When 0 is more than 1

Hello NFC Clients and Friends,

Riddle me this: When is 0 more than 1, 2, or even 5.75?  The answer became apparent to me yesterday as a Norman Financial Coaching client checked off a few boxes on her Action Plan: Phase I to do list:

1) Initiate in kind transfer of assets in both a taxable brokerage account and Roth IRA 

    from Edward Jones (hereafter EJ) to her corresponding accounts at Fidelity,

2) Sell the 8 (!!!!!!!!) EJ recommended, actively managed, high fee, load mutual funds. (Reminder of why actively managed funds are good for your broker, not you!), and

3) Invest the proceeds into Fidelity’s ZERO fee Total Stock Market and/or large cap S&P 500 equivalent fund. Is this deal from Fidelity too good to be true? Nope.

Why jump through these hoops?  Because when it comes to investing, fees can make a huge difference. But a picture—in this case a Google sheet—is worth a 1000 words. This is real data, real dollar amounts, from a current client, verified face to face as I shepherded her through the process of selling off all 8 (!!!!!!!!) EJ recommended funds, now at Fidelity thereby avoiding even more egregious commissions/fees that would’ve been charged at EJ. This generated the cash to make two simple purchases, one in her taxable brokerage and one in her Roth IRA account. Take a moment to reflect on the juxtaposition of how these hard-earned teacher dollars would be impacted. But if you “ain’t got no time for that…”

        The TLDR: for this group of $88,807 of assets, the first year cost savings is $7,025! Annual cost savings every year going forward, $1,919!  And I’m fairly positive that I didn’t capture all the fees, commissions, and nickel and dime costs associated with these accounts– see if you can unearth more in this opaque 10 page morass of a disclosure from EJ. That’s almost $2000 per year now compounding for her, rather than from her in fees paid to EJ, the funds, and her broker. That is a serious opportunity cost!  Over a 20 year investing period (assuming an 8% annual return), this “extra” money would compound into $103,109! Rather than paying a non-fiduciary broker that money each year to “manage” her set-it-and-forget-it portfolio, she could hire a fee-only financial advisor who is actually a fiduciary to help create an early retirement and estate plan and still have over $100k!  That warrants a 100% guilt-free family outing to Applebee’s to celebrate!  Imagine if all of her family’s assets were similarly invested before we optimized– this was only 2 relatively small accounts!

Note: if the above case study were applied using Vanguard, performing the same upgrade to her financial health using Vanguard’s Total Stock Market ETF (VTI) or S&P 500 ETF, (VOO) the only difference would be the minuscule 0.03% annual maintenance fee on the funds, or $26.64. That's less than lunch for two at Applebee’s!

To be clear, the point of this post is not to pick on Edward Jones (or recommend Applebee's); the internet has already done a merciless job of this. Quite frankly, much further up my hit list would be a company like AXA Equitable, the French owned insurance conglomerate who has financially abused teachers and many others for decades. Extricating teachers from these egregious AXA 403(b) annuity contracts sold as retirement planning is what started me on the path of financial advising for my colleagues decades ago. See 403bWise if you would like to evaluate your district’s 403b and 457b rating and options. Hot tip: if you 403b vendor is an insurance company (e.g. Horace Mann) and/or has a US President’s name in it (e.g. Lincoln Financial), run away.

Having a plan is far better than not.  Soliciting help is a great idea.  However, as my students over the past 31 years in my public school teaching career can all tell you I had two rules for all projects: 1) Don’t suck, and 2) No glitter– it's the herpes of the arts and craft industry! Unnecessarily expensive, ulterior motivated, value-subtracting financial support sucks. The glitter directive is just a personal issue of mine, so feel free to do as you wish with that stuff.  Interesting “fact?”--  The US military is rumored to be the world’s largest consumer of glitter.

There are several ways to get the guidance and varying levels of support to suit your specific needs, all of which cost money.  I highly recommend hiring a fee-only (vs.a fee-based) financial advisor. There are also several low-cost, effective ways to diversify your portfolio and achieve the risk adjusted rate of return you desire, even for DIY-ers (e.g. using Target Date Funds, the 3-fund portfolio, the Simple Path to Wealth, etc.). Please just make sure that the investments themselves are not needlessly complicated, commission-riddled, excessive fee-generating machines.  In other words, when it comes to your investment portfolio, 0% (or close to zero) fee/commission is greater than 1%, 2%, and certainly a 5.75% load on Class A fund shares as was the case for all 8(!!!!!!!!) EJ investments in the modeled client portfolio above.

I hope everyone is enjoying the summer!

Yours in Financial Fitness,

David

Norman Financial Coaching