Bullshit on Stilts: Tackling the bullshitology of financial decisions.

Decoding Costs of Investing. What are Your Total Costs?

September 06, 2024 • Keli Alo & Mark Robinson • Season 1 • Episode 13

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Are hidden fees draining your investment returns without you even realizing it? We promise, by the end of this episode, you’ll be armed with the knowledge to uncover and tackle these sneaky costs. Join us, your trusty knuckleheads, as we navigate the labyrinth of investment fees with a mix of serious analysis and our signature humor. From the transparency of buying fast food to the murky depths of 401k charges, we’ll highlight how understanding the total cost of investing can significantly impact your financial performance.

Ever wondered why your 401k statements seem like they’re written in a foreign language? We break down the Department of Labor’s fee disclosure mandates, helping you decode management, advisory, administrative, record-keeping, and trading costs. We’ll also dissect the various share classes of mutual funds—like A, B, and C shares—and their associated 12B-1 fees, ensuring you’re not caught off guard by hidden charges. With our fun analogies and real-life examples, you’ll grasp the crucial differences between loaded and no-load mutual funds, empowering you to make informed decisions for your financial future.

Thinking about switching to an integrated managed account but unsure about the costs? We’ve got you covered! We’ll compare the cost structures of integrated accounts versus individual retirement accounts held at discount brokerage houses. From commissions to expense ratios and wrap fees, we’ll guide you through the fee jungle, helping you understand what you’re really paying for. Plus, we’ll share some hilarious banter and behind-the-scenes tomfoolery to keep things light and entertaining. Tune in and become a savvy investor with a clearer picture of where your money is going!

Developing your financial bullshit sniffer one episode at a time.

Keli Alo:

Welcome to Bullshit on Stilts, a podcast hosted by two guys with vast financial backgrounds and great bullshit sniffers who call out the cliche crap, spackle and flap doodle spewed by so-called experts across the landscape of financial advice, identifying as doctors of bullshitology. You can count on your esteemed hosts okay, maybe knuckleheads to bring you a lively, if not deadly, mix of bullshitology. You can count on your esteemed hosts okay, maybe knuckleheads to bring you a lively, if not deadly, mix of serious analysis, hijinks and tomfoolery, all within a 99.1% bullshit-free safe space. Let's get after it. So welcome to Bullshit on Stilts. Today we're going to be talking about the final question within the Fab Five for investing, which is know your total cost.

Mark Robinson:

Know your total cost State it otherwise know what you're paying for and what that is. So there's an itemization factor in there instead of just a summation of total cost.

Keli Alo:

Yes, yeah, yeah, you're after you actually what You're after you actually what You're after you actually what.

Peanut Gallery:

What the hell?

Keli Alo:

What he is trying to say is quote you have to actually Sometimes hunt for the various fees and or costs in order to actually truly know what those total costs are. Right, Because they're made up of a number of different potential charges.

Mark Robinson:

Right, right. During our discussion today, we hope to maybe put some light onto not just what your total expenses are, but itemizing some of those. And is that a value to you or are you receiving value for that? So potential value and actualized value for that cost.

Keli Alo:

Yeah, I think most people that I've worked with in the past. They can't even begin to figure out what the costs are From an analogy standpoint. I can drive up to a McDonald's Burger King and I can see all the prices.

Peanut Gallery:

No, you do drive up to.

Keli Alo:

McDonald's.

Mark Robinson:

No, I can.

Keli Alo:

I've never done that in my life. I don't know what you're talking about. I really don't eat fast food ever, except for almost every day, but still that's nothing. But the point is is that there are so many places that you go and you can look at a price and before you buy it you can discern whether you find that worth buying or not. And yet in the financial service world, both insurance and investments it's not that easy to actually look up all the prices. Do they disclose it, maybe, but are you going to read 70 pages worth of legal written documents to figure out? Oh, that's what they're charging me for. X, y and Z, I think the vast majority of people never even open up a fund prospectus, but it qualifies as complying with the mandate for transparency.

Keli Alo:

Kelly. Yes, well, it qualifies for well. I told you that. I didn't tell you that, but I sent you the prospectus and I said you should read through this. I've disclosed it. Are you fucking kidding me?

Mark Robinson:

And we're not saying that many of these expenses don't have value. Many do have value. But you, as a consumer or an investor, you have to determine is there real value there for you and, if not, do something about it. That's right.

Peanut Gallery:

Do it.

Keli Alo:

Just do it. In fact, it kind of connects back to the other Fab Five questions, right, when it comes to how am I doing? Compared to what? If I don't know my fees and let's say I'm underperforming or maybe I'm outperforming, are the fees appropriate for the kind of performance I'm achieving with an advisor? Without an advisor, whatever your circumstance are, and if you don't know what you paid for something you can't really know, is there a value there? Is that fair to?

Mark Robinson:

say yeah. Is there a qualitative or quantitative justification for that fee?

Keli Alo:

Right. In fact, if you take this another step and say look, different consumers purchase things differently and for different reasons. Even if they purchase the same exact item, it's generally going to be for a different reason. So when I was growing up in the 80s, as you were growing up.

Keli Alo:

As I'm was growing up in the 80s, as you are growing up as I'm still growing up and I'm allowed to wear jeans once every while. I mean, I'm in a jumper most of the time but still sometimes I get to wear jeans. Well, when I was growing up, levi's it was a jeans that you bought and they were like I don't know, 28 bucks a pair. And then all of a sudden, in the 80s, calvin Klein, gerbos all these jeans are coming out and they're priced at $70, $80, $100. And this is in the 80s.

Keli Alo:

Were they a better jean than a Levi? No, not really. What are you buying? Just a brand that you can show people that you have. But from a value standpoint, was it more or less valuable? As a consumer, you get to decide whether you're going to buy the Calvin Klein jean or the Levi or the Lee jeans or the Wrangler and, by the way, you see all the prices there and you get to try them on and you get to walk out of the store purchasing what you really want and you find value in. In investment land, it's not that easy, because it's hard to figure out what cost you're actually paying for until you start knowing the different fees that might be nested inside that investment portfolio, whether it's a 401k, a brokerage account, an IRA or anything else In economics it's called marginal value.

Keli Alo:

Correct. Now everybody's really turning in because whenever you say economics, people are like oh, let me listen.

Mark Robinson:

So X for me, service or product at this price point, it's a value to me. Add another 50 cents to it, or one half of 1%. Nah, it's not a value, that's right, and I believe that's called the marginal or incremental increase in value. And there's a point where, uh-uh, no more, yeah, same thing with your investment accounts.

Keli Alo:

Same thing with your investment. So to practically apply this, let's say that your cost to invest you figured this out and we're going to get to the cost. Let's say it's two percentage points that you're paying in total cost to invest and when you're looking at how you're doing and you're comparing it to a benchmark for yourself, you find that you're kind of underperforming. Do you still want to continue to pay two percentage points for investments if you're continuously underperforming? Does that make sense? It does make sense. You're looking at me like I got a horn growing.

Mark Robinson:

No, no, no, okay, no, just lobsters coming out of your ears. No, and I think that's very important for you to bring that up, because once you recognize that you are underperforming and let's say it's by 1% a year and you, through your own analysis, you regard that you're paying too much in fees, and let's say that's 50 basis points, or one half of 1%, and you have $100,000 invested. So now we're looking at $1,500 a year. What are you going to do about it? You know that you're underperforming by your own assessment, or paying a little bit too much in expenses. What are you going to do about it? When does that just become academic or an observation and something that's actionable?

Keli Alo:

Yeah, yeah, in fact, there's a lot of people that we've worked with through the brainstorming process that we work on and helping them figure out what they want to do. Does it make sense, maybe examine different options and then they can go out and purchase whatever they want with whomever they want, right, but so many people because they don't know what they own, why they own it, how's it doing compared to what, and what are my total costs? We actually do a report for people to just help walk them through all the answers if they don't have the chops to do it or they're not inclined to do that, because it's still confusing. But boy, when we get done with that assessment with them and we walk them through, what they find is the most frequent response we get is I had no idea. So let's kind of I think we're setting this up right, but let's get into. How do you identify the cost to invest? And I think it's different if it's a 401k plan versus an IRA and a brokerage account or just a standalone taxable investment account.

Mark Robinson:

Yeah, and why is that? Because we have optionality if it's an outside account Outside being non-401k.

Keli Alo:

Non-401k Right, okay, correct, okay. So let's talk about 401k first. How do you go through as a 401k plan participant and you're contributing your money monthly dutifully and so forth. How do you go through and figure out what you're paying for your investments that you own and are investing in in your 401k?

Mark Robinson:

Well, DOL, and I forget the year mandated. Shame on you. All of the fees and expenses have to be disclosed, right down to the administrative fees and right down to what are the costs for your account specifically.

Keli Alo:

So when you say the fees and we're talking there's a number of different potential charges what would those fall under in terms of how would you? You know you have management fees or advisory fees or record keeping, but what are those types of fees that get Well?

Mark Robinson:

generically you have management fees, management fees for the individual or individuals that are actually at the portfolio level making decisions. You have all the support that goes into the reporting, so that would be administrative. What kind of reporting You've got legal? You have administrative costs In a 401k. You've got record keeping also, and then of course, you have trading costs within the portfolio. I believe certainly in mutual funds. That's a trading cost. So those are generically, and then we can go into some of the others, for example the 12B1, kelly, which I'd like you to just briefly explain what that is 12B1 fees are associated with mutual fund and different.

Keli Alo:

What I'm going to say is share classes of mutual funds. So you have, for instance, the A share mutual fund Once upon a time you had B share mutual funds you have C share mutual funds and you have oodles of other share classes institutional advisor shares, you name it. There's all sorts F1, 2, 3, 4, 5, 6, in share classes. Here's the little thing that most neophytes don't understand. If we're looking at, we'll take Growth Fund of America from American Funds, but there are a lot of different share classes. The portfolio and what it owns doesn't change Same thing. Whether you buy the A share, c share, f1, f6, doesn't matter. The only difference is what the charges are for the investor that owns that share class. So whenever you think of or hear of a 12B-1 fee, that's typically associated with what are called loaded mutual funds.

Peanut Gallery:

Loaded simply means that I'm a little bit drunk. I'm a little bit drunk because I'm drinking, drinking, drinking.

Keli Alo:

If I sell you an A, b or C share mutual fund me, the broker is going to receive a commission from the sale of those mutual funds. If it's an A share, the 12B1 fee will charge a percentage and that percent goes right to the salesperson. So let's say it's a 5%, 3%, 4% charge. If you invest $1,000 into that A-share mutual fund, the end of the first month what you'll see is that 3%, 4%, 5% charge has been taken out of your money.

Peanut Gallery:

Yeah, this is the booth and, Mark, don't freak out. We're in your ear, please. You know you're not experiencing an out-of-body experience, but all we're getting from Kelly's mic is this Listen. So you need to get in there, man. You need to shake it up or get control of this thing. Booze out.

Mark Robinson:

So $30 to $50, let's say yeah $1,000.

Keli Alo:

Yeah, so as a result that's gone, you start with an A-share fund behind the power curve, basically at a net negative return because of those charges, and then charge up front and then, once those charges are done, the second year, there are 12B1 fees still inside that fund, but it might be 0.2% a year that's still being sent to the person that sold you the fund. Eventually, the A shares kind of sunset, there are no loads and they become what's called a no-load, a share mutual fund, meaning that if you put more money into it there are no charges for that new money. It there are no charges for that new money. Usually it's around eight years. I think, if I recall right, that the A-share load sunsets goes away and you can invest in that fund and not be charged those upfront commissions, so to speak.

Keli Alo:

C-share we'll talk about next, which is what's called level 12B1 fee on a C-share. Let's say the investment portfolio charges 1.5% a year. 1% is being sent to the person that sold you that C-share fund. 0.5% really makes up the cost of the fund's portfolio management, record keeping, custodial reporting, all of that. That's the 0.5. The 1% above it that goes to the person that sold you it and it's on the fund year in and year out. I don't believe there's any sunset for Class C shares. So you're going to be paying, in this example, instead of 0.5% a year, you're paying three times the amount at 1.5. Just so, the person that sold you it gets a commission every year in the form of what's called the 12b1 fee. So that's the 12b1. We can talk about B, but I don't think it's out there anymore. Thank, you.

Keli Alo:

It's the reverse of the A, which means that the person that sells the B share fund back in the day would get paid a commission. Nothing was taken out of your account. But if you sold the investment within a certain timeframe it might be, I think, eight to 10 years you would get a penalty charge of in this example, let's say, 1.5% to get out of the fund and invest in another fund and that's charged when you remove your money.

Mark Robinson:

Okay. So if I own an A-share fund and I pay the 5%, is my advisor able to switch within that fund family? They may have 30 different funds in it. Are they able to make tactical changes? Move me out of the large cap growth fund to their flagship large cap value fund or a small cap or somewhere overseas?

Keli Alo:

Yeah, are they?

Mark Robinson:

able to do that for me.

Keli Alo:

Yeah, so they call it transfer. So once your money's in the A-share fund, the money let's say it was $50,000 that you bought the A-share fund and you want to take 20 of the 50 and move it to another fund within the fund family. So we're talking American funds, so you want to use another American fund to add to your current holding maybe a little bit of diversification. You can actually transfer the money to the other A-share and you won't get charged an additional commission. It's just on new money that you get charged commissions on. Part of the reason why A-shares exist is to keep the money in the investment house itself, because it's costly to sell an A-share after you've been charged in this example, 4% or 5% commissions on and go to a new family Because, guess what, you may have additional charges in that new fund family All right.

Mark Robinson:

so that would be on your advisor to put you in a good fund family.

Keli Alo:

Yeah, they've got to be looking out for you.

Mark Robinson:

It's not going to have a negative effect long-term on your portfolio performance and won't embarrass them. Correct, all right. So if I'm in a C-share and I'm paying 1% every year, does my broker, he or she, able to move within that fund family?

Keli Alo:

They can, but a C-share is a C-share, so if you move into another C-share, to my knowledge you're going to have the full fees applied to your account, right?

Mark Robinson:

Within that fund, family.

Keli Alo:

Within that fund, family, still 1%, still 1, 1.5, whatever it is.

Mark Robinson:

So I can do that with much lower costs in this case one-third lower costs. Presuming expenses of 50 basis points or one-half of 1% in my A share not working off the front-end commission, I'm just talking about the existing Once you're invested, yeah, the existing expense ratio.

Mark Robinson:

So I can do that at no cost. Or I can pay someone that management fee, also on the fund, 50 basis points, one half of 1%, and I'm going to pay my advisor twice that 1% for his or her acumen in moving me out of my large cap growth in this example to that flagship large cap value fund within that fund family. Do some explaining as to where that might make some sense? Kelly.

Keli Alo:

A-share funds were created as a long-term investment Mutual funds were developed.

Mark Robinson:

Mutual funds, A-share mutual funds yeah, yeah, yeah.

Keli Alo:

So they're considered long-term, which means you buy in and you don't get rid of it. You just buy it, hold it, maybe add money down the road to it, but you're not getting in and out of it. You just buy it, hold it, maybe add money down the road to it, but you're not getting in and out of it. And to some degree I can tell you that whenever we see and have seen A-share funds, our first answer is don't get rid of it. You've already paid the cover charge and they're good fund family, so we'll just navigate within it so that you don't create more charges. The point on the C-share side would be this If you have an advisor and really let's talk about a broker, because brokers are paid on commissions, they're not allowed to charge fees for their services unless they become an investment advisor representative. So the C-share side allows the broker to be a little bit more allocation. A changing of allocations periodically versus the A-share For instance, if I put C-shares in, c-share isn't considered a long, long-term investment compared to the A-share mutual fund. As a result, I can move you in and out of other funds. I could even move you from a C to an A-share and I got the commission for a couple of years on the C and then, hey, there's a really good fund over here, let's go into the A share. And then I bang you for another two, three 4% commissions on top of that, shocking All sorts of stuff.

Keli Alo:

And we're not saying everybody out there in the financial service world is trying to take advantage of you, but the best way to know is to get your hands around the Fab Five questions. The one we're talking about right now is what are your total costs to invest? So when we've done analysis of people's portfolio and typically it's going to be kind of a second opinion, an outside objective view we walk through and we're looking for advisor fees. We're looking for loaded funds and we'll figure out the cost of those loaded funds. We're looking at any other additional charges that may be in those accounts so that we can cobble together the annual total costs of your investments.

Keli Alo:

Most of the time people are very, very surprised at the dollar value of those charges and expenses. Oh, really, because they're always thinking about well, it's only 0.6%. Well, it's only 1%. Well, it's only 1.5%. It sounds small, but translate that into the US dollar If you've got a half a million dollars or you've got a million dollars. Boy, 1% starts getting to be a large dollar amount, sneaky turtle. And so this is where this is about right With regards to figuring out your total costs.

Mark Robinson:

You know, Kelly, when we're talking about the Fab Five. And now we're on the last component of that, which is know your total cost. All this within a 401k is what the 401k provider and the vendor have to comply with. So we are know what you own, why you own it, how you're doing compared to what, and what are my total costs. Let's put that into the fiduciaries for the 401k plan. What do they have to go through? What funds are we offering within the plan? Why are we offering them, how are they doing compared to what? And managing, control and account for all costs associated with the plan.

Keli Alo:

That's the Fab Five. That's right, the Fab Five. Where does it come from? Doesn't it come from DOL SEC? It comes from mushrooms.

Mark Robinson:

No, no, no, it comes from mushrooms. Remember you and I with the mushrooms.

Keli Alo:

Yeah, that's where it came from.

Mark Robinson:

It was out in podcast land, we met a bowl of mushroom soup with French baguette. That's where it came from. This guy was good Holy balls.

Keli Alo:

So let's talk a little bit about the different structures of investments, or different types of investments right, that people may encounter when they're interacting with financial service industry. So what are some of those? We'll take one at a time and kind of talk a little bit about that Well itemize them.

Mark Robinson:

We can discuss these. It would be, for example, an integrated account stocks, commissions, bonds, markup markdowns, wrapped fees. That's all I got.

Peanut Gallery:

That's it. Yeah, that's all Really.

Mark Robinson:

Yeah, wow. Well, don't say wow, without coming up with at least one other thing.

Keli Alo:

Well, you got UITs, which are expense ratios on the mutual funds.

Mark Robinson:

Oh, yeah, yeah, yeah. Uits ETFs have the mutual funds.

Keli Alo:

Limited partnership, I mean, there's all sorts of, I think, when it comes to delineating the fee structures, right? So you have funds, mutual funds, index funds, exchange traded funds. They all have some sort of what's called an expense ratio, which is nothing more than expense, right? And is that fairly easy to find information of a mutual fund or index fund you want to buy to figure out how much they charge.

Mark Robinson:

Well, if you're in a 401k. It indeed is Sure, Because they summarize that down as a separate document from the prospectus on the mutual fund itself.

Keli Alo:

How wonderful so let's take a harder example, what if you have an individual retirement account at Schwab or Fidelity or Pershing LLC or whatever as the custodian? The best way to find it, the way that I always use personally is I like Yahoo Finance and there are other platforms out there, but I'm very accustomed to using it. I know where to go and so I type in that ticker, I look for the right fund. That shows up as I'm typing and I click on it and the summary page will show you all sorts of things to include. What is the expense ratio of this fund? I've never never, that's a new word, never Naver, that's a new word, naver, awesome. So I've never seen an expense ratio that didn't have a higher authorized charge. And yet they typically charge what's called the net expense ratio and that's what's actually being charged.

Mark Robinson:

Kelly, I'm amazed how you can just disturb the natural atmosphere of this studio with some of the words that you come up with. It's almost speaking in your own tongue.

Keli Alo:

It's a gift. I'm pretty fabulous when my hair is in rollers.

Mark Robinson:

So, kelly, let's move over from the expense ratio on the funds. We've talked about individual stocks. There's just the commission on an individual stock, when you buy it, when you sell it, there's no internal expense ratio.

Keli Alo:

And it's really trading costs anymore. Yeah.

Mark Robinson:

And the same thing with bonds, except we call it a markup or a markdown and many online trading platforms. It's just a flat fee, like $15 or $20 just to buy the bond, Just to buy the bond I know that is the case with Fidelity Just a flat rate for the most part. So we have stocks and bonds, commissions, markup, markdowns. We've talked about expense ratios. Let's get a little more complex and talk about wrap fees and integrated accounts.

Keli Alo:

So wrap fees are what are associated with typically multiple different funds or investments being managed by one house. So rather than just stocks or just bonds, they may be managing stocks, bonds, they may be funds inside it. There may be individual stocks or bonds inside this, and so a wrap fee is a fee charged against all those investments in the account. So maybe it's a 1% wrap fee which, hint, hint, nudge, nudge, is really an advisor fee, but they call it a wrap fee and then inside it they theoretically manage, buy, sell things on your behalf. If they're allowed to, that's a wrap fee. Right?

Keli Alo:

The integrated account or integrated managed account is one that they integrate different securities that historically weren't able to be integrated.

Keli Alo:

It was really difficult, maybe 15 years ago, to manage direct stocks and mutual funds in the same account. Well, the integrated managed accounts and the technology and the trust service platforms out there have been able to essentially mature to where I can integrate stocks, bonds, cash, mutual funds, exchange traded funds, all sorts of things into one account, and it makes it easier for the consumer. And again, we have a wrap fee inside that account, again using 1% as the example. So if you have funds in that integrated managed account, remember those funds have expense ratios. So, while your stocks may be purchased at a trade execution of $3 a trade or something, and your bonds have their spreads or their markups or downs, but you have 60% of your money in these funds, well, there's expense ratios on those funds. The question is 1% plus what Is your funds at 0.9? Are your funds at 1.3? Because it's more of an esoteric fund and it's more expensive to manage. But that's what the RAP fee does, whether it's the managed account or the integrated managed account.

Mark Robinson:

All right, so the integrated, as well as the WRAP, is an additional advisory fee and there might be some administrative within that 1%, correct, yeah? Then we have the expense ratio within most pooled funds, mutual funds, etfs, et cetera. And then we have commissions with stock purchases and sales, as well as potential for front-end commissions on A-share mutual funds. Yes, and mark-up or mark-downs on bonds, is that?

Keli Alo:

pretty much what the expenses are. Yeah, yeah, I mean, I think so it's certainly enough for what we're talking about. There may be some esoteric other charges.

Peanut Gallery:

What.

Keli Alo:

Are you lost yet? Oh, what Are you?

Mark Robinson:

lost yet, oh, do you have a searing commentary that we can exit out of the fifth of the five of the?

Keli Alo:

Fab Four Good questions uncover a lot of BS Well that's good.

Mark Robinson:

So we end kind of on a high note in that you're not disparaging your partner or anything of that nature. Listen if I commented of all the things that I thought of you. I just can't do that. I know I have all the attributes of disease. I do know that. A strong smell, you know Rotting flesh, that's okay, and that's okay to be almost a social leper.

Keli Alo:

Oh, I get that. So when you attack me, as you do, as I do, I take my gun and I go's why I let you do that Every time we get done recording, I go inside and look in the mirror and I'm just pleased as punch with what I see as a juxtaposition of what I'm looking at. For the last hour I'm looking at you.