RPF0514-Friday_QA
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00:00:30.000 | It's Friday. That means live Q&A.
00:00:34.000 | ♪
00:00:50.000 | Welcome to Radical Personal Finance,
00:00:52.000 | the show dedicated to providing you with the knowledge,
00:00:54.000 | skills, insight, and encouragement you need
00:00:56.000 | to live a rich and meaningful life now
00:00:58.000 | while building a plan for financial freedom in 10 years or less.
00:01:01.000 | My name is Joshua and I am your host.
00:01:03.000 | And today we do a live Q&A show.
00:01:05.000 | This is where we have an open phone line
00:01:07.000 | and callers call in and ask anything you want.
00:01:09.000 | It can be philosophical, it can be tactical,
00:01:12.000 | it can be practical or wildly useless.
00:01:15.000 | That's up to you.
00:01:17.000 | ♪
00:01:22.000 | I guess wildly useless is probably a little bit of an overstatement.
00:01:25.000 | It's hard to think of why anybody would call in
00:01:27.000 | and talk about anything that's wildly useless.
00:01:29.000 | But these shows are open so much in the same way
00:01:32.000 | that other shows may do an open line Friday
00:01:34.000 | or any discussion that you would like to have,
00:01:37.000 | then these shows are available for you.
00:01:39.000 | I do not set the agenda.
00:01:41.000 | I do not screen the calls other than to have a quick idea
00:01:44.000 | of who's calling and what they want to talk about
00:01:46.000 | because I serve as my own phone screener.
00:01:48.000 | But these shows are open to you.
00:01:50.000 | If you would like to join for a show,
00:01:53.000 | you'll notice I'm not giving you the phone number right now.
00:01:56.000 | The reason for that is I do screen the calls
00:01:58.000 | simply by people who support the show as patrons.
00:02:01.000 | Patrons of the show are those who voluntarily say,
00:02:03.000 | "Josh, we get a lot of value from what you're doing.
00:02:05.000 | We appreciate what you're doing,
00:02:07.000 | and we want to send some money your way."
00:02:09.000 | If you do that at radicalpersonalfinance.com/patron,
00:02:12.000 | radicalpersonalfinance.com/patron,
00:02:14.000 | you get access to these call-in, the time, the number, etc.,
00:02:18.000 | so that you can call in.
00:02:20.000 | So today, let's go right to it.
00:02:23.000 | Shiv in Washington.
00:02:24.000 | Welcome to Radical Personal Finance.
00:02:25.000 | How can I serve you today, sir?
00:02:28.000 | - Hey, Josh.
00:02:29.000 | Thanks again for the show and everything that you do.
00:02:33.000 | Today I have a question about frontloading the 401(k) account.
00:02:38.000 | I think it's a good question to consider at the start of the year.
00:02:41.000 | I want to know your views about it.
00:02:43.000 | What are the pros and cons of frontloading?
00:02:46.000 | What factors one should consider
00:02:48.000 | in deciding whether to frontload a 401(k) account or not?
00:02:51.000 | - Have you ever done this in the past yourself
00:02:53.000 | or is it just more of a thoughtful question
00:02:56.000 | to understand a little bit more about it?
00:02:59.000 | - I'm planning to do it this year.
00:03:02.000 | That's how I'm arriving at this question.
00:03:06.000 | - Right.
00:03:07.000 | So for those who aren't familiar with the nomenclature,
00:03:11.000 | the idea of frontloading a 401(k) account is this.
00:03:15.000 | Each year, you have a total maximum amount
00:03:18.000 | that you can make in terms of contribution limits.
00:03:21.000 | And in 2018, that number for people who are under the age of 50
00:03:28.000 | is $18,500.
00:03:31.000 | That is the total allowable contribution limit
00:03:34.000 | for employees who are under the age of 50.
00:03:36.000 | Of course, if you're over 50 and available,
00:03:39.000 | then the catch-up contribution limit will be $6,000.
00:03:42.000 | So that would be $6,000 in addition to the $18,500,
00:03:47.000 | which would bring you up to a total of $24,500.
00:03:50.000 | So generally, what most of us would do,
00:03:53.000 | especially if we're getting into the world of maxing out an account,
00:03:56.000 | is we would sit down and we would figure out
00:03:58.000 | how much per month we could contribute
00:04:01.000 | if we're going to max it out at $18,500.
00:04:04.000 | So you would take $18,500 divided by 12,
00:04:07.000 | and you would come up with a number of $1,541.67 per month.
00:04:13.000 | And then you would sit down with your pay
00:04:15.000 | and you would try to figure out,
00:04:17.000 | well, how much of my income does $1,541.67 per month count as?
00:04:24.000 | So if I had $100,000,
00:04:27.000 | what percentage of my income would I need to contribute
00:04:30.000 | to equal $1,541.67?
00:04:35.000 | So if we use a number like $100,000, it's relatively simple, of course.
00:04:38.000 | $18,500 out of a $100,000 salary is 18.5%.
00:04:44.000 | So you would figure it out, and I just figured the formula out.
00:04:48.000 | So if you take your--let's just stick with that $18,500 number.
00:04:53.000 | Multiply 18,000--take $18,500 and divide it by your salary,
00:04:57.000 | and that will give you the percentage.
00:04:59.000 | So if you have $18,500 and you divide--
00:05:06.000 | let's say your annual salary is $75,000.
00:05:09.000 | You take $18,500, divide it by $75,000,
00:05:14.000 | which gives you 24.7% of your income,
00:05:18.000 | and then you need to take that and figure out what that would--
00:05:21.000 | if you're doing it on a percentage basis,
00:05:23.000 | it would be the same amount,
00:05:25.000 | whether you're paid biweekly, monthly, or however it works.
00:05:28.000 | So to figure out how to take the total maximum contribution,
00:05:31.000 | you just simply divide the maximum contribution by your salary,
00:05:33.000 | and that gives you the percentage of your income.
00:05:36.000 | Now, most of the time, the normal way to contribute to a 401(k) account
00:05:39.000 | would be to spread those contributions out.
00:05:42.000 | If you were earning $100,000,
00:05:44.000 | you would just contribute 18.5% of your income each pay period.
00:05:49.000 | Whether you're paid monthly, biweekly, that won't matter.
00:05:51.000 | Each pay period into the account if you do it on a percentage basis.
00:05:55.000 | The idea of front-loading, however, is to say,
00:05:58.000 | "How could I contribute and get all of the money into my account
00:06:03.000 | as quickly as possible?"
00:06:05.000 | If your annual income were $100,000,
00:06:09.000 | but you were the kind of person that maintained $100,000
00:06:12.000 | in your checking account,
00:06:15.000 | you wouldn't necessarily need to have all of the money right now.
00:06:19.000 | And so you could front-load your contributions to the 401(k) account.
00:06:23.000 | If you're--for sake of simpler math--
00:06:27.000 | if your monthly before-tax income were $10,000 per month,
00:06:33.000 | then you could call up your HR department and say,
00:06:36.000 | "In January, I want you to put all of my $10,000 income
00:06:40.000 | into my 401(k) account."
00:06:42.000 | And then in February, you could tell them,
00:06:44.000 | "I want you to put $8,500 of my annual income
00:06:47.000 | into my 401(k) account."
00:06:50.000 | And during those two months,
00:06:51.000 | you simply spend the money out of your checking account
00:06:53.000 | on your expenses.
00:06:55.000 | And by the end of February, in my example,
00:06:57.000 | your 401(k) account is fully funded.
00:07:00.000 | Now, what are the benefits of this?
00:07:01.000 | Well, the first obvious benefit
00:07:03.000 | is that your money is invested more quickly.
00:07:07.000 | So if, on the whole,
00:07:09.000 | the value of your investments is going to increase--
00:07:13.000 | and we generally assume that it is
00:07:15.000 | because, of course, that's why we're investing
00:07:17.000 | in the first place--
00:07:18.000 | and then, on the whole,
00:07:19.000 | the general trend for investments is positive--
00:07:23.000 | by having your money invested earlier--
00:07:25.000 | I'm going to rephrase--
00:07:26.000 | on the whole, the general trend for investments,
00:07:28.000 | such as the publicly traded equity markets
00:07:31.000 | in the United States,
00:07:32.000 | is generally positive.
00:07:34.000 | By having your money invested earlier,
00:07:36.000 | you probably get a chance to take advantage of
00:07:40.000 | a higher likelihood that your money will go up.
00:07:43.000 | If all of the money were invested in January every year,
00:07:46.000 | instead of spread out through the year,
00:07:48.000 | on the whole, mathematically,
00:07:49.000 | we would expect there to be a higher rate of return.
00:07:53.000 | Could be wrong in some random years.
00:07:55.000 | Could be that in January of 2018,
00:07:57.000 | as we record this,
00:07:58.000 | the markets are high,
00:07:59.000 | and then in June, all of a sudden, they plummet.
00:08:02.000 | But, on the whole,
00:08:03.000 | we would expect them to go up.
00:08:04.000 | So by investing your money more quickly,
00:08:07.000 | you are having the opportunity
00:08:09.000 | to have the accounts grow more quickly
00:08:13.000 | and potentially be worth more.
00:08:16.000 | This could, of course, push your taxes back.
00:08:20.000 | Your income is all going in up front,
00:08:22.000 | so you have lower expected taxes,
00:08:24.000 | at least in the beginning.
00:08:26.000 | And this would be useful with regard to
00:08:31.000 | if you knew that you might be fired
00:08:34.000 | or you might leave your job,
00:08:35.000 | you at least would be able to have access
00:08:37.000 | and have the money there.
00:08:38.000 | This could also be a useful strategy.
00:08:40.000 | I don't know if it would hold up in bankruptcy court,
00:08:42.000 | but if you were trying to get more money
00:08:44.000 | into a 401(k) account,
00:08:45.000 | to have an asset-protected strategy,
00:08:48.000 | I don't know if that would ever be considered
00:08:49.000 | to be structuring something
00:08:52.000 | to avoid the claims of creditors,
00:08:53.000 | but it's a useful strategy to know of
00:08:55.000 | to get as much money into your 401(k) as possible.
00:08:58.000 | Downsides to it.
00:09:00.000 | The only downsides that I can think of
00:09:01.000 | is the obvious ones of,
00:09:03.000 | number one, you may need the money.
00:09:05.000 | That can be a problem.
00:09:07.000 | If you don't have the money in your checking account
00:09:09.000 | to cover your expenses,
00:09:10.000 | which most people don't,
00:09:11.000 | then they need the money.
00:09:13.000 | But perhaps the more important one would be
00:09:15.000 | to figure out how your employer
00:09:17.000 | actually calculates their employer match.
00:09:21.000 | Some employers have a system wherein
00:09:24.000 | they'll match your contributions
00:09:27.000 | based upon the total amount
00:09:28.000 | that you put into the account.
00:09:30.000 | In that case,
00:09:31.000 | when you make your January contribution,
00:09:33.000 | they may also make their employer contribution.
00:09:37.000 | On the flip side,
00:09:38.000 | some employers have the system
00:09:40.000 | where they match you on an ongoing basis.
00:09:42.000 | And so if they only match you
00:09:43.000 | on a small percentage basis over time,
00:09:46.000 | then, for example, 5%,
00:09:49.000 | they match you the first 5% you put in,
00:09:51.000 | they'll go ahead and match you 2.5%.
00:09:54.000 | Well, you're not putting 5% of your salary in in January.
00:09:56.000 | You're putting in 100% of your salary in January.
00:09:59.000 | They're still only going to match you 2.5%,
00:10:01.000 | and you might run out of an employer match.
00:10:04.000 | But those would be the only major considerations
00:10:07.000 | that I can think of
00:10:08.000 | as far as things to be careful of.
00:10:10.000 | Shiv, did I miss anything that you're aware of?
00:10:14.000 | I think that was it.
00:10:16.000 | I had the thought of employer match as well,
00:10:19.000 | and that's how I asked you the question.
00:10:21.000 | I think now I need to get in touch with my HR
00:10:25.000 | and understand how they do the contributions,
00:10:28.000 | their part of contributions.
00:10:30.000 | Yeah, I need to--
00:10:32.000 | that would be very important.
00:10:34.000 | It would be important if you were going to pursue this,
00:10:36.000 | if I were going to do it,
00:10:38.000 | I would physically talk to the director of human resources.
00:10:42.000 | I would explain to that person the actual plan,
00:10:45.000 | the actual numbers,
00:10:47.000 | and I would make sure that administratively
00:10:49.000 | that they would be able to handle that.
00:10:51.000 | I would make sure and verify it
00:10:54.000 | from just the details of getting the checks cut.
00:10:57.000 | You're going to have to submit multiple forms.
00:10:59.000 | You'd have to submit a form here in January to them,
00:11:02.000 | and then you'll have to submit a new form in March,
00:11:05.000 | and you would have to verify it
00:11:07.000 | with regard to the employer match.
00:11:09.000 | But I would definitely make it a personal conversation,
00:11:12.000 | explain what you're doing and why
00:11:14.000 | so that they're aware of it
00:11:16.000 | and so they can make sure there are no problems.
00:11:18.000 | I'm not aware of any problems with the strategy.
00:11:20.000 | How will it work out?
00:11:22.000 | Depends on the markets.
00:11:24.000 | It's one of those things--
00:11:26.000 | It's one of those things where in some ways
00:11:30.000 | you'd almost think that you could do the same strategy
00:11:34.000 | except backload it.
00:11:35.000 | If you had a way to predict the markets,
00:11:37.000 | you could do the same strategy and say,
00:11:39.000 | "Well, I'm just going to not take my income
00:11:41.000 | in November and December."
00:11:43.000 | Perhaps there would be someone who could--
00:11:46.000 | there would be someone who could use this idea aggressively
00:11:49.000 | and say, "I'm going to wait for a market correction,
00:11:51.000 | and if it gets to June and I see that the markets are down,
00:11:54.000 | that's the time I'm going to make 100% contributions."
00:11:57.000 | To me, the whole thing's a little bit unwieldy.
00:11:59.000 | I think frontloading is probably the way to go
00:12:01.000 | if you're going to pursue an aggressive strategy like this.
00:12:03.000 | Either that or just keep it straight and simple.
00:12:05.000 | I don't see any problem with it, though,
00:12:07.000 | other than the simple scenario of the employee match.
00:12:10.000 | So those are my thoughts, Shiv.
00:12:12.000 | Good for you for being in the situation
00:12:15.000 | with your personal finances that you can do that.
00:12:18.000 | You can be confident that given those considerations,
00:12:21.000 | you are in the top few percent of the richest people in the world
00:12:25.000 | who have the ability to forego their income for a few months
00:12:28.000 | while they make 401(k) contributions.
00:12:32.000 | Anything else, Shiv, before I go on to the next call?
00:12:35.000 | Nope, that's all. Thanks for the info.
00:12:37.000 | Thanks for calling.
00:12:38.000 | All right, we go to Tyson.
00:12:40.000 | Tyson, welcome to Radical Personal Finance.
00:12:42.000 | How can I serve you today, please?
00:12:44.000 | Yeah, I just had a general question
00:12:46.000 | after moving from North Carolina out to Utah.
00:12:49.000 | For about 10 years, I had a financial advisor,
00:12:52.000 | and they're based out of North Carolina.
00:12:54.000 | But throughout those years, I put money aside
00:12:56.000 | into a money market account that they set up for me.
00:12:59.000 | And now it's about a quarter of a million dollars.
00:13:02.000 | And I'm not really utilizing their services much.
00:13:05.000 | It's just set aside in a kind of a target date fund,
00:13:09.000 | 80% equities, 20% bonds, not really exciting, which is fine.
00:13:13.000 | I don't really play in the market too much.
00:13:16.000 | But the asset center management fee takes away from that.
00:13:19.000 | When you look over the last 10 years,
00:13:21.000 | the return probably is a little bit less than just a standard fund
00:13:25.000 | that I could have bought myself through Vanguard or Fidelity.
00:13:28.000 | So my question is, is there either of those two,
00:13:32.000 | Fidelity versus Vanguard, for a straightforward target date fund
00:13:35.000 | that you prefer, would recommend,
00:13:37.000 | over the other, the reasons for that, and the secondary question,
00:13:40.000 | if I pull the money out of the account set up by my financial advisor,
00:13:45.000 | is there a tax implication to transfer that over to Fidelity or Vanguard?
00:13:50.000 | Let's answer number two first because it's easy.
00:13:53.000 | No, there's not.
00:13:55.000 | You can fire your financial advisor at any point in time,
00:13:59.000 | and you can transfer the assets from one advisor to another advisor
00:14:04.000 | without any tax implications.
00:14:07.000 | The mechanism for doing so is standard.
00:14:09.000 | It will either be your brokerage company will just send the check directly
00:14:13.000 | to your next brokerage company, or they will send the check to you,
00:14:17.000 | and you will just forward it on to the next brokerage company.
00:14:20.000 | But there are no tax implications as long as you're going from like account
00:14:24.000 | to like account.
00:14:25.000 | If you're moving money from an IRA to an IRA, there are no tax implications.
00:14:29.000 | In terms of a secondary question, which you didn't ask,
00:14:32.000 | but I want to answer in terms of fees, generally,
00:14:36.000 | if you're dealing in the world of fee-based accounts where you're paying a fee
00:14:40.000 | that's calculated on assets under management,
00:14:43.000 | then there are no additional fees for that.
00:14:46.000 | If you have some accounts that are purchased on a commission basis,
00:14:52.000 | then you would need to look to make sure to see if there are any fees
00:14:55.000 | associated with transferring those, whether there is a surrender charge
00:15:00.000 | of some kind.
00:15:01.000 | Surrender charges are common on things like annuities,
00:15:04.000 | but on mutual funds you usually don't have surrender charges,
00:15:06.000 | but you want to check the class of shares that you have
00:15:09.000 | and just see if there are any costs associated with making those changes.
00:15:14.000 | But if you're paying money on a percentage basis,
00:15:16.000 | there are basically going to be no fees for that change.
00:15:22.000 | Now, whether or not you should actually do it is a separate question.
00:15:26.000 | Of course, that's the more valuable approach.
00:15:31.000 | So what value, Tyson, do you believe that a financial advisor brings to your life
00:15:38.000 | and to your finances?
00:15:41.000 | Well, initially when I got with financial advisors about 10 years ago
00:15:45.000 | and I finished out school and I needed some guidance as far as whole value life
00:15:50.000 | insurance, cash value life insurance.
00:15:52.000 | I had quite a bit of money coming in at the time
00:15:56.000 | and not a lot of places to put it necessarily.
00:15:59.000 | So at the time I did need some guidance with where to put the money
00:16:03.000 | and how to be tax efficient with my money.
00:16:08.000 | So at the time it was a great help.
00:16:11.000 | Now we're 10 years down the road and all those things have been established,
00:16:14.000 | I maybe talk with an advisor once every year to year and a half.
00:16:20.000 | It's kind of one of those kind of set it, forget it situations
00:16:22.000 | where everything is now set.
00:16:24.000 | I don't foresee any big changes in the next 10 to 15 years of my life.
00:16:28.000 | So I'm just trying to think of that 1% per year, times that by 10 to 20 years.
00:16:35.000 | I don't know if I'm getting that value out of having the advisor anymore.
00:16:39.000 | So probably not.
00:16:40.000 | If this advisor is not doing a competent enough job of demonstrating their value
00:16:44.000 | to you, they're probably not bringing the value.
00:16:47.000 | Now the way that I would approach it, I would talk to the advisor and tell them
00:16:51.000 | I'm starting to question the value proposition here.
00:16:54.000 | And they may or may not respond to that.
00:16:58.000 | The value of your accounts may not be sufficient to where they actually want
00:17:03.000 | to work with you or they would find it to be a valuable thing.
00:17:07.000 | Or the value of your accounts may be there and they just haven't realized
00:17:09.000 | they're not doing a good job serving you.
00:17:13.000 | So the way that I answer the question is you have to look to see
00:17:16.000 | is this advisor really giving me value.
00:17:19.000 | Now I don't believe that the argument is best stated either I'm the type of person
00:17:26.000 | that uses a financial advisor or doesn't use a financial advisor.
00:17:30.000 | Some people believe that financial advisors bring no value.
00:17:35.000 | A couple years ago I went round and round on this with my friend Jim Collins,
00:17:40.000 | who is a popular blogger at the website JL Collins NH.
00:17:46.000 | And he's published a book last year called The Simple Path to Wealth.
00:17:50.000 | And Jim is very well known in the personal finance writing space for being an advocate
00:17:57.000 | that in essence everybody should have their investments managed with Vanguard.
00:18:01.000 | And a financial advisor brings essentially no value.
00:18:06.000 | And I love what he does.
00:18:08.000 | He does a great job of bringing people to a place of confidence in their decisions.
00:18:14.000 | He makes the investing process simple.
00:18:16.000 | He does a great job.
00:18:17.000 | But Jim and I used to argue because I come from the background of being a financial advisor.
00:18:21.000 | He would say, "Well, financial advisors don't bring value
00:18:23.000 | and here's all the data that demonstrates that they don't bring value."
00:18:26.000 | And I would say, "Well, I think the data is flawed."
00:18:29.000 | And usually the way that this argument is based is to say,
00:18:34.000 | "Does a financial advisor help you to choose investments that are going to make a higher rate of return
00:18:39.000 | than the investments that you're choosing on your own?"
00:18:42.000 | This used to be how the money management and the financial advice space would go.
00:18:46.000 | You would meet with somebody from Merrill Lynch and they would come and they would say to you,
00:18:50.000 | "Look, I can pick better stocks than the other person can."
00:18:53.000 | A lot of that has changed.
00:18:55.000 | Now, it's not fully changed.
00:18:56.000 | There are still individual money managers and advisors that work with big brokerage companies,
00:19:02.000 | small brokerage companies who do still do portfolio management in that way.
00:19:07.000 | But the industry and the type of thing that you're describing has changed.
00:19:10.000 | And if your advisor has your money in target date retirement funds,
00:19:15.000 | by definition that advisor is not bringing you additional, what's called alpha,
00:19:21.000 | additional outperformance with your portfolio.
00:19:24.000 | Your target date retirement funds could be purchased with this advisor paying their 1% fee
00:19:29.000 | or it could be purchased without this advisor not paying the 1% fee.
00:19:33.000 | So if you're going to continue paying costs and fees, the only reason for you to do that would be
00:19:39.000 | if you're getting value that's in excess of those costs or fees.
00:19:42.000 | And this is going to depend not on the structure.
00:19:44.000 | This is going to depend on the advisor.
00:19:46.000 | So when I used to manage money, when I actually left the firm I was with,
00:19:52.000 | I was in the process of establishing a new registered investment advisory firm.
00:19:59.000 | And one of the pieces that I came across was at that time was some of Vanguard's research on the subject.
00:20:09.000 | And I'm going to cite that to you here.
00:20:11.000 | If you go on and you do a website called – sorry, you do a web search for Vanguard,
00:20:16.000 | the value of a financial advisor, you'll find a white paper that Vanguard published.
00:20:20.000 | And I'll just use their categories as an example because Vanguard, of course,
00:20:24.000 | is famously known as the low-cost mutual fund provider.
00:20:29.000 | Jack Bogle, everything was about index funds exclusively.
00:20:32.000 | That's what they're known for is low-cost index fund advice.
00:20:36.000 | They researched this and they found that in their assessment that there were a number of different areas
00:20:42.000 | where an advisor could bring value.
00:20:46.000 | So the first – and here were the different categories that they thought.
00:20:51.000 | Number one, a financial advisor could be able to bring help to the client by helping them to make a suitable asset allocation choice
00:21:04.000 | using broadly diversified funds and exchange-traded funds.
00:21:08.000 | That's their first part of their strategy, so helping the client to come up with a suitable asset allocation strategy.
00:21:14.000 | And they believe that there is value there.
00:21:18.000 | It is significant, but it's hard to actually quantify this.
00:21:21.000 | Now, my example of this is as an advisor, I think that I frequently would be able to talk somebody into pursuing
00:21:30.000 | a more aggressive form of portfolio design based upon my ability to allay some of their fears.
00:21:40.000 | And if I can move somebody from a portfolio that has an expected return of 5% to a portfolio that has an expected return of 7%,
00:21:50.000 | and if I charge them – and this, again, is overly simplistic – but if I charge them 1% for that process, that could be helpful.
00:21:58.000 | But helping somebody to develop a suitable asset allocation could be really, really helpful to them.
00:22:03.000 | But they actually don't quantify that one exactly.
00:22:06.000 | They say it's something greater than zero in their analysis.
00:22:09.000 | In their little footnote in the paper, they say, "The value is significant, but it's too unique to each investor for us to quantify."
00:22:15.000 | The second area that they believe that an advisor can bring value is to help the client do cost-effective implementation
00:22:23.000 | of their investment strategy by choosing funds and investment products that have low expense ratios.
00:22:29.000 | And their analysis says that that typically adds about 40 basis points.
00:22:32.000 | So, again, 40 basis points is 0.40% return, 40 basis points of value for a client.
00:22:40.000 | The third area of help would be rebalancing.
00:22:43.000 | And so they believe that because an advisor may be more prone to help the client rebalance and rebalance consistently,
00:22:50.000 | that could add about 35 basis points of help and additional alpha to the portfolio.
00:22:58.000 | The next area is what they call behavioral coaching.
00:23:01.000 | The idea is by helping a client to make different decisions on their investment choice,
00:23:07.000 | by helping a client to make different decisions on their willingness to bear risk,
00:23:11.000 | on helping a client to make different decisions in terms of how much money they save and contribute,
00:23:16.000 | and most importantly, by helping a client to maintain, to stay invested, to stay in good investments
00:23:24.000 | when everyone's saying, "Take all your money out of your 401(k) and put it all in Bitcoin because you're going to make millions,"
00:23:30.000 | and by helping a client stay invested when the sky is falling and you need to take all your money and put it into gold,
00:23:38.000 | by doing that, then a client could bring 150 basis points of value to --
00:23:45.000 | excuse me, an advisor could bring about 150 basis points of value to a client.
00:23:50.000 | The next category of value is asset location.
00:23:53.000 | So can the advisor help the client to efficiently locate their assets in the place that makes the most sense to them?
00:24:03.000 | The simplest example here would be that you want your capital gains investments.
00:24:09.000 | If you have a choice between some assets inside of a retirement account and some assets outside of a retirement account,
00:24:15.000 | then financial advisor 101 is that you always put your capital gains investments outside of the retirement account
00:24:23.000 | and you put your ordinary income investments inside the retirement account.
00:24:26.000 | So you put your bond portfolio in the retirement account because the retirement account is going to be paying ordinary income taxes,
00:24:32.000 | and then you put your stock portfolio or other long-term capital gains property outside of the retirement account
00:24:38.000 | because that's where you can pay taxes at capital gains rates versus ordinary income rates.
00:24:43.000 | So that being 101, as far as asset location strategy,
00:24:48.000 | then an advisor can add somewhere between zero and 75 basis points of value.
00:24:54.000 | The last two categories of value that Vanguard identified was spending strategy,
00:24:59.000 | helping a client to do an intelligent withdrawal plan from their portfolio.
00:25:04.000 | They said that that could be anywhere from zero to 110 basis points of value.
00:25:09.000 | And then in terms of thinking about investing from a total return strategy versus an income-only strategy,
00:25:16.000 | the idea is many people look at their investment portfolio and they say, "I'm only going to spend the income,"
00:25:22.000 | when in reality some of your best investments don't generate a lot of income.
00:25:26.000 | What they do generate is growth, capital gains, but that's spendable money.
00:25:31.000 | And so you should look at your portfolio in terms of total return, not just in terms of income.
00:25:37.000 | You wouldn't buy the property next door that has no future value.
00:25:41.000 | It would be better for you to buy a property that has some income and significant potential for appreciation
00:25:48.000 | versus just buying a property that's just going to produce income for you but is not going to go up in value.
00:25:52.000 | And that's value, but it's value that's greater than zero, but that's so unique to each investor it's hard to quantify.
00:26:00.000 | But in terms of their total potential value that they calculated a good advisor can add,
00:26:07.000 | it would come out to be about 3% in net returns, something like that, about 3% additional growth and additional returns.
00:26:14.000 | Now again, this is coming from Vanguard, so I think that gives an air of credibility to the research.
00:26:20.000 | It's well done academically, but that helps to articulate the value of a financial advisor.
00:26:27.000 | So the question is not does a financial advisor have value or not.
00:26:34.000 | I think the question is, number one, am I the kind of person who would gain that type of value from an advisor?
00:26:42.000 | And number two, is my current advisor the type of advisor who's delivering that type of value?
00:26:50.000 | And neither one of those are gimme's.
00:26:52.000 | So you could be the kind of person who would gain value from an advisor, or you could be the kind of person who just says,
00:26:57.000 | "No, I can figure that out myself."
00:26:59.000 | And number two is this advisor may or may not be the type of advisor that's helpful.
00:27:03.000 | So after that little speech, Tyson, how would you grade your current advisor?
00:27:10.000 | I think right now probably not one that is in alignment with what I need to do.
00:27:16.000 | And from what you just spoke about, I don't believe I'm getting those kind of, oh, I guess returns on the advice I'm getting from them,
00:27:24.000 | being that I'm really not getting any advice.
00:27:26.000 | So maybe instead of saying no advisor, maybe it's time to shop for a different advisor.
00:27:30.000 | That might be a better approach.
00:27:32.000 | So what I would do if I were you, given that you've moved, I would shop for an advisor,
00:27:37.000 | and as I did that, I would interview them and let them do their job and see if they can take the job.
00:27:45.000 | I think you should view a financial advisor as somebody who serves you, somebody who works for you.
00:27:51.000 | And that means if you're going to hire somebody who works for you, there should be an interview process.
00:27:55.000 | And so you should interview them.
00:27:57.000 | Start, of course, with Paladin Registry, radicalpersonalfinance.com/paladin, P-A-L-A-D-I-N.
00:28:03.000 | Start with those advisors, but look around, ask for some recommendations from people that you know and respect,
00:28:08.000 | and go and perform an interview process with the advisors.
00:28:12.000 | Tell them your situation. Tell them what you're looking for.
00:28:15.000 | Tell them your concerns and be clear with them on what your convictions are about your approach to finances and not.
00:28:21.000 | At the end of the day, you'll spend some 10, 20 hours of your life interviewing people.
00:28:29.000 | And then at the end of it, sit down and talk with your wife and say, "Well, do we get value from this person?"
00:28:35.000 | You may find somebody who brings you value, and you may find that at the end of the day,
00:28:39.000 | "No, I'm just going to go ahead and move my money, buy a target date retirement fund with another firm, do it cheap, do it myself, and be fine."
00:28:48.000 | I don't carry water for the financial advice industry.
00:28:52.000 | I believe that financial advisors, it's our job to, one, bring value, and two, consistently demonstrate that value to our clients
00:29:03.000 | in the same way that every other industry has to do.
00:29:08.000 | And so I believe that good advisors will embrace that challenge and will deliver on it.
00:29:14.000 | And 80% of the advisors won't and don't deserve their clients, don't deserve the business.
00:29:20.000 | And I'd be happy to see them all disappear out of the business and go find something else where they can actually bring people value
00:29:27.000 | so that they can feel better about the work that they do.
00:29:31.000 | Josh, I appreciate your time and thank you. That brought a lot of clarity and gave me something to think about and to work on in the near future. I appreciate it.
00:29:39.000 | Thank you for calling in. And for the rest of us, I would just say that I – how do I reinforce the point without repeating it?
00:29:48.000 | Make sure that you're gaining maximum value from everything that you do. That should be the point.
00:29:56.000 | That applies to me and Radical Personal Finance. If you're not getting value from my show right now, pause, delete, move on.
00:30:07.000 | Find something else that is gaining you value.
00:30:09.000 | Now, I'm going to work day and night to try to deliver on that for you, but there's nothing sacred about that.
00:30:16.000 | It's always funny. Frequently, I get reviews and emails from people who say, "Well, your show just doesn't do it for me anymore and I'm going to go on and listen to some other show."
00:30:28.000 | I always just chuckle a little bit because I have subscribed and unsubscribed from so many podcasts over the years,
00:30:36.000 | and yet I have never written to somebody to say, "I'm unsubscribing from you."
00:30:42.000 | I've often think about that. I'm not worried – I hope this doesn't sound overly arrogant – but I am not worried at all about the people who write me a note
00:30:51.000 | or who put a nasty review and say, "I used to listen to Joshua's show, but I'm done with it." I don't worry about them.
00:30:58.000 | What I worry about is the many, many people who just said, "Pause, delete, and move on."
00:31:03.000 | My job is not to worry about the people who get all angry about something and just post a review.
00:31:08.000 | My job is to worry about if I see trends of many more people who don't say a thing that just move on.
00:31:16.000 | Now, to be clear, just like if I were a restaurant owner, it would behoove me as a restaurant owner to pay careful attention to my Yelp reviews
00:31:25.000 | and to pay attention to the traffic coming in and out and to see if there's a correlation between those two things.
00:31:30.000 | That would be very, very important to me as a restaurant owner.
00:31:33.000 | But I shouldn't automatically assume that if I get a bad Yelp review but my dining room is full, I shouldn't automatically listen too deeply to that one particular Yelp review.
00:31:43.000 | In the same way as a podcast host, I look to see, "Is my dining room full and what are my Yelp reviews?" by way of analogy.
00:31:52.000 | But the point is, get value from things. If you're not getting value from your gym membership, if you're not getting value from your personal trainer,
00:31:58.000 | if you're not getting value from your accountant, go and hire somebody else.
00:32:03.000 | I am a firm proponent and an advocate for capitalism. What is it that makes capitalism so valuable?
00:32:11.000 | It's competition. The fact that if you do not compete effectively in the marketplace, over time, your competitors will take all your business away from you.
00:32:22.000 | What does this lead to? Winning for the consumers. Think about this.
00:32:28.000 | The car that you're driving right now today could very quickly and easily, without any major modifications and for the most part without any major work,
00:32:39.000 | could easily go to 200,000 to 300,000 miles without many significant mechanical problems.
00:32:47.000 | Most vehicles can do that. 30 years ago, that was not the case. 30 years ago, the average car couldn't get much past 100,000 miles.
00:32:58.000 | What made the difference? Many things, but the basic of it was competition.
00:33:04.000 | Car manufacturers prior to, before the 1970s, they were developing their skills, but there was a revolution in the United States
00:33:13.000 | where the American car manufacturers just sat on their laurels and stopped improving things,
00:33:19.000 | and the Japanese car manufacturers ate their lunch and dramatically improved vehicles, vehicle longevity, etc.
00:33:26.000 | Now, since then, American car manufacturers have come fighting back and produced great products today that are well-served,
00:33:33.000 | but the winner in that competition was not Ford or GM versus Honda or Toyota.
00:33:39.000 | The winner in that competition was the consumer, you and me, and it's the same in every other industry.
00:33:45.000 | So in the world of financial advice, what I am quite happy to see is the fact that financial advisors have been exposed to tremendous competition.
00:33:54.000 | Vanguard has eaten everybody else's lunch.
00:33:58.000 | If you look at the amount of assets that Vanguard owns and if you look at the success that Vanguard generally,
00:34:05.000 | Jack Bogle specifically, all of his team has had in convincing the marketplace of the value of the Vanguard strategy,
00:34:11.000 | he was the laughingstock of the industry when he started, and he has had the best revenge of all,
00:34:18.000 | which is completely vanquishing basically your enemy.
00:34:22.000 | Now, what that's done is that's brought tremendous pressure. It's brought pressure.
00:34:27.000 | What's happened in the industry? Fees have gone down. Expenses have gone down.
00:34:31.000 | From every company, fees and expenses have gone down.
00:34:35.000 | Now, you'll find plenty of people that charge high fees, but now they have to justify those fees.
00:34:41.000 | It's not automatic. Gone are the days pictured in the pursuit of happiness where the broker would just call you up and say,
00:34:47.000 | "Hey, listen, I've got some bunch of shares of such and such a stock," and you would believe it, and that would be your big thing.
00:34:53.000 | The world of modern money management has dramatically improved, and it will just continue to improve.
00:35:00.000 | Now we face a danger that too much money is passively managed. People aren't paying attention.
00:35:07.000 | Know what will happen? That will create new opportunities for new investors who say, "No, I can do better.
00:35:13.000 | I can find the inefficiencies," and the money will flow to them.
00:35:16.000 | The person who wins in competition is you, you, the customer.
00:35:24.000 | So you hold all the power. Act like it. Don't give in to old, outdated ideas. Don't give in to old approaches.
00:35:33.000 | Act like you've got the power because you really do.
00:35:36.000 | Only two callers on today's show. Plenty of room here, as you can see, if you would like to call into a future show.
00:35:42.000 | Sometimes I have a lot of calls, and sometimes I don't have a lot of calls with these shows,
00:35:46.000 | but if you want to talk with me, if you want to talk about an area of financial planning or money management,
00:35:50.000 | early retirement, financial independence, this is your best way to do it. I'd love to have many more of you call.
00:35:55.000 | Last year we did a few shows where I opened them up to the wide audience and took a half a dozen, a dozen calls in an hour,
00:36:00.000 | and those were fun. So come on by RadicalPersonalFinance.com/patron and sign up there, RadicalPersonalFinance.com/patron.
00:36:08.000 | Thank you to the several new of you who have done that so far this year.
00:36:11.000 | I will be here to continue earning your support and to continue earning your compensation.
00:36:17.000 | Thank you for those of you who do that. RadicalPersonalFinance.com/patron.
00:36:21.000 | Other announcements? I've got about a minute of music. Let me make sure to see if I have something useful to share with you in the next minute.
00:36:28.000 | I hope you've enjoyed the discussion I've had on expenses. I hope that's been useful to you.
00:36:33.000 | For many of us here in January, one of the best things that you can do with regard to your 2018 financial household returns is to cut expenses.
00:36:43.000 | If you look at them individually, the impact of any specific expense is probably pretty small.
00:36:52.000 | But if you look at them collectively, the expense is thousands of dollars for most of us.
00:36:59.000 | So don't fall prey to despising the small changes.
00:37:05.000 | Good money management is usually a result of a lot of little decisions repeated over time, a lot of wise little decisions.
00:37:13.000 | So take even the concepts I've shared here about competition, take them to your own personal budget,
00:37:19.000 | and look with zero-based thinking and with a very critical eye, look at every expenditure in your budget,
00:37:26.000 | and ask yourself, "Am I gaining value from this?"
00:37:29.000 | If you're not, change it to where you are.
00:37:32.000 | And if you're a service provider and a financial advisor, this would be a good time of year to be calling your clients,
00:37:37.000 | because if we don't consistently reinforce the value that we do bring, our clients will forget more quickly than anyone else.
00:37:44.000 | Have a great weekend, y'all. I'll be back with you next week.
00:37:51.000 | This show is part of the Radical Life Media network of podcasts and resources.
00:37:57.000 | Find out more at RadicalLifeMedia.com.
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