more or less than originally invested.