financial mistakes and how to avoid them

YFP 208: Why Minimizing Fees On Your Investments Is So Important

Posted on June 17, 2021November 2, 2022 by yfpadmin

Why Minimizing Fees On Your Investments Is So Important

Tim Baker digs into the f-word we want to minimize when it comes to our investments…FEES! When you do the hard work to save money, you should be interested in keeping as much of that investment intact by minimizing the fees that can take away from your long-term gains. Tim discusses various fees, the impact these fees can have on achieving your long-term savings goals, and strategies you can take to evaluate the fees related to your own investment plan.

Summary

Tim Baker discusses the many types of fees associated with your investments and their impact on your financial plan, including expense ratios, platform fees, trading fees, and advisor fees. He also breaks down the ABCs of mutual funds: A shares, B shares, and C shares and the types of fees each of these investments may include. Tim further details how these fees can impact your investments over time, affect growth, and impact your financial plan overall.

Tim discusses his experiences with clients, sharing that many do not know they are being charged various fees or do not understand the full impact the cost can be in the long term. While many fees may be challenging to uncover, Tim shares the importance of asking questions about fees, whether you are just getting started or are farther into your investment history. Investors should be asking what their fees are, why they are paying them, and the benefit – if any – they have on the investments.

Tim mentions that it’s okay to pay a fee for professional help but be wary when advisors are charging commission because there may be a conflict of interest. Tim also suggests you ask what you are getting for your fees across the board, with professional services as well as the investments themselves. Typically, the expense that you pay does not equate to increased benefits for the investor, so trimming those fees whenever and wherever possible may benefit the investor over time.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Tim, back-to-back episodes. Good to have you on again.

Tim Baker: Yeah, good to be back. I’m excited for this episode. I think it’s going to be hopefully valuable for those that are listening.

Tim Ulbrich: Yeah, I think so. And we talked last week about common financial errors or mistakes, some that we’ve made, some we’ve seen other pharmacist clients, colleagues, make. And today, we’re talking about one that was not on that list of common mistakes we discussed last episode but certainly can have a major impact on how much wealth you’re able to build. And we’re going to talk really big numbers at the impact that fees can have, fees on the investments is going to be the focus of today’s discussion and hopefully shedding some light on a topic that maybe folks have heard about but haven’t really thought about and evaluated for their own investing plan. So Tim, one of the things I share when I talk on the topic of investing is that if you’re going to do all of the hard work to save money each and every month, take advantage of compound interest and the time value of money, then we want to do everything we can to maintain as much of the pie as possible. And I often think that there’s really three big things that can eat at our investment pie: that’s taxes — and we’ve talked about that on several episodes on the show of things that we can do from the tax-advantaged investing standpoint — inflation — obviously can be out of control to some degree — and then the third is the one we’re going to be talking about today, which is fees. And something I’ve heard you say before is that you need to follow the “Three F Rule” of 401k management. And that’s Figure out the Fees First. So that’s what we’re going to be digging into today, and that’s even beyond just the 401k when we talk about fees. So Tim, before we get too far into the weeds about this discussion of fees, let’s back up a bit as some may be thinking, fees on my investments? What fees on my investments? So talk to us a little bit about the common fees that are out there when it comes to one’s individual investment portfolio.

Tim Baker: Yeah, if I could even back up further, Tim, I would even say like the importance of this — like it shouldn’t be understated. And I think that, you know, when we — kind of like when I talk about baby stepping the financial plan, we look at things like what does the emergency fund look like, what does the consumer debt look like.

Tim Ulbrich: Yeah.

Tim Baker: When we dive in particular into the investment part of the financial plan, one of the first things I look at is fees. And you know, outside of the asset allocation, which the asset allocation being like how do I divvy up in a broad sense between like stocks versus bonds and you can actually get more granular than that, outside of the asset allocations, the fees probably play one of the biggest roles in your ability to kind of build wealth over time and really the fees, just like you mentioned along with tax and inflation, is it can really be in a factor that erodes that ability to build wealth. So it’s super important. And you know, when I look at the fees, one of the problems in the industry is that the industry is not super transparent with regard to what the investor pays. A lot of these can be wrapped up in products that are sold to investors or not necessarily appropriately disclosed on a statement. So you’re really up against it when you’re trying to figure out, OK, what exactly am I paying? And the fact that it can be a little bit opaque in that regard is frustrating. I think that’s one of the things that we work with our clients is to show them, ‘Hey, did you know that you’re paying this in your 401k?’ And most people are like, ‘I had no idea.’ Then the question is, ‘Is that good or bad?’ And I’m like, ‘Well, it’s typically higher than what we see,’ or something along those lines. So to me, the name in the game is really trying to understand — to answer the question, what are the things that you could be charged? And then like what is that exactly for your particular case? So if we look at the things that we typically see, if we look at the 401k first, you know, the things that are typically in the 401k are things like platform fees. So this might be where Fidelity or Schwab or someone might charge you a fee just to really have an account with them. And that’s less common in a 401k. You typically see them more in brokerage accounts, more in IRAs. When I was in the broker dealer world, we would charge — the custodian would charge clients just to have an account open. And a lot of this is in also response to like lower entrance environments. You know, they’re trying to make money where they can. And sometimes these additional line item fees are created. Things like trading fees and transaction fees. So this is like anytime that you buy and sell, again, typically you don’t see these inside of a 401k, but you do see these outside, like a brokerage account, an IRA, you know, if you buy stock ABC, sometimes you’ll be charged anywhere from $7 to $50 a trade. Now, these have kind of become less and less common as a lot of the custodians want to be competitive and they’ll waive fees and things like that.

Tim Ulbrich: Race to 0 here, right?

Tim Baker: Exactly.

Tim Ulbrich: Yeah.

Tim Baker: Yep. The other thing that you would see are things like advisor fees. So these can be both within inside and outside of a 401k. So these are things like, ‘Hey, I work with an advisor, and they charge me a flat 1% on the investments that they’re managing.’ It could also come in the form of commissions, and that’s a whole other ball of wax in terms of how an A share, a B share, a C share mutual fund, you typically don’t see commissions inside of a 401k, but you do see — sometimes you see C share, which are commissions, inside of a 401k. But you typically see those more in brokerage accounts, IRAs, and such that. And then probably the last one that basically permeates just about every investment is expense ratio. So the expense ratio is the money that the fund takes to kind of run the fund. So if I’m a mutual fund manager, Tim, and I’m in charge of a large cap mutual fund, you know, I’m managing billions of dollars, so I’m pulling a bunch of investors’ money together to buy large cap stocks and the like. Then I need to pay myself, I need to pay for the fancy office on Wall Street, I need to be able to pay for information. I might even need to pay sales people to go out and market my fund. So those all are basically captured in an expense ratio. So the expense ratio basically, you know, takes money out of that fund and it’s shared, that expense is shared, with the rest of the investors that are invested in it. So those are typically the broad strokes. You also see other ones I would say outside — and these kind of can get wrapped up into platform fees — but you’ll see like administrative or like bookkeeping fees in a 401k. And this could be like record keeping and all of the laws that are surrounding 401k plans and 403b’s. These can be pretty prohibitive. Sometimes they’re a flat fee, sometimes they’re a percentage. But these are kind of just administrative fees that, again, that are not listed on a — they’re not listed on a statement anywhere. It’s just part of the plan and what the plan takes to make sure it runs within the laws of the United States.

Tim Ulbrich: Tim, when I hear you say, you know — and obviously it depends on the account, you mentioned some of these may be more applicable to like an IRA, brokerage, others across the board, but several different types of fees you mentioned, right? Platform fees, advisor fees, trading fees, sometimes commission fees, expense ratios perhaps is the one that folks may be most aware of. My follow-up question is transparency and understanding of these fees. So those are two very different things to me. You know? Even if something is transparent, how it’s disclosed or how somebody may be informed of it or how easy it is to find that information obviously can lead to whether or not they may have an understanding of it. So in your experience working with clients and really more specifically our clients at YFP Planning, is this something that you find folks are surprised by? And how transparent and accessible is this information to either the individual or you as the advisor trying to work with them?

Tim Baker: Yeah, Tim, so I think it is a surprise. And what I typically try to do to kind of make it a little bit more real is put it in real dollar sense. So you know, one of the things that when we talk to pharmacy schools and we’re trying to like drive home the point that this isn’t Monopoly money, that when you graduate, you’re like at with the average student loan debt that graduates are coming out with, it’s a $2,000 payment for 10 years. And when most people think about it in that terms, you’re like, ‘Oh, OK, that becomes more real.’ So I try to do the same thing with the fees. So yeah, like when we go over this, I think at first, it’s like, ‘Oh, OK, well that doesn’t sound that bad.’ You know, so like I’m looking at this independent pharmacist, their 401k, and typically the smaller the employer, the worse the 401k is or the most more expensive it is per each participant. So like this particular pharmacist, their all-in when they look at the administrative fees and the average investment fees, it’s about 1.27%. So you’re like, ‘Wow, that doesn’t sound too bad, 1.27%.’ But if you have $100,000 in that 401k, that’s $1,270 per year that the 401k and the funds inside of the 401k basically absorbs. So with this particular client, they have $250,000 in that, so that’s a lot more. It’s a lot more money. It’s more than double that every year. And again, it’s not like it’s a line item on the statement anywhere. It’s what the 401k takes to run and the investments take to basically run the funds that they’re in. So what we really try to do is, again, look at it — and we have tools that can assess that information. But even to do it yourself — and I’ve tried to do this even outside of the tools that we use — it’s hard to find. You have to find basically the plan. Every year, they have to file what’s called a Form 5500 with the IRS that basically outlines how much money is in the fund and what are the assets, what are the liabilities, if there’s any loans, what are the admin expenses. And a lot of those are just a dollar amount that’s populated in there. So like sometimes you might see like, ‘Oh, my administrative fee is 1.2%.’ And then the next time we log into our tool, it’s 1.4% just because there’s new data that’s been filed with the IRS. So it’s a little bit of a moving target as well. And I think the — you know, I think I read a stat somewhere that the average 401k all-in expense is about like 1.68%.

Tim Ulbrich: That’s wild.

Tim Baker: So — yeah. And again, when I look at our 401k that we’ve set up at YFP, I think it’s less than .2%. I think the fees have changed a little bit for ours, but I think when you look at the expense ratio and everything, it’s less than .2%. So it’s a factor of 8. So if I’m paying $1,000 — and again, that’s a pretty large 401k with that, then I don’t want to pay $8,000 a year. So those are some of the things that most people when they say, ‘Oh, like 1.2% is not bad,’ but then when we actually put in dollars — and then if we compound that year over year, it really adds up. So to me, the fees are so important. And I think another discussion to have is like OK, but like are the fees worth it?

Tim Ulbrich: That’s right. Yep.

Tim Baker: And I would say in a lot of the cases, no. I mean, with some of these fees, you have to pay the fees to be able to like have the fund run and things like that. But in a lot of cases, if you’re paying 10x the amount in terms of an expense ratio, you’re not getting 10x the performance or it’s not 10x safer for the same amount of performance. So every type of fee is going to be different in why you would pay this versus that, but in most cases, the name of the game is to kind of shave that down as much as you can to really the investments unadulterated so it can grow and really allow you to build wealth over 10, 20, 30 years, whatever the time horizon is.

Tim Ulbrich: Yeah, and I think one of the things, Tim, I’ve heard you say often is that our job, your job, and the planning team’s job, one of the roles is to really try to keep as much of that contribution intact as possible and allow the compound growth to do its thing, right? So really minimize the fees that are coming out of that. And I think that’s so important. You know, again, back to my earlier comment, if you’re already doing the hard work, right, to put away whatever percentage of your income each and every month towards long-term savings, then why do we want to give up anything in terms of the fees? And that example you gave is really powerful, that independent pharmacist who’s got $250,000 in that account with a 1.27%, which is, as you mentioned, is lower than the average 401k. You know, that’s a little over $3,000 this year. But as that account continues to grow and compound, that $250,000 is eventually going to turn into likely $300,000 and $400,000 and $500,000 and so on. And that fee obviously will continue to go up over time. So let me ask the big and nebulous question. Like yeah, maybe a 10x fee isn’t worth or justified that you’re going to have that value, but is there a place where the fees are justified? You know, such that whatever would be the net return inclusive of fees makes the fees worth it? And how do you evaluate that decision?

Tim Baker: Yeah, I mean, I think with — so it’s going to sound a little self-serving, but I think if you’re paying an advisor, a fiduciary, a fee-only advisor, and you’re paying them say whatever percentage out of your investments to be able to do financial planning or investment management or what we do, which is very comprehensive with the tax work and really a lot of different components there, I think that the return that you get far exceeds what you pay. The idea is that our focus is on more of wealth building, not necessarily just the investments and everything else but it kind of is beyond that. When I think of the — if you take things like expense ratio as an example, I’m looking at a client who — you know, and that same client that was at 1.27%, I think when we first started working with them, it was close to 2% because there are things that you can control and there are things that you can’t control with regard to the 401k. So things that you can’t really control are things like administrative, record keeping fees. Like that’s just — you know, I always talk about with the investments in a 401k, that’s the sandbox. Like those are the toys that you can play with. There’s only 10, 20 mutual funds in there. And it’s the same thing, like with some of the fees, you can’t really effect change unless you’re small enough that you can, you work for an independent pharmacy, you can say, “Hey, boss, this 401k is pretty terrible. Can we replace it?” For bigger organizations, that’s a harder thing to go about. So you’re kind of stuck with those fees. But things that you can control somewhat are things like the expense ratio. So this particular client’s, her average investment fees are .06%. So that’s her expense ratio. But when we started, it was closer to .8%. So again, a $100,000 portfolio, just for this part of the portfolio, she’s paying $60 per year whereas before she’s paying over $800. So the reason that we did that — or how we got there is that the funds that she was in, she was selecting a lot of the funds that she heard of like American funds or I think there was like a Morgan Stanley here and JP Morgan. And these funds are more expensive as in comparison. So I’m in this particular portfolio, and I’m looking at the mid-cap fund that she was in, it’s called a Touchstone mid cap, and the ticker is TMPIX. That costs .9%. So if I had $100,000 just in this, I would be paying $900 per year. What we replaced that with was an iShares fund that basically is .05%. So .9% versus .05%. So $50 on $100,000 or $900. So like those are things that you can control. And for the most part, there’s going to be differences, especially as you get to mid and small and international funds. Like there will be some differences in performance and some differences here and there, but for the most part, you know, like if I look at those same funds and I have the data that says over the course of a year, the mid cap iShares that we put her in is up 56%. The one that was more expensive is up 33%. You know, five years, it’s pretty close, 17% with the one that we put her in, 16%. So the performance, these are things you have to look at: since inception, 10% versus 9% for that. So like there are things that you have to look at, but typically the expense that you pay is not worth it. And for things like large cap, when you click into those and you say, ‘OK, what am I actually invested in?’ So like what are the underlying funds, it’s the same stuff, Tim. It’s things like that we know about. It’s Apple, it’s Microsoft, it’s Amazon, Facebook. It’s just that if you wrap it in a more expensive wrapper, you charge 5, 6, 10x just because it’s a known entity, even though Vanguard and iShares are pretty known, there is — like from a large cap fund, it should be very cheap because everyone is invested in the same stuff. So I don’t like paying high administrative fees. I don’t mind paying like a flat dollar amount, so like there’s sometimes you see like, oh, it’s $80. OK. That’s better than .8%. Expense ratio, I don’t like paying a high expense ratio. I don’t like when advisors charge commission. I just think that there’s a conflict of interest there. So these are typically outside of the 401k. So I think it’s OK to pay a fee for professional help, but it just depends on like what do you get for that? And you know, and all of the associated fees that come with that, what do you get for that? So if there are 401k’s that charge you .2% or less and then there’s some that charge you close to 2%, that’s a big range over the course of — and are you getting 12x more value there? And I typically say the answer is no.

Tim Ulbrich: Yeah, I think it’s just a really good reminder, you know, Tim, that No. 1, not all fees are created equal. Right? So really asking yourself, what may or may not be justified with this fee? And then you know, I think really evaluating and understanding what your current fee situation is and recognizing that some of that may not be in your control, to your point, that especially for those that work for a larger organization, unless you’ve got the ear of HR and can influence those decisions, that 401k plan is probably what it is in terms of some of those fees. But within the fee options, might you have some control when it comes to expense ratio and then obviously in other accounts, IRA and so forth, then you can leverage other options to reduce those fees. Tim, I suspect that many of our listeners, especially those that are listening today that have been saving for some time, might be investing in mutual funds through various institutions to be unnamed and are paying substantial fees and, as we’ve discussed, aren’t even aware of it. So I want to take a few minutes to just break down the A, B, Cs of mutual funds. And that’s A shares, B shares, and C shares. So can you quickly define the difference between A shares, B shares, and C shares and then talk to us a little bit about what is the fees or could be the fees associated with those types of shares?

Tim Baker: Yeah, so whenever you see A shares, B shares, C shares, what you typically — think commission. So that’s — it’s a sales commission for that intermediary, the intermediary being the financial advisor, that is selling you a product, i.e. a mutual fund, in exchange for a commission. And I’ve sold these in the past, so like I’m a big proponent of fee-only. I haven’t always been a fee-only advisor. I started in the industry in fee-based, which is often confused for fee-only. A lot of the fee-only people want advisors that are fee-based to identify as fee and commission. So when I was in this model, I thought, again, I thought we were great because we didn’t have to sell a proprietary product that was with one of the big financial institutions. We could basically sell whatever we wanted. But the reality is that you want to really work with someone that is not selling on commission, in my opinion, because I think there’s a conflict of interest there. So anytime that you have the sale of a product with advice, there’s a conflict. So when you hear or see A, B, C shares — and you can typically see this, you can see this on the statement, but it’s not necessarily as intuitive as you would want it. So like I’m looking at a statement from a very big institution that I know goes and markets to pharmacists, talks to pharmacy schools, but on the statement, I see the mutual funds that this particular pharmacist was in was a Washington Mutual Investors Fund, CL A. So CL A. So that’s Class A, which that’s an A share mutual fund. So what that means is that for an A share mutual fund, these are up front basically fees or commissions with lower expense ratios. So these are typically better for long-term investors. I would say they’re not necessarily good for anybody. But the idea, Tim, is that if this particular — say you opened up an IRA with me and I basically charged you an A share commission, this particular fund I think basically charges 5.75%. So $5,000 times 5.75%, that’s a $287 commission that goes straight to me. So basically, when I look at my statement the next time, my statement is going to be like $4,700. It’s going to be $300 short. A lot of advisors don’t necessarily like to sell those because it can be very, you know, abrupt for clients. The other way to basically sell these — and I’ve never sold a B share, and I’m not sure how prevalent they are, but a B share, it’s basically, it has high exit fees for when you sell and higher expense ratios. But they convert over to A shares over basically the course of many years. So the idea is that you don’t get that kind of abrupt fee, but if you hold the investment long enough, it basically converts into an A share. And I don’t have as much experience with these and I haven’t seen these much, even on statements. But the one that I do see fairly often is called a C share. So these have higher expense ratios than A shares and a small exit fee that’s typically waived after one year. So the idea is that in that same example, if you were to basically buy, put $5,000 into a C share mutual fund, you wouldn’t necessarily get hit with a big commission up front, but what’s basically on there is — and it’s kind of built into the total expense ratio — is 12b1 fees. So this is like a marketing fee. So as the advisor, I would be making say like 1% as long as you held that investment. So it’s more of a trailing commission that you pay versus an up front commission. And these could be very prohibitive to an investor. Lots of fees that you really don’t understand how you’re paying. And the advisor is basically getting paid that marketing or that service fee over the course of however long you’ve held that investment.

Tim Ulbrich: So Tim, let me ask the question that I suspect many of our listeners are thinking, that I’m thinking individually as you describe A shares, B shares, C shares on the heels of our discussion of today’s day and age where we can obviously have an option to reduce some of those fees, whether that be up front trading fees or even ongoing expense ratios. There’s other options that are out there. What is the role, if any, for these A shares, B shares, and C shares? Like are these ever in the best interest of a client? And I say that dramatically knowing it’s not a black-and-white answer, but why would I invest in an A share, B share, or C share?

Tim Baker: So in my experience in this world, you would charge a client — and this is going to be very true for many kind of new practitioners and pharmacists that are out there that are maybe seeking help and a lot of people that are listening to this. So the industry and really why I’m here sitting in this seat and why, Tim, we’re partners, it kind of is derived from the story or the way that the industry basically operates. So when I was in the fee and commission, the fee-based world, it was — and I started working with a lot of pharmacists — the going advice was — you know, and I remember, I actually remember, I have this pivotal memory where I was talking to my mentor and I think the pharmacist couple that I was working with, they had something like $300,000 in student loans. And I was like, ‘Hey, mentor, like what do you think that we should do with this client’s?’ And basically, the advice was, to me, to how to advise the client was to say, “Hey, just tell them the loans will figure themselves out. Either a snowball or something like that, focus on the highest interest first,” which is terrible advice, Tim, as we all know, that the student loans are going to be more nuanced. And then you know, because this client maybe had like $20,000 to invest, that’s not a lot of money. So like it was sell them insurance that they didn’t need, so whether that was life or disability insurance, and then invest their IRA or something like that and then just touch base with them every couple years until they have $50,000, $100,000, $250,000, and then you can actually ‘help’ them. The problem with this model, Tim, is that it’s not a planning issue. Like we work with clients that are in their 30s that there is a lot of need there to get their investments, their debt, their cash flowing budgeting, their insurance, their credit, their taxes, all humming and working in a unified fashion that we’re really trying to take the resources that the client has and apply them in a way that is a wealthy life to them. It’s not a planning issue. It’s a pricing issue. And unfortunately, the way that the industry is set up is that, hey, unless you have investments, I can’t really do anything for you. And it’s because somebody with $20,000, that’s $200 a year on a 1% AUM versus if someone had $200,000, 1%, that’s $2,000. So money talks, right? So that’s where A share and C share and those types of commissions come into play is like typically if it was less than $50,000 or typically less than $100,000, you would charge these commissions, especially the A share, because it was a higher upfront or a C share because it was more — I want to say it was more undetected, under the radar. And then you would couple that with a crappy insurance product or disability that they might not need. Or maybe they do need, but you’re still making commission on that. And that was a way for you to help the client and make a little bit of money, feed yourself at the same time. And I don’t want to — so I also don’t want to paint a picture, sometimes especially in the fee-only community, there is this picture that’s painted that like people that charge commissions are evil. They’re not. They’re not. It’s just the difference in model. And you know, I was early enough in my career that I recognized — in financial services — that I recognized that there was a better way, and that’s being fee-only and that’s not charging these commissions. So I was able to pivot away from that. It’s not that they’re evil, it’s just that I think the model or the system that they’re in doesn’t necessarily suit itself for a lot of clients. You know, typically — we talk about this with insurance — typically the better the insurance product is for the person that’s selling it, the worse it is for the person that’s basically buying it. So there is this kind of 0-sum, so to speak. So if you’re out there and you’re like, ‘Hmm, I’m listening to Tim and I’m going to look at my statement and see,’ if you see like A’s and C’s next to your mutual fund that says Class A or just I’m looking at one that says Investo Equity and Income Funds C, I know that that particular — at that particular time, he’s being charged kind of an ongoing trail that’s eating away. And again, if he’s being serviced for that, maybe that’s worth it. But in most cases, it’s not. I wouldn’t say that there’s ever — there’s never a time — but I would say, you know, again, there are advisors out there that will work with you in a fiduciary capacity and that should be divorced from the commissions that you would make from selling a product. So one of the things that, you know, kind of longer story longer, Tim, one of the things that I talk about, when I was in the broker-dealer world, the fee-based, fee and commission world, this is the story that I tell prospects and clients is you know, I would show up to the office and I would see on my counter, I’m like, ‘Oh, this mutual fund wholesaler is going to come a-knocking.’ And that wholesaler would show up to our office in a fancy suit, he would take basically the advisors in our office, which was me and my mentor, he would take us out to a fancy dinner or a fancy lunch, I should say, he would show us fancy glossies about why his funds were so — or her funds were so great. And then he would basically say, “Hey, when your client Tim Ulbrich, when he leaves his job or if he has money on the side and he wants to roll over that Fidelity 401k, like use our funds.” And —

Tim Ulbrich: Sounds like another industry I know, Tim.

Tim Baker: Yeah, it sounds like drug rep, right? And when I say that, most people are like, ‘Oh yeah.’ But here’s the difference, Tim. Like in the medical world, my understanding is that it’s illegal for physicians to get kickbacks from pharmaceutical companies because it taints their ability to prescribe medication without the strings attached, right?

Tim Ulbrich: Absolutely. Yep.

Tim Baker: But if we compare that to my industry, the financial services, not only is it legal, it’s prevalent. So like 95% of advisors out there operate in this manner. So like now, like no one takes me out to lunch, Tim. No one takes me out to lunch because I’m not incentivized to put someone in these mutual funds because I don’t make a commission from that. So what I’m incentivized to do is to put the client in the best situation across the board, but particularly for the investments we’re talking about where they’re paying the least amount for the most gain. So like, I would get through those lunches — again, they’re not all bad. You would learn something. But you kind of felt like you needed to take a shower because you kind of — you know, they gave you something. They gave you a nice lunch, so you’re kind of like, alright, well, if this client rolls it over, you kind of feel beholden to them. And I just hated that feeling. And by the way, if you’re putting those sales rep out in the field, that costs money.

Tim Ulbrich: That’s right.

Tim Baker: Who pays for that? The investor does. And that typically means that fund that you’re investing in is going to be more expensive. So I remember having this conversation, you know, and I was talking to this old wholesaler, this experienced, I should say, wholesaler, and I’m like — and I found the kind of story to really dig deeper, and I’m like, “So how can you guys justify charging 1.5% on your large cap when I could put the client in a Vanguard fund that’s .05%?” And he started talking about like, you know — and again, there was nothing about that when I was buying because it’s literally 10x more — like it’s so much more, and I just don’t think that you get that return. So I know a little bit — kind of on a tangent there — but to me, it’s one of these things that I think as a pharmacist, these are things that you probably aren’t looking at that over the course of years really have a compounding factor, either from a negative perspective or if you can remove those, it can be very positive. So it’s important to maybe dust off your statement and look at it and really understand what you’re paying.

Tim Ulbrich: Yeah, and as we zoom out for a moment, Tim, to that point coming full circle here, don’t underestimate the long-term impact of these fees. You know, any one year, especially for those that are maybe getting started with investing and haven’t built up that large portfolio, you might look at 1%, 1.2%, 1.5% and say, ‘Eh, what’s the big deal?’ But if you look at 1.5%, as an example, versus .2% as another example and perhaps even an opportunity to get lower than that, over the long range of 30 or 35 years, that’s a big frickin’ deal.

Tim Baker: Yeah.

Tim Ulbrich: Big deal. And I wrote a blog post a couple years back that we’ll link to in the show notes really showing two side-by-side examples of somebody who’s investing over 35 years, another person same timeline, 1.5% average annual fee versus .2%, and it ends up being the difference of $1 million. And the title of that article is “Are You Making this $1 Million Mistake?” And you know, for some, maybe it’s larger. For others, maybe it’s a little bit smaller. But I think it’s so important that we uncover, understand, and begin to put a plan in place that can minimize these fees if possible wherever you have control of doing that. Tim, two perspectives I want to talk about as we wrap up this really important: And that’s first, from the perspective of, ‘Hey, I’m listening and I’m at the beginning of my investing journey. What can I do?’ And then somebody who’s listening that says, ‘You know what, I’m more in the wealth-building phase. I’ve been investing, maybe I’ve got a loose understanding of some of these fees but I’m not exactly sure. And what can I do and pivot now? And is it perhaps too late or not?’ So what would you say to those two individuals, one who’s just getting started, what tangible steps that I can take, and somebody who’s maybe a little bit later on in their journey and wondering is it too late and are there steps that I can take to help reconcile some of this issue around fees?

Tim Baker: Yeah, so I think for both of those buckets of people, I think it really goes back to what are your goals, right? So I think some people, they work with an advisor because they think that’s the right thing to do. And the advisor, you know, unfortunately sometimes it’s like every solution is the same. So everyone needs insurance and I need to make that commission. And that’s not true. I think it’s really understanding what your goals are, and that’s the first and foremost thing. And I think from there, if you’re at the beginning of the journey, I think it’s ask questions. You know, if I’m looking at my 401k statement, I want to understand why am I paying these fees? A lot of 401k’s, they have these managed solutions, and I’m like, well what do you get for that? And most of the time, it’s not a whole lot. Same thing like if you’re at the beginning and you maybe, you were contacted by an advisor in pharmacy school, chances are if you started working with them, a lot of those in mutual funds and IRAs and even — we just signed on a client that was sold this recently, and we’re like, it’s kind of a process of unwinding them. It’s really being cognizant of this and don’t sweep this under the rug. So like it’s definitely something that can compound over many, many years. So you want to get it right out of the gate. And it isn’t ever too late. So for the second, for the wealth-building phase, people that maybe have been working with an advisor for a long time or maybe their advisor is someone that’s been in the family, things have changed. So like even 10 years ago, what was offered in terms of high expenses and commissions and things like that, that day is thankfully dying with the advent of Vanguard and really trying to drive fees down and things like that. But I look at some of these well-known institutions that a lot of pharmacists work with, there’s just a better route. So like, you know, I’m looking at this particular statement, and the all-in for what this particular client was paying on commissions and everything like that was something like 1.75%.

Tim Ulbrich: Sheesh.

Tim Baker: You know? And if I compare that to like what we do, like if we were to move that into an IRA, it’s like .05%. And it almost sounds like fake. It sounds like it’s not real. But the reality is it’s like if you can get your money in a position where it’s unadulterated by those kind of hidden — and I could say they are kind of hidden because if you look at the statement and I search like “commission” or “fee,” it’s nonexistent. There might be like a fee disclaimer in the small print, but again, it’s not a line item that’s very obvious to the investor. So I would just say, like I would question, again, if you’re in a wealth-building stage, I would question what you’re currently in and if there’s a better way, just like we do with car insurance and things like that. There are opportunities out there to potentially be in a better position to again, really allow you to build money and grow wealth over time.

Tim Ulbrich: Yeah, and Tim, I would wrap up here by telling our listeners and community, whether you’re at the beginning of this journey, whether you’re in that wealth-building phase, whether you’re somewhere in between, I think this obviously is such an important topic. And we would love to have the opportunity to talk with you to see if what we offer at YFP Planning is a good fit for you and your individual plan and situation. And folks can find more by going to YFPPlanning.com, they can schedule a free discovery call. And I’m going to toot our own horn for a minute, but I’m so proud of what we have built — Tim, really what you have built starting back in the days of Script Financial, which is a fee-only comprehensive financial planning model. And one of the things I so appreciate about that model is it’s fully transparent, the fees are the fees in terms of what we charge for our services, and the client is paying our financial planning team for the advice that they’re giving related to their financial plan as a whole. So you know, whether that means we’ve got to spend a boatload of time on the investments and the retirement side of the plan, whether that’s we need to spend some time on the tax side or the insurance side or the student loan side or the home buying side, whatever would be the aspect of the financial plan, by nature, because of how that client is transparently paying for the advice and the transparency of those fees, we can spend the time where we feel like it’s most needed for the client and their financial plan and ultimately is in their best interest. And so that’s a model that I’m really proud of that we offer to the YFP community and for folks that are looking for a financial planner or perhaps re-evaluating the relationship they have currently, head on over to YFPPlanning.com and you can schedule a free discovery call. Tim Baker, great stuff, as always. And appreciate your time and expertise here as it relates to the discussion of fees and looking forward to upcoming content we have for the second half of 2021.

Tim Baker: Yeah, thanks, Tim.

Tim Ulbrich: As always, a thank you to the listeners for joining us on this week’s episode. And as we wrap up this first half of 2021, we appreciate you listening but also would appreciate if you could leave us a rating and review on Apple podcasts, which ultimately helps other people find this show. Our mission is to help as many pharmacy professionals as we can on their path towards achieving financial freedom, and one way we can do that is by reaching more people with this show. So if you haven’t already done so, please do us that favor, leave us a rating and review and ultimately that will help others find the show in the future. Thanks for joining us and have a great rest of your week.

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YFP 207: How to Avoid These 6 Common Financial Mistakes

Posted on June 10, 2021November 2, 2022 by yfpadmin

How to Avoid These 6 Common Financial Mistakes

On this episode, sponsored by Insuring Income, YFP Co-founder and Director of Financial Planning, Tim Baker, discusses common financial errors ranging from those made with investing, insurance, credit, and more. Whether you are just getting started with your financial plan or looking for a tune-up, this episode will help you avoid the most common financial blunders so you can maximize your financial plan and achieve your financial goals.

Summary

Tim Baker and Tim Ulbrich discuss six common financial mistakes and how to avoid them. While financial mistakes may seem inevitable, Tim and Tim speak from their own experiences with financial errors and share ways to prevent these mistakes from impacting your financial plan and financial goals.

Common financial errors discussed in this episode include:

1. Not taking advantage of employer match

When you don’t take advantage of your employer’s match, you essentially turn down free money. Many people don’t take full advantage of employer matches because they are not auto-enrolled to do so. Getting the maximum amount out of your employer match increases your compound interest over time.

2. No budget or no financial plan

Without a budget or financial plan, it is increasingly difficult to reach your financial goals. The budget is not a one-size-fits-all and should custom fit your personal experience and what works for you.

3. No insurance or inadequate insurance

As a pharmacist with a spouse, house, and mouths to feed, you should be aware of your insurance needs and insured for an event that will require insurance ranging from life, disability, or professional liability insurance.

4. Failure to monitor your credit reports

Tim Baker recommends checking your credit reports twice a year – he pulls his reports with the changing of the clocks for daylight savings. With the increase in the digital nature of personal information, it is critical to monitor your credit for errors and identity theft.

5. Not investing or not having the right attitude when it comes to investing

Being risk-averse may impact your long-term financial plan. Building and maintaining an appropriate asset allocation that matches your goals, risk tolerance, and time horizon while avoiding impulse purchases or hunches is a more intelligent way to positive investment returns.

6. Not utilizing professional advice

Financial professionals know what they are doing, and hiring someone allows you to have more free time to do the things you want to do.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Tim, welcome back to the show.

Tim Baker: Hey, Tim, thanks. Thanks for having me back. It’s been awhile.

Tim Ulbrich: What’s new and exciting from YFP Planning’s perspective?

Tim Baker: It feels like a lot, Tim. I feel like this year is full of change and we’re excited. A lot of things going on in the background. We’ve had our lead planners out in Columbus to do some planning. It was good to kind of meet up and now that people are getting vaccinated, to be able to meet up and do some planning and talk about our goals. And that was exciting to kind of show the new office, which people may or may not know that YFP has bought headquarters in Columbus. And we’re in the process of kind of renovating a little bit and getting that ready for us to move here in — move in here shortly. And that’s been exciting and having to deal with contractors, maybe not as exciting. I think the team has continued to expand. We finish up tax season here, which is always hair on fire, and we had a lot of good help to go through that. But we actually welcomed back a former team member, now current member again, Christina Slavonik, who worked with me a year or so ago and decided to kind of come back into the fold. And we’re super excited to have her as part of the team. And yeah, so lots of changes, but all good things I think.

Tim Ulbrich: Yeah, certainly excited to have Christina back, what that means for our team. Pumped up about the new office and it’s an open invitation to any of the community that’s in Columbus or finds their way traveling through Columbus, we’d love to host you and have a chance to meet up with you. Please reach out to us. And a shoutout, as you mentioned, Tim, to our tax team. I mean, over 250 returns that we filed this year, lots of wrenches that were thrown their way with extensions and delays in state extensions and legislative pieces that were being passed in the middle of tax season. And I thought they handled it well, and we’re ultimately able to serve the community, and we very much believe tax is an important part of the financial plan. So excited to see that continuing to grow. So today, we’re talking all about common financial errors. And you and I know that financial errors seem inevitable. We’re all human; we all make mistakes. And one of our goals with YFP is to help you, the YFP community, and certainly our clients as well, to avoid as many financial mistakes as possible. And certainly we have lots of resources that are here to help in this, whether it be this podcast, blog posts, checklists, calculators, and certainly our one-on-one comprehensive financial planning services as well. And just to be clear, this is not about shaming by any means. This is about learning and hopefully avoiding a repeat of making the same mistakes. So if you’ve already made some of these mistakes, certainly Tim and I have. We often talk about these between the two of us. We’ll that here again today. So if you’ve made some of these mistakes, certainly this is not about beating yourself up. Take what you’ve learned and certainly apply that information, and hopefully that can help with avoiding future mishaps or help you to spread the word and encourage and teach others along the way as well. So Tim, let’s get to it. We’re going to warm up with what many consider low-hanging fruit. No. 1 financial error/mistake I’m going to list here is not taking advantage of the employer match. So talk to us about the employer match and why not taking advantage of it is a significant financial error.

Tim Baker: Yeah, so I think this is where often we say, it’s free money. So not often do you ever come across a situation where there’s money to be had, you know, without anything in return. So I think in a lot of cases — and I know there’s some gurus out there that say like if you’re in debt, you shouldn’t even do this, and I would probably disagree with that. I think there are some exceptions if you have lots of high interest like credit card debt, consumer debt, then this might be a situation where you don’t want to get the match. But I would say for the most part, if your employer has a 401k or a 403b match or whatever that is, you want to make sure that you are taking full advantage of that. Most employers are going to have matches that are going to incentivize you to put anywhere between 2-6% to get the full match. There are some that are designed to push you a little bit further. But for the most part, if you’re in that sweet spot of putting in 2-6% of your income into a 401k to get a full match, I would say to do that. The reason that you want to do this is because if you can get that dollar, those dollars deferred and into that retirement account, this all goes back to the concept of time in the market versus time in the market. And really taking advantage of more compounding periods to take advantage of the compound interest. So if you’re out there and you have — you’re looking at your student debt or if you have sizable consumer debt and you’re like, man, I just feel like I put money in and it stays the same, that’s compounding interest kind of taking advantage of you. And what we want to do is flip the script a bit and get that to where your money is making money. So Albert Einstein has said, “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.” So the idea here is that you can get your money to work in the investment world and keep it working and allow those dollars to make baby dollars and they make baby dollars. That’s the idea here. So it’s really about time in the market. We see this as less and less of an issue now that I think it was the Obama administration, you know, has really pushed 401k plans to have an auto-enroll feature. So based on studies on this, if we are the variable that gets in the way, meaning people, that we typically are going to go with whatever is the default. So if the default is not to enroll and you have to actually take steps to do that yourself, we’re not going to do that. If the default is that we’re already auto-enrolled, then that’s what we’re going to do. So a lot of these plans — and Tim, our plan has this — is that after a certain period of time, we auto-enroll participants and we say, “OK, we’re going to auto-enroll them at x%.” For ours right now and for — speaking of the YFP 401k — we auto-enroll at 3%. The maximum match is if they put 4% in. So they would just have to go in and make that determination that they would like to do that. So auto-enroll features on 401k’s have made this a little bit less of a common mistake, but they’re still there, nonetheless, and we still come across more than you would think of those that are not putting in at least to get to the company match. And just to kind of put a bow on this, think of this in this light: You know, if you’re a pharmacist and we use round numbers here — if you’re a pharmacist and you’re making $100,000 and your company offers you a 3% match, think of that — and you’re not taking advantage of that right now, think of this as like a 3% raise where you are making $103,000 because $3,000 of that is going into your company 401k. And it’s surprising, you know, I think if you — dependent on the 401k — and I know we’re going to talk about the fees in an upcoming episode — but dependent on the 401k, it’s surprising how quickly those types of accounts can grow if you are deferring dollars out of your paycheck so you’re hopefully not missing it too much, it invested in the right way, and it’s not being eaten away by fees. It’s surprising how quickly those accounts can grow. This is a big, big miss if you’re not necessarily taking advantage of a match.

Tim Ulbrich: Great stuff, Tim. And I think just to further highlight time value of money, and I think for those that are listening that are especially getting started on the employer contribution side and perhaps aren’t leaning into that match yet, there is some trust in the momentum in compound interest, right? You can run the calculations, see the numbers, but it does feel like early on that you’re putting money in and you’re not seeing that growth until obviously those funds get to a certain balance and then you start to see the momentum of the growth on the growth. But to take your example, Tim, of somebody making $100,000, 3% employer match, $3,000, I would encourage folks to also think about it’s not just that $3,000. It’s what would that $3,000 be worth in 25 or 30 years? Right? So you know, that $3,000, if that were to grow at let’s say 7% average annual rate of return over 25 years, that $3,000 in 25 years is worth more than $16,000. So time value of money is not just what does it mean in today’s dollars, but what would it also mean in the opportunity cost of not investing those dollars? So that’s No. 1, not taking advantage of the employer match. No. 2 is no budget, no financial plan. Harsh words, Tim Baker. What do you mean by that? And you know, budgeting, spending plan, whatever we want to call it, why is it so critical to the financial plan?

Tim Baker: And some people would disagree with this. But I guess some people, especially if they might lend credence to like, you know, if you’re starting out, if you’re a new practitioner, definitely budget. If you get to a certain inflection point, you don’t need to budget. I would disagree in a sense. If you think about this in terms of like if you think about your household and the salaries you make as like revenue, if you’re a household and you’re making $200,000-250,000 as a household and you equate that to like a business and a business making that revenue, businesses are going to have budgets, they’re going to have projections, they’re going to bucket money for certain — just like we do, Tim, at YFP. You know, we have ‘this is the amount of money we want to spend on marketing, and this is the amount of money that we want to spend here and there.’ Like that’s a budget. And I would say that if you treat your household as a company, like you’re going to earmark those for different purposes. So I think this is a way of how you go about and do that. So I think where budgeting kind of gets a bad rep is the $0-based budget where every dollar has a job and you basically assign a purpose for every dollar that kind of flows through the household. And for some people, that can be super arduous, that can be super over-the-top. But I don’t necessarily think it’s an exercise that doesn’t have merit or value. But I think typically as you go, you find the flavor of ice cream that works for you. So there’s lots of different types of budgets out there. You know, you have the $0-based. I’ve seen a line item budget, I’ve seen a pay yourself first budget. There’s a lot of different ways to go about it. I think at the end of the day, a budget goes back to what is the intention of the resources that you have.

Tim Ulbrich: Absolutely.

Tim Baker: And applying that to — and by intention, we typically mean like goals. So what are the goals that you have? What are you intentionally trying to achieve with the six figures of income that you’re earning? And how do we go about that? So the budget is typically the structure or the steps to go from ‘Hey, I want to travel,’ or ‘I want to be able to give back,’ or ‘I want to be able to take care of an aging parent.’ The budget is typically the mechanism that allows that to kind of come to be. So I would say that this is typically lockstep with the savings plan. Most financial planners, in my opinion, they’ll say, “OK, your savings plan is your emergency fund, and that’s it. So you need to have $20,000 in your emergency fund as an example or $30,000 in an emergency fund,” and then it stops there. I think it needs to go further. So I think your budget and how you’re spending needs to kind of be in sync with how you’re deliberately saving for different things that are basically on the docket for goals. So — and I wouldn’t even call this a step, Tim. It’s a process. I’m a big Sixers fan, trust the process. Hopefully JoJo is going to come back —

Tim Ulbrich: I was going to say…

Tim Baker: No, but it’s a process. And I think what people do and where they get hung up on budgeting is that it’s more about striving for improvement and not perfection.

Tim Ulbrich: Yeah, that’s right.

Tim Baker: We want everything to be balanced, we want everything to kind of line up. And in most cases, that’s not going to happen. So depending on the budget and what flavor that suits you best is going to really allow you to kind of figure out how it works. So to me, this is really about being more intentional with spending, being more intentional with kind of top-line revenue. So this is not just an effort in kind of an exercise in scarcity of like, hey, this is what the pie is. I want to challenge you to grow the pie. So to me, it’s looking at both sides of that equation and really striving for improvement of what you’re trying to accomplish and not perfection. So I think that if you can kind of wrap your arms around that and not be wed to one way of doing things, then I think you’re going to see improvement. So and there’s lots of different tools out there, technologies, Mint, YNAB, some people use good old-fashioned spreadsheets, some people use envelopes, like physical envelopes to do this. At the end of the day, you know, I think the question you should be asking is, am I intentional with how I’m spending? Am I intentional with how I’m bringing money into the household? And does this align with the goals that I have set out for myself. And if it doesn’t, then I think that’s where you kind of need a little bit of a gut check to make sure that you’re on track.

Tim Ulbrich: Yeah, intentionality really stands out there to me, Tim, whether someone’s listening and they’ve got a net worth of -$400,000 or a net worth of $4 million. The process may look different, the intensity of the month-to-month might look very different, but at the end of the day, like budgeting, whatever you want to call it, to your point about looking at it from the point of a business, it’s about what are the goals, what are we trying to achieve, and then what’s the plan to make sure that that’s a reality. And the buckets might look bigger or smaller, the process might look more or less intense. But it’s about being intentional with the goals and the plan. For those that are looking for a starting point, a template, a process, you can go to YourFinancialPharmacist.com/budget. We do have a spreadsheet that you can get started with, certainly not necessarily the ending point. You can implement technology tools and evolve it from there, but that can be a good starting point. So that’s No. 2, no budget, no financial plan. No. 3 is no or inadequate insurance. I’ve mentioned before, Tim, on this podcast that insurance I think is an often overlooked part of the financial plan for obvious reasons. Thinking about something like a death or a disability or a professional liability claim isn’t necessarily the most exciting thing to think about when it comes to financial planning, especially when we can think about things like investing or saving for the future or getting rid of that student loan debt. So tell us here about what you see as some of the common pitfalls around inadequate insurance coverage.

Tim Baker: I think what a lot of people default to, a lot of pharmacists default to, is that what their employer provides as part of their compensation package is the plan for their insurance. And it’s not. It’s typically — we view it as a benefit that should be taken into consideration as we’re building out an insurance plan for your financial plan. And we’re really talking about the protection here, so like what we talk about with our YFP planning clients is how are we helping them growing and protecting — so protecting being the operative word in this step — their income and growing and protecting their net worth while keeping their goals in mind? So protection here is what we’re talking about. And typically, you know, what we focus on is things like life, disability, and professional liability. So your employer might provide you different coverages based on the employer. And that’s going to mean different things to different people, depending on their life situation. But oftentimes with pharmacists, you need to take more action in this or you run the risk of exposing yourself to a loss that could potentially be catastrophic. So you know, health insurance — so I would say that the one thing that is a plan and not necessarily a perk is health insurance. So health insurance, you’re typically best to go with the group policy, although that could change in the future. That could change where the way that employer compensation packages are designed in our country is that if the government isn’t providing that, it’s health insurance the employer does. That could change in the future, and we’ve seen that with things like pensions and 401k’s where pensions have gone away and they’ve been more robust, and a lot of it put the onus back on the employee for saving for retirement. So that could change in the future. But if we break down the insurance piece, a big miss is if we say not having adequate insurance is knowing what to have, knowing what you think that you need from particularly a life and disability insurance policy. You know, I typically say with regard to life insurance — and another piece of the protection of the financial plan is estate insurance — is that typically when you have a spouse, a house, and mouths to feed, those are typically going to be the opportunities to make sure that you are protected from a life insurance perspective and from an estate planning perspective. So more often than not, pharmacists are going to need a lot more of a benefit than what their employer can provide. So that’s typically where you want to go out into the individual policy world and make sure that you are fully protected. That’s one of the problems in the financial services industry too is like we come across a lot of pharmacists, Tim, that they might be 27 or 28 and they’ve been sold a crappy insurance policy, life insurance policy, that they don’t need, right? Because they don’t have a mortgage, they don’t have other dependents relying on them, their loans are going to be forgiven upon death or disability, so it’s just a policy that they probably don’t need right now. So it’s kind of like you have a hammer and you see a nail and it was a good cookie-cutter solution for everyone. One of the mistakes here is not understanding the need. So like we’ll have clients that will come in that will have young kids and things like insurance are not even brought up. And I look at that and I’m like, that’s a big risk. Like the student loans are important, and you’re talking about real estate investing and some other things, but like we probably need to address this first. So — and it’s typical, right? We don’t want to — we typically think that it’s not going to happen to us, a premature death or disability. So it’s very natural. So that’s part of the planner’s job is to kind of bring that to the forefront and make the proper recommendations. The other thing we’ve been talking about is disability insurance. So these are typically more likely to happen and typically more expensive because you typically have medical bills that are going to pile up as a result of a disability. So having the proper insurance there, whether that is through your employer or your own policy or buying a supplemental policy to kind of make you not whole but make you to — indemnify you to a certain threshold that you feel like you can continue the household, that’s a big thing. And a lot of these policies, the way that they’re written don’t provide a lot of protection. So it’s really looking at does it make sense to add a policy for yourself? So the idea here is that the sooner, the better. Whether it’s life, disability, the younger that you can get these policies in place, typically the better from a cost perspective. A lot of the policies that you have through your employer, the group policies, they’re not portable. Or if they are, they’re not great compared to the individual policies. So I think if you can have these separate from the employer, it makes a lot of sense with regard to protecting your financial plan.

Tim Ulbrich: Yeah, and I think you’ve covered a lot here, and there’s just a lot to think through. And we’ve only talked through very briefly three different areas. You mentioned professional liability, life, disability. But questions of like, what do you need? What do you not need? Based on what you do need, how do you shop for those, looking for policies that — and getting advice that really has your best interests in mind to make sure you’re not underinsured or overinsured? What does your employer offer? What do they not offer? What’s the gap? What are the tax implications? So important part of the plan. I think our planning team does an awesome job of weaving this in and for folks to consider, are they underinsured? Do they have adequate insurance or not? And how does that fit in with the rest of their financial goals and plans? So that’s No. 3, no or inadequate insurance. No. 4, Tim, failure to monitor credit reports. Wow. When I think of checking a credit report, I think of boring, No. 1. No. 2 is necessary, right? So you know, why is this such an important step? How often should one be doing it? And why do they need to monitor credit reports over time?

Tim Baker: Yeah, and I would definitely chalk this up to like to stage of life. So you know, if you’re more Gen X or Baby Boomer, this might not be as important because you might not be making the big decisions, although you could be sending kids to college, there might be some loans that you’re taking out. But I would say that if you’re — a lot of the clients that we work with, you know, especially as they’re starting their careers, there’s a lot of decisions that are being made that credit granting is on the table. So that’s like home purchase, car purchase, things like that. Naturally, because of age of credit, your credit is going to become stronger and stronger as you go because that’s the way that the factors that kind of go into your credit score, age of credit is a big one. But I think the big thing that is kind of universal here that is becoming more and more of a thing is just the identity theft stuff. So as our lives become more and more digital and there’s more exposure to theft, it’s kind of this cat-and-mouse game. It’s not really a question of if, it’s really when. Having kind of eyes on this is really important. So I like to typically recommend that we check credit at least twice per year. So I kind of do it when the clocks change, so when we spring forward and fall back. I myself have gone through this exercise. I’ve found large enough mistakes on my credit report that drastically changed my credit score. And this is even — like when I first started advising clients on credit, this was before the days of like banks learning kind of suspicious behavior. A lot of these banks, a lot of these institutions, they’ve come a long way to alert you and kind of give you some structural things to look at, you know, if you have expenses that are out-of-state or whatever. Even in that environment, there were some things that were from my credit report that should not have been there, that drastically changed my score. So typically, you see differences in scores because you have different formulas that every Equifax, Experian, Transunion are using to calculate your score. Different creditors are going to report differently. So if you buy a Toyota, they might be really good about reporting to Equifax but not Transunion for some reason. Or Mastercard is really good, but this other company isn’t. So you’re going to have different inputs. And really, that’s going to be the big factor that will see why your scores are different. But I think the big thing for all those that are out there listening to this is going to just be from an identity theft. And I’ve looked at client credit reports, and I’ve made comments about hey, these are things that we can do to improve this or these are different factors to consider, but I can’t look at a credit report and know that hey, this doesn’t belong there. So it’s really kind of home cooking that is really important here. So the Fact Act that was enacted I think in 2003 allows you to access your credit report for free one time per year from each of the three reporting agencies for free. So you go to annualcreditreport.com. It sounds fake, it sounds kind of hokey, but that’s the way to — the site that you want to go to is annualcreditreport.com, and pull your credit score from each of the reporting agencies. I would just kind of rotate them through and take a glance at it, see if there’s anything fishy or — and then you can always dispute things that are inaccurate, and it’s pretty easy to do that on the website there. So that would be a big thing that I would make sure that you want to build into your practice.

Tim Ulbrich: Yeah, I think to your point, this is a good maintenance part of the financial plan, right? It’s like periodic oil changes, like we’ve got to be doing this. I like your rhythm of when the clocks change, twice per year, again, annualcreditreport.com. We talk about tax being a thread of the financial plan, credit is a financial — is a thread of the financial plan, impacts so many different areas, whether that would be home buying, real estate investing, business purchases, you mentioned identity theft, so something we’ve got to stay on top of. We did an episode, Episode 162, where we talked all about credit, importance of credit, improving your credit, understanding your credit score, credit security practices, so I’d encourage you to check that out. Again, Episode 162. Tim, No. 5 here on our list of common financial errors is not investing or improper attitude towards investing. Now, I think we’ve talked a little bit about not investing when we talked about not taking advantage of the employer match. So obviously time value of money, compound interest, we’ve got to be in the market. Talk to us more about the improper attitude towards investing. What do you mean there?

Tim Baker: Yeah, so I think there’s like two extremes here when I would say that typically doesn’t necessarily align, which I think with what I think is a healthy investment portfolio. So one is not wanting to dip your toes into the market. So I kind of hear like, ‘Oh, I don’t want to take risks. I don’t want to lose any money.’ And I think for us to kind of stay in front of things like the inflation monster, like taxes, you can’t just stuff your mattress full of dollars and hope to one day be able to retire comfortably. You know, so it’s kind of like if you want to make an omelet, you’ve got to crack some eggs. So the idea here is that we need to build out a portfolio that takes risk intelligently but that is over the course of your career in line with what you’re trying to achieve. And most people, you know, if you’re in your 20s, 30s, 40s, and maybe even 50s, they typically are more heavily weighted in bonds than they need to be, in my opinion. So you know, a lot of people when the market crashed at the beginning of the pandemic, they’re like, oh my goodness, Tim, like I want to take my investment ball and go home, meaning like I want to get out of this investment. And the idea is no, like let’s keep going. Either let’s put more money in or let’s hold the course. So you want to do exactly what the opposite of how you feel. So you know, the big drivers in your ability to build wealth over time from an investment perspective is that you have the appropriate asset allocation, so the mix between stocks and bonds, and really driving your fees as low as possible with regard to the investments. In a lot of cases, when we look at our clients, there’s a lot of opportunity for improvement there. And one of the things we talk about in webinars and even in our presentation with clients is that you look at all the variables in investing, and we have conservative — we talk about Conservative Jane. So Conservative Jane makes $120,000, she gets 3% cost of living raises, she works for 30 years, but she doesn’t invest the dollars. She basically keeps them in cash or like a Money Market. At the end of that time period, she has $600,000. But then we look at Aggressive Jane, who does the exact same thing except the only thing that she changes — and I think the big thing is she puts 10% into her 401k — the only thing that Aggressive Jane does differently than Conservative Jane is that she trusts the market in the long run. So the market returns about 10% year over year, and we adjust it down for inflation to about 6.87%. And Aggressive Jane is not saving harder, she’s not working longer, she’s not making more money, she’s just trusting in the market over that amount of time, and the swing is about — I think it’s $1.2 million. So Aggressive Jane at the end of those 30 years will have $1.8 million. So that’s very impactful if you can internalize that and bake that into your investment strategy is really trust the market. Over long periods of time, it’s very predictable. The only other thing I think I’ll say about this is the other side of that is that people have maybe unrealistic expectations of their investments. So they think that if they invest a certain way for four or five years that they’re going to have this portfolio that it can live off the interest. That’s not the case, you know. And I think that there is a lot of speculation and things like that where you’re heavily invested maybe in crypto or these certain stock that can get you into trouble. And I typically say that it’s not that there’s no room for that, it’s that the overwhelming majority of your investments should be super boring and bland and not exciting at all. And typically the more exciting that the investments are, the worse it is for you, the investor. Keep that in mind as well.

Tim Ulbrich: Tim, I would argue — and you probably see this with clients and our planning team does as well — I’m not sure there’s a harder time than right now to trust the market over a long period of time and stay the course. You know, you mentioned that a good long-term investing plan — I’ve heard you say before — should be as boring as watching paint dry, right?

Tim Baker: Mhmm.

Tim Ulbrich: And I have that head knowledge, like I agree with that and I suspect many of our listeners do as well, but pick up any news cycle for 24 hours, right? I mean, whether it’s — and I’m not saying any one of these alone, to your point, is necessarily a bad thing or that folks shouldn’t be doing them — but whether it’s news around crypto or NFTs or ESGs or think of what happened with GameStop and Robinhood and others, like and I think it really challenges like the philosophy and you really have to be disciplined in like tuning out the noise for long-term investing strategies. Now again, I want to highlight, I’m not saying any of those things doesn’t necessarily have value or doesn’t have a place in one’s plan, but if the vast majority of an investing plan should be boring and should be over a long period of time, we’re trusting the market, it’s hard right now. I mean, it’s hard. Are you feeling that pressure not only individually but I sense from clients you’re probably seeing some of that as well.

Tim Baker: I kind of don’t listen to it. I don’t really read much — I mean, I try to read into it just to have an understanding of what’s going on, but I guess for me, I don’t feel the pull like I used to back in the day. One, because it’s a very humbling experience, and sometimes my clients haven’t been humbled. But like I kind of equate this, Tim, to kind of go a little bit off topic here, it’s like have you ever been around someone that’s like, man, the world is going to heck, this generation, whatever. And I think back on like well, what did they say about like the hippie, like free love? I feel like it’s always — like they probably were saying that about the dot-coms when before that, so there’s probably always been things like that that have tempted people to kind of go awry. And maybe cryptocurrency is a thing that does ultimately shatter our traditional way of looking at money and investments and things like that. I don’t know. I mean, I think that it’s really too soon to tell on that. But yeah, I mean, I think so. I mean, I think it is tough. I think if you’ve been humbled enough, it can be a little bit easier to drown it out. But to me, I think of this as like singles and doubles, singles and doubles, to use the baseball analogy is that if you’re going up at every at-bat and you’re trying to hit the cover off the ball, you’re going to strike out a lot. And you might hit a few home runs, but we’re really looking at consistency. And if I know that there is this — the S&P 500 returns this, and it’s never been, we’ve never had a rolling 20-year period that’s been negative, even through the Great Depression, I’m going to bank on that unless told otherwise. So like, that can be hard for people to hear because they think of investments and they think sexy and exciting and things like that, but that’s not what I think a healthy investment plan makes. I think you want to keep the speculation low. And I’m not saying that that’s not — I still from time to time will go to a casino and play Blackjack or play poker. I still gamble just because I don’t do it as much as I did when I was younger, but just because I’m out and I’m with friends or I’m doing whatever. But if that’s the bulk of what your plan is to get to financial freedom, so to speak, I would caution you.

Tim Ulbrich: Yeah.

Tim Baker: And it could work. I mean, it could work. You could put all your proverbial eggs in the Amazon bucket and be completely OK, but you know, the way that people view Amazon — maybe not now but you know, 5-10 years ago, was very similar to how they viewed Sears back in the ‘70s, ‘80s, and ‘90s.

Tim Ulbrich: That’s right.

Tim Baker: And that company was this behemoth and they sold everything and would never go away. And then all of a sudden, it’s not a viable company anymore. So — and I can say this, I used to work for Sears back in the day, so I can say that not everything lasts. But I think that the U.S. stock market has been very predictable over the long run.

Tim Ulbrich: That’s a great example, Tim. We might be dating ourselves a little bit, but you think of — I can remember when it was the lesser known at the time Walmart and Amazon entering into the KMart and Sears world. It’s hard to even think of that in today’s day and age. I think your point about being humbled is a really interesting one. You know, we’re talking about common financial errors. So I’ll throw one out here. 2008, I was humbled by thinking I could pick individual stocks. Thankfully, I didn’t invest a whole lot of money. Circuit City, how did that work out? Right? So you know, I think your point about being humbled and again, there may be a portion of the portfolio where this makes sense for many folks, especially if they want to scratch that itch. The other thing you mentioned here, which I want to highlight we’re going to come back to next week is you mentioned fees. And we’re going to talk next week about how important it is to really understand the fees of your investment portfolio and really understand the impact that those fees can be having on your long-term returns and the importance of holding on to as much of your investment pie as possible. So stay tuned with us next week as we talk about fees. Tim, I want to transition into our sixth and final error, which is not using professional advice, not having a coach in your corner when it comes to the financial plan. And I think this is a good segue to what I just mentioned of this day and age, there’s a lot of noise. And so having somebody who’s keeping you accountable, who’s really reflecting back to you what you said were important and the goals, helping you look across the financial plan and really helping to direct you towards those end goals that you had articulated and to keep you on the path when human behavior may suggest that we want to go off the path from time to time. So obviously we’re biased, full disclaimer, we wholeheartedly believe in the value of a financial planner, otherwise we wouldn’t be doing it. So Tim, tell us why you think this is such an important part of the plan and why it’s perhaps a mistake if folks leave out a coach from their plan.

Tim Baker: Yeah, so I think if we look at it like our mission of empowering pharmacists to achieve financial freedom, I think we both agree that in a one-on-one engagement with a fiduciary, a fee-only planner, is the shortcut to that. And I think we’ve seen that a lot with our clients where we see kind of the before picture and the after picture, and those are typically because of I think that relationship that a planner has with a client and the way that is forcing them to think differently, right? So like I often joke that I’m a financial planner, but I need a financial planner because I need someone to — a third party to objectively look at our financial plan and say like, am I insane? Or are we nuts? Or are we on track? Right? So I like I know the technical piece of it, like I know what it is to be a CFP and what — just like you’re a pharmacist and you need to know the technical piece of it or a doctor, they’re still going to go to like other health providers to kind of provide that insight and those opinions. But so I think the third party is a big thing. I think the other thing that we don’t necessarily trade on that much is, you know, like for a lot of people, when’s the last time you actually sat down and talked about goals with yourself or like with a partner? So like, you know, I kind of equate this to like I’ve been in periods of my life, Tim, where you are so — I don’t want to say like zoned out but like you ever get into your car and you’re going to work, and it’s 6 o’clock in the morning or whenever you go into your work, and you drive that 30-minute commute, and then you get to work and you don’t even remember any of that drive. It’s just —

Tim Ulbrich: That’s right. Yep.

Tim Baker: You’re on like autopilot. I think that the danger of not utilizing a professional in some regard is that you get into that where you like wake up 10 years from now or 20 years from now and you’re like, what the heck did I actually do? Or like is this a wealthy life for me? And you’re not having those critical conversations with yourself or out loud, which I think can be so powerful. So where are we going? Are we sure that’s where we want to go? Is this insane? And having that kind of, again, objective third party to make sure that we’re outlining goals and we’re being held accountable to that. And then I think the other thing that like is really important is that guidance, is that knowledge, is that technical expertise with best interests in mind. So to me, like if you’re talking to a financial planner, the two things that I think need to be there and if they’re not I’m going the other way is are you a CFP? So unlike a PharmD or JD or MD, like this is a designation that there’s an ethics requirement, there’s an experience requirement, there’s an education requirement that most financial advisors don’t need to kind of do what they’re doing. So like the barrier to entry to become a financial planner is very low. So you want to make sure that the CFP designation is there. And I think the other thing is are you a fiduciary? Are you going to act in my best interests? Or can you put your interests, meaning the planner’s interests, ahead of mine? And what most people don’t know is that 95% of advisors out there are not fiduciaries. And typically if you know the names of those types of firms, they’re not fiduciaries, meaning that they can put their own client — put their own interests ahead of their client’s. So you know, I think that the technical expertise and that is, those are just table stakes. Like I think that that’s going to come with the territory. It’s really I think overlying the human element and to me, I think what we try to do from a planning perspective is make sure that we’re taking care of clients today, say in 2021, but we’re also taking care of clients in 10, 20, 30 years from now and their future self and really threading the needle between taking care of what’s going on today and then that future version of yourself. And I feel like if you don’t feel like that push and pull, if you’re always saving or if you’re always spending, that can lead to some problems. And I think that having that objective third party to kind of guide and hold you accountable, give you some tough love, give you some encouragement, give you some idea of where you’re at compared to peers, for example, I think that’s vitally important.

Tim Ulbrich: Yeah, and Tim, what you said about the human element just really resonates with me and I think will with our community as well. I mean, I think we often may have a perception of financial planners or advisors, whether that’s from movies or books we’ve read or parents that have worked with an advisor, whatever it be, but we tend to think I think of more of that tactical type of moves that folks are making, right, whether that’s certain investing decisions and insurance decisions, maybe it’s Roth conversions, things like that, tax decisions, etc. All of those are important and to your point, that’s table stakes in terms of an expertise that they’re going to provide. You want that knowledge, experience, and expertise. But it’s the human element. I think so much of the value you’ve provided to Jess and I has been in the conversations that have been initiated and the constant revisiting of what are our goals? What did we say was important, and are we actually living the wealthy life that we said we wanted to live? And the answer to that is not always yes, but we need that compass that we’re moving towards and we need that reminder, we need some accountability, we need a coach to make sure as life is racing by that we’re ultimately stopping, pausing, and getting back on the direction that we said was so important. So for those that are listening to this, if that is resonating with you, we’d love to have an opportunity to talk with you to see if what we offer from a financial planning standpoint is a good fit for you. You can go to YFPPlanning.com, you can schedule a free discovery call. Again, YFPPlanning.com. Tim or I would love to have a chance to talk with you further. Tim, great stuff. We’ve covered six common financial errors, and as always, we appreciate the community listening in to this podcast. If you liked what you heard on this week’s episode of the podcast, please do us a favor and leave us a rating and review on Apple podcasts or wherever you listen to the show. That will help other pharmacists be able to find this show as well. Thank you so much for joining, and we look forward to this episode next week. Have a great rest of your day.

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Tag: financial mistakes and how to avoid them

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