Hello, and welcome to the Life By Design podcast, brought to you by Strategic.This podcast is all about helping you live your great life.Each episode will feature insights from our Chief Investment Officer, Doug Walters.Hello, and welcome back to the Life By Design podcast.Joining me again is Doug Walters.Hi, Jay.How are you?Fantastic.Great.Um, so today we talked about maybe diving in a little bit into a topic of fees.Ah, exciting.Yes.And I'm sure most of you are gonna find this riveting at home.But I think it's a very important part of this.And, um, you know, again, one of those things that I, I, till I got here I didn't know a lot about, and why it mattered, and, and what it, you knowThis whole just was very nebulous to me in general.Maybe, maybe parts still are, uh, but like-you know, and I thought it'd be good for us to talk, um, for, for us, uh, Strategic, and, and we are, uh, very transparent about our fees and what we do.And so I thought maybe that might be a good point to start is let's, let's continue that transparency, do an intro about our fees and our philosophy behind it, and then we can start talking about other things people could be on the, on the lookout for.Right.Sure.So our fees generally are an asset-based fee, meaning it's a percent of the assets under management.And the nice thing about that is it really aligns our incentives with our clients.The more money we make for them, the, the more we make.So, you know, perfect alignment in incentives.We don't sell anything, we're not making any, you know, commissions.It's all based on that asset-based fee.Right, and it, it aligns very well with our fiduciary duties, and, you know, all the ethics that we kinda have around our CFP, CFA stuff is, is doing well for our clients and, and in their best interest.Right, right.And we're very transparent about this fee.We show it to all of our clients upfront, so they're very aware of what we're charging them.Yeah, and, and that is part of our process with, uh, intros or onboarding.You know, for those of you who are listening that are clients, you know this, you've seen it.Uh, and for those of you who aren't, you, if you were to come in for an onboarding or to become a client, right upfront.It's very clear.Right, right.And that fee that we are charging is not just for investments- Mm-hmm.which is obviously my world, but the whole, um, planning, uh, relationship- Yeah.with our clients.So it goes well beyond investment management.It's that whole great life, planning.Yeah.Yeah, and I mean, it's just, uh, it, it's very cool to see that.Uh, and that was one of the neat things when I first came onboard that we showed, was just like, "Oh, okay.That's great," you know?Like, "I can see, that makes sense."It, it's very transparent, as we said already.Right.Uh, but yeah.And, and so with that, and kind of the philosophy behind that, why, why do we do that?What, like what is the reason behindWhat is the reason behind transparency or behind the, uh- The, the fee structure.the, the fee structure?Again, it's that alignment of incentives.We wanna make sure that, you know, we are always operating in the best interests of the client.We've talked in the past about being a fiduciary.Mm-hmm.Our, our incentives are perfectly aligned.Our goal is to grow our clients' assets.That is in their best interest.And nicely, it's in our best interest as well.Right.And so what are like spee- So that's kind of how we operate.What are some other fee structures out there that, if I was an investor, I would wanna be aware of?Right, so you could be getThe, the other way to charge is more of like a product-based fee, so you're paying for purchasing an investment product, say, you know, an upfront load, they call it, on, uh, a mutual fund or an annuity.You're paying like a certain chunk of cash upfront.Mm-hmm.Um, so that's another, another way.I think, um, it's probably be a good idea to talk about like the f- other fees that are out there within even our universe.Okay.Right?Yeah.So it's, you know, what are weWhat are the potential fees to watch out for that could be on top of this management fee that your advisor is charging?And what is your advisor doing to try to minimize those fees?Does that make sense?Yeah, I think that's great.Yeah.So, so I think it, uh, the, the most common is a, an expense ratio.So it's a, sometimes called a hidden fee, although it's not hidden.You can look them up.They're very accessible.But just about any fund you might own, say a mutual fund, uh, an exchange traded fund, is going to have an embedded expense ratio in it.Call it, you know, ten basis points, meaning dot-01%.Mm-hmm.Uh, but they can be high as well.They could be over 1%, and that would be a, you know, a significant potential fee.So you'd want, you'd wanna look at those and understand those embedded fees within the funds that you own.What is that fee going towards?It's going towards the manager who has built that, uh, that investment product.You know, so some, you know, some products are very simple, like an S&P 500 index.Very simple to construct.The fee is gonna be very low.If you have a very complicated product, which is, you know, maybe has, uh, embedded options or, you know, is investing in hard-to-access securities, that fee could be much higher.And that's at its, at its lowest essence is based on, like you said-the amount of work that an, uh, someone has to put in to manage that to make sure it's doing what it should be doing.Right.Right, exactly.And our job, so where we're, we are adding additional value for our clients and it is one of our guiding principles on our investment team, is to make sure that any expense we're paying there within those, those investment offerings, we're getting rewarded for that expense in terms of extra return.So, our goal is, is not necessarily to minimize those fees, but it is to maximize the return we're getting after considering those fees.Mm.And I can give you a really concrete example- I'd be interested.that aligns with our, our philosophy.So, at the core of our clients' portfolios, we could choose that S&P 500 index and we could pay a very low expense ratio for it and our clients would have solid access to US large cap equities.We generally don't do that.We put our, the core of our clients' portfolios for that, that US large cap exposure into multifactor funds, funds that focus on factors that tend to outperform over time, quality, value, momentum, size, and you pay a little bit extra for that.Mm.The expense ratios are still relatively low for these funds, but they are higher than the, you know, they, this typical index fund.But over time, those funds have been rewarded with higher returns, so our clients are getting rewarded for paying a little bit more for those funds.Right.And then, you know, i- in relation, we've talked about this in the past, but with, for instance, private equities, right, the fee would, increases the more money you're making.It's not a set fee and then you could build on top of that, go, "Okay, we know what that fee is, so we'll try to get more m-" You know, this grows with private equities, it grows with how much e- how well it does, right?Right, right.So with, with private equity, there are generally layers of fees.There's a management fee, there's a, um, you know, something equivalent to an, uh, an expense ratio perhaps, and then typically, there is like a performance fee as well.So if they clear a certain hurdle, they're gonna start to take, you know, a portion of the profits from you- Mm-hmm.and it can be as much as 20%.And, you know, you might say if they're outperforming, great, they can have some of that.The problem is, and we've talked about this in the past, is again, when you factor in all of those sort of layers of fees and the performance that ultimately results, you're not getting rewarded for, for those fees, for the liquidity you're giving up, for, um, not having access to those, those funds because you tend to be, you know, when you invest in private equity, it tends to be locked up, so you're not getting rewarded for those fees.Mm.So why bother?Right.Yeah.Yeah, and I, I guess I brought that up just as an example of how it can be different, right?And, and, you know, we, we have another podcast where we talked about fiduciary, working in the best interest, and, you know, really understanding what it is you're getting, being clear on that.Right.You know, and then confident that you're doing the best that you could be doing out of, out of what you're being offered.Right.Yeah, exactly.So that's, that is, you know, a big part of our job to make sure that we are, know, being as fee efficient as possible, making sure we're getting the return if we're paying a little bit more.And there are other fees.Again, we started this conversation with sort of what other fees should we- Yeah.be watching out for.There's custodial fees.You know, your money is held somewhere.Right.Right?And in our case, we tend to use Schwab.Money is held at Schwab.Schwab is the custodian.They have to make money somehow as well.We are, there's different ways we can custody assets at Schwab.We are always looking for the way that's going to advantage our clients the most.Typically for us, that means we will do trade-based pricing, so we pay for trades, but on the Schwab platform, a lot of the funds are tra- are, are free, uh, free to trade.Right.So trade-based but we're choosing funds that don't have, uh, a trading fee.So keeping, again, keeping those fees as low as possible for our clients.So custodial fees is another.And another one that's a little bit, uh, more nebulous is, is spread.So this isn't a fee that anyone's charging, but it is a real fee when it comes to, to investing which is, there is a spread between the price you can buy a security at and the price you can sell it at.Okay.Okay?So again, this is the- With you so far.All right.Okay.So it's notYou know, there is some infrastructure when you're buying and selling securities, and someone has to make some money from, you know, supporting that infrastructure.Okay?So you have market makers who are providing a spread.Mm-hmm.If you're buying, you're gonna pay a little bit more.If you're selling, you're gonna pay a, a little bit less, and that spread is what that market maker is going to, to make.So they have to, um, earn some money for creating that liquidity.In general, for, you know, a US large cap company say, or a big, uh, uh, liquid exchange-traded fund, those spreads are tiny, right?It's a very small expense that would be incurred.Uh, and again, by expense I mean inefficiency really.If you are using illiquid securities, if you're not choosing your, your fund partners well, you could end up with big spreads.You go to trade, rebalance your client's portfolio, you could end up losing, um, significant amount on, on those trades.So we wanna make sure, again, as we're choosing our securities that they are liquid.Mm-hmm.That they're going to be able to trade, that we can keep those spreads as tight as possible.And if there is, you know, if we are paying, you know, holding something that is a little bit less liquid, we wanna make sure there's a reason for that and that we're getting the reward for it somewhere in the portfolio.Yeah, and, you know, a lot of that did not make sense to me.And soAnd I'm sure for those of you at home, you're going, "What?"Uh, and, and I think that's okay, right?The, the idea of this is to understand the complexity behind all of this.And, and for you and I, listener at home, uh, it may not have made sense but that's why you trust in a fiduciary.That's why you trust in your, your investment team, uh, to, to relay that to you in a way, and, and to take care of it for you, right?To make sure that, that all makes sense.Um, but yeah, that'sUh, that was great, Doug.Yeah, yeah.No, we are, we are worrying about it so our clients don't have to.That's right.But this- Yeah.is, this is what, you knowFor those of you that maybe, uh, enjoy this kind of talk, now you know.There's the, there's the, the depth at which that can, that can go.And, and I think it'sYou know, I, I, uh, we wa- we were talking about, uh, you know, in our fiduciary podcast kind of relating this to cars and, and, you know, to kind of bring it back home to that, some of us know a minuscule amount about how our car actually operates, right?Like if weYeah, maybe we could change a headlight or a taillight and be okay andBut, you know, there's some complexities inside the engine, you know, thatI don't know.Sometimes the car just gets me to work.That's all I know, and I'm happy about that.Right.And if it doesn't, I go to a mechanic, and they figure it out, and they fix it for me.And so, you know, that's, that's kind of how I feel here, is like, okay, I, I kinda, uh, follow the engine and how it works, but, you know, in order to actually make it work and run the way that it should, uh, I need an expert.Right, yeah.Well said.SoAll right, Doug.Well, thank you.All right.Thanks, Jay.This podcast is for educational and informational purposes only.Please see the full disclosure in our show notes for more information.