Stop Living by One-Size-Fits-All Budgets — and Paying for One-Size-Fits-All Financial Advice

Summary

NerdWallet's Smart Money Podcast: Detailed Summary of "Stop Living by One-Size-Fits-All Budgets — and Paying for One-Size-Fits-All Financial Advice"

Release Date: August 11, 2025

In this insightful episode of NerdWallet's Smart Money Podcast, hosts Sean Pyles, CFP®, and Elizabeth Ayoola delve into the pitfalls of standardized budgeting and financial advice. Through engaging discussions and expert interviews, the episode challenges conventional personal finance norms, offering listeners nuanced perspectives to better manage their unique financial situations.

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Challenging One-Size-Fits-All Budgeting

[02:19] Elizabeth Ayoola opens the episode by reflecting on her personal investment journey. She shares her initial strategy of investing in low-cost index funds inspired by Warren Buffett, avoiding financial advisors due to associated fees. However, Elizabeth admits, "Present me is realizing that maybe paying fees isn't so bad after all," signaling a shift in her approach toward financial planning.

[02:41] Sean Pyles introduces the episode's central theme: evaluating different financial advisor fees and determining when paying for professional advice is worthwhile. This sets the stage for a deeper exploration of personalized financial strategies versus standardized advice.

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Book Club: Redefining Budgeting with Dana Miranda

[02:53] The hosts introduce their Book Club segment, featuring Kimberly Palmer interviewing Dana Miranda, the author of You Don't Need a Budget. Dana presents a provocative stance against conventional budgeting methods, particularly the widely endorsed 50/30/20 rule.

[03:57] Dana Miranda emphasizes the importance of questioning standardized financial advice:
"We so often are hearing one size fits all advice that really doesn't fit everybody and it ignores a lot of individual circumstances..." [03:57]

She argues that personal finance should be adaptable to individual lives rather than adhering strictly to preset rules. Dana highlights the potential for financial guidelines to induce shame when individuals fail to meet arbitrary targets, such as the 20% savings component of the 50/30/20 budget.

[05:48] Kimberly probes further, asking whether personalizing spending strategies means each individual must create their unique approach or if general guidelines still hold value. Dana responds by advocating for "conscious spending" over rigid budgeting:
"Rather than taking a rule of like how much money can I spend on certain things?... try to do that more intuitively and decide on spending that works for you." [06:01]

[07:13] Dana challenges the necessity of paying off all debts and bills promptly, advocating for prioritizing based on the consequences of non-payment. She states:
"Start with knowing what those consequences are... make your financial decisions that way." [07:13]

This perspective encourages financial triage, where essential needs take precedence over debt repayment if necessary, allowing for a more balanced and less stressful financial management approach.

[10:25] Addressing emergency funds, Dana suggests rebranding them as "comfort funds" to remove the stigma associated with the term "emergency." She explains:
"I want to take the word emergency out of the way that we talk about personal finance... prepared for opportunities and to take care of ourselves in different ways." [10:25]

This shift in terminology promotes a healthier relationship with savings, emphasizing preparedness for both unforeseen challenges and potential opportunities.

[12:19] Dana extends her critique to traditional investment advice, particularly the emphasis on retirement savings through 401(k) plans. She questions the one-size-fits-all approach, noting the cultural and systemic factors that make long-term savings challenging for many individuals. Dana concludes:
"You're being told that you have to put money into a 401k... where folks on the political side can push more for that kind of change in our public safety net that we need." [12:19]

Her insights advocate for a more flexible and individualized approach to investing, tailored to each person's unique circumstances and long-term goals.

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Money Question: Navigating Investment Fees with James Bashel

[16:43] Transitioning to the Money Question segment, a listener named Margaret inquires about the myriad of fees associated with investing and financial advisors. Margaret's question encompasses fees from financial planners, managed funds, and brokerage services, seeking clarity on what constitutes high or low fees and whether higher fees correlate with better value.

[19:10] James Bashel, a financial advisor with NerdWallet Wealth Partners, joins the discussion to unpack the complexities of financial advisor fees.

Understanding Fee Structures

[20:05] James Bashel outlines the primary fee structures in the financial advisory industry:

• Fee-Only: Advisors charge solely based on the fee structure agreed upon, such as a percentage of assets under management (AUM) or fixed/hourly rates.
  "Fee only means that the only fee they're going to charge you is the fee that they quote you." [20:05]

• Fee-Based: These advisors may earn commissions from third-party products in addition to their standard fees, potentially introducing conflicts of interest.
  "They might be getting a commission from a third party for that on top of the fee that you're paying them." [20:35]

• Commission-Based: Advisors earn commissions from selling specific financial products, which can sometimes lead to recommending products that benefit the advisor more than the client.

[21:41] Sean Pyles raises a critical point about the practicality of fee-only advisors versus those receiving commissions. James concurs, emphasizing the importance of fiduciary standards:
"The fiduciary standard is the legal obligation to act in your best interest at all times. So there's no conflict of interest." [20:30]

Determining Fee Levels

[24:11] James Bashel discusses what constitutes high or low fees, noting a trend of margin compression due to increased industry competition and efficiency:
"We're seeing margin compression across the whole industry, which is inherently good for the consumer." [24:11]

He explains that average fees for fee-only advisors hover around 1.05% of AUM, with higher asset levels often benefiting from lower percentage fees due to the decreasing marginal complexity:
"At the $100,000 level, the fee might be 1.2%... at the $10 million, you might see it's at 0.5%." [25:40]

[26:57] James Bashel advises that clients should focus less on the fee structure and more on the value received:
"The fee you want to pay needs to be justified by the value you get out. How that fee is calculated is less important than the actual fee you are paying." [26:57]

Hidden Fees and Redundancies

James warns listeners to be vigilant about redundant fees, such as being charged both an upfront planning fee and an ongoing fee for the same services:
"Make sure you're not getting charged twice for exactly the same thing." [28:46]

Credentials Matter

[29:30] Sean Pyles emphasizes the importance of hiring credentialed advisors, such as Certified Financial Planners (CFPs), to ensure professionalism and adherence to fiduciary standards. James adds that while certifications like CFPs, CFAs, and CPAs indicate a higher level of expertise, due diligence is still necessary:
"The CFP is the most specifically geared towards financial planners... it's probably the safest place to go from a branding perspective." [30:17]

Human Advisors vs. Robo Advisors

James contrasts traditional human advisors with robo advisors, highlighting the cost and service differences:
"Robo advisors... their fees are going to be much lower than a holistic planner's fees. You're getting much less in the service." [32:57]

He notes that while robo advisors typically charge around 0.25% of AUM, human advisors offer personalized financial planning and emotional support, which can provide significant psychological benefits beyond mere investment returns.

[34:26] Addressing the listener's belief that "you get what you pay for," James clarifies that higher fees do not necessarily translate to better investment returns. He references studies showing that over 80% of actively managed portfolios underperform the market, often due to higher fees associated with active management. However, he underscores the non-financial benefits of human advisors, such as peace of mind and time saved:
"Greater peace of mind... getting time back for what matters and outsourcing the job to someone whose single job it is to make sure your finances are looked after." [35:23]

Final Thoughts: Navigating Fees

In his concluding remarks, James Bashel encourages listeners to shop around and compare different advisors and fee structures to find the best fit for their specific needs:
"Find the solution that you're looking for and find the best fee for that solution." [36:59]

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Key Takeaways and Recommendations

1. Personalize Your Financial Strategy: Move beyond standardized budgeting rules. Understand your unique financial situation and tailor your approach accordingly.

2. Evaluate Financial Advisor Fees Carefully: Understand different fee structures—fee-only, fee-based, and commission-based—and choose the one that aligns with your best interests.

3. Prioritize Value Over Fee Structure: Focus on the value and services provided by financial advisors rather than being solely fixated on how they charge fees.

4. Credentials Matter: Hire credentialed financial advisors (e.g., CFP®, CFA) to ensure professionalism and adherence to fiduciary standards.

5. Consider Both Human and Robo Advisors: Weigh the cost savings of robo advisors against the personalized support and emotional benefits offered by human advisors.

6. Shop Around and Compare: Meet with multiple advisors to compare fees, services, and compatibility before making a decision.

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Conclusion

This episode of NerdWallet's Smart Money Podcast adeptly navigates the complexities of personal finance, challenging listeners to rethink conventional budgeting and financial advice. Through the compelling insights of Dana Miranda and financial advisor James Bashel, the hosts empower listeners to make informed, individualized financial decisions that align with their unique life circumstances and goals.

Whether you're re-evaluating your budgeting approach or contemplating the value of professional financial advice, this episode provides the clarity and guidance needed to enhance your financial well-being.

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For more personalized advice, listeners are encouraged to reach out via NerdWallet's Nerd Hotline at 901-730-6373.

Transcript

[Sean Pyles]

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[Elizabeth Ayola]

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[Elizabeth Ayola]

One of the first people I learned about investing from was Warren Buffett. So I opted to invest in low cost index funds and I didn't bother with a financial advisor because of the fees. To be honest, present me is realizing that maybe paying fees isn't so bad after all.

[Sean Pyles]

Well, sometimes those fees are well worth paying, Elizabeth. So this episode we're going to give a rundown of different financial advisor fees and when it's worth paying them. Welcome to NerdWallet's Smart Money podcast where you send us your questions about your money and we tap our vast pool of nerdy knowledge to answer them. I'm Sean Pyles.

[Elizabeth Ayola]

And I'm Elizabeth Ayola. On this episode of our amazing podcast, we answer listeners question about financial advisor fees. How do they work, how much should you pay and how can you avoid paying too much?

[Sean Pyles]

But first, it's book club time. This is our semi regular series where personal finance nerd Kimberly Palmer speaks with authors of new and interesting finance books. Hey Kim, who are you talking with this time?

[Kimberly Palmer]

Our guest today is Dana Miranda, author of youf Don't Need a Budget. And it's a newly released book about money that offers some unconventional views I found really intriguing. We'll talk to Dana about whether we really need to pay our bills, pay off debt, or even save for an emergency.

[Sean Pyles]

Sounds great. We also want to remind listeners that you can enter for a chance to win our book giveaway [e-mail] bookclub for our next book club pick. And with that, Kim, I'll let you take things from here.

[Kimberly Palmer]

Great. Thank you. Dana, welcome to our show.

[Dana Miranda]

Thanks so much for having me.

[Kimberly Palmer]

Here at NerdWallet, we talk a lot about budgets, especially the concept of the 50, 30, 20 budget where you aim to have 50% of your take home pay going towards needs, 30% towards wants, and 20% toward debt payments beyond the minimums and savings. So are you saying that is all wrong?

[Dana Miranda]

I don't think that the way anyone chooses to manage their money is wrong. But the premise of you don't need a budget is to question the advice that you're hearing. Because we so often are hearing one size fits all advice that really doesn't fit everybody and it ignores a lot of individual circumstances which is really what drives our relationships with money. Everybody's situation is very unique and very nuanced. And so the advice that we offer and the way that we as individuals read that advice needs to take those nuances into consideration and understand sort of what is driving the advice, maybe who that advice is written for and how does that fit into your plan in your life. Something like the 50, 30, 20 budget is really meant to simplify money management so that you're not doing this every dollar has a job kind of money plan. You're not constantly tracking every expense, every bit of spending that you do. And that's a really good goal to work toward, I think. But offering that kind of prescription without addressing the nuances that might exist in people's lives, often, rather than feeling like a guideline, can feel like a way for someone to judge themselves and then to feel ashamed if they're not meeting. Usually that 20% savings plan that is part of that budget. And I think it's really important to kind of understand where that comes from. That plan was also never meant to be a budget. It was a set of guidelines for managing money in the original book that it came from. And it was also that included a lot more nuance and a lot more flexibility on what might work in your life. And it's sort of been taken and spread throughout the personal finance space as a set of rules for people to follow, because it's a little easier to sort of proliferate that way.

[Kimberly Palmer]

So what does that mean if someone's thinking about, okay, how should I think about how I'm spending my money? Does everyone just have to kind of figure that out, how their own custom approach? Or are there any general guidelines we can live by?

[Dana Miranda]

I don't think that there are general guidelines that we can give people for how to spend your money. What I try to do in you don't need a budget. And with my work in general is to offer questions for people and experiments. And I really frame them as experiments. Like, if you want to try experimenting with a 50, 20, 30 plan for a while, try that and see how it fits in your life, adjust it, see how that works. But more often, I think it's more important to get a basic understanding of how our financial products and systems work. So usually our debt products, our banking, things like that, how those work and how they can fit into our lives, and then just work from a set of questions about how do you want money to support you day to day, you know, this month, this year, in the long term, and what kind of steps can you take if those steps are accessible to you to support those goals?

[Kimberly Palmer]

There are some other aspects of conventional money wisdom that you really turn on their head as well. I want to get into some of those. So first of all, you say you might not have to pay off your debt or even pay all your bills. Can you explain what you mean by that?

[Dana Miranda]

Sure. And I'll start with the debt. That really gets to, like I was saying, understanding how your financial products work. And I Guess bills sort of works the same way. So basically when you're being asked to pay off a debt or you're being asked to pay a bill, that's some kind of provider telling you that you owe money, that's a financial commitment that you have made of some kind. And not paying that or paying it or paying it late or whatever, however you might handle that comes with different consequences. And what I think is really important for people to understand is start with knowing what those consequences are. So the consequence of not paying a certain bill might be having a utility turned off. Right. Not paying a debt bill might be accruing interest. Those are very different things. So if you need to prioritize because you don't have the money to pay them both on time, you need to understand what are the consequences of, of those and make your financial decisions that way. There are also consequences, especially with rapid debt payoff. When you're putting extra money toward debt payoff, the consequence of that is that you're not putting it towards something else. So saving for some other thing in your life or spending on some other thing in your life. And so you have to decide, is that consequence worth having your debt paid off faster? And I think it's important to again, ask those questions and make those decisions for yourself and think about how that actually plays into your individual life rather than just sort of taking the set of rules about paying off debt as quickly as possible and especially being impacted by the shame that our culture puts on carrying debt.

[Kimberly Palmer]

Yeah. The way I read that section of your book too is thinking, okay, if you have a medical bill and you feel like, okay, of course you feel pressure to pay that. Then you also have your rent and your food. And I read that section of your book as saying it's okay to prioritize your essential needs. It might make sense for you in that moment to put your food and your rent first before you pay off off that bill, for example. Am I reading that correctly?

[Dana Miranda]

Absolutely. Yeah. There's some people are just playing financial triage and you have to make those decisions. And starting with those consequences is a, a tool to help you make those triage decisions. But it can go a step further. And you can also decide that I'm not going to prioritize paying off this debt as quickly as possible, putting my extra money toward that, because I want to send my kids to private school and that tuition is going to cost me money because I want to take them on a vacation every year. Because I want to go on a vacation every year right you can decide what is a priority in your life instead of taking a set of rules and making your finances kind of this siloed thing that has to follow a certain set of rules and not allowing it to be pliable to the rest of your life. And often the way that we teach personal finance and the kinds of rules that we offer separates them from everything else that's happening in our life and doesn't allow us to find a balance between those things.

[Kimberly Palmer]

You also had some really interesting thoughts on emergency funds and savings. And in fact, you say maybe we shouldn't even use the word emergency. Tell us about that.

[Dana Miranda]

I use the word rather than emergency fund. I call that nest egg savings that you have a comfort fund or your rainy day savings. I call that a comfort fund because I want to take the word emergency out of the way that we talk about personal finance as much as it makes sense for people, because I don't believe that the loss of income necessarily, which is often what we associate with using an emergency fund, has to constitute an emergency in itself, or a change in your finances in general, has to constitute an emergency in itself. And I also don't think that you need to hold on and to and hoard that money until something feels like enough of an emergency to use it. You might be in a situation where your job feels toxic or your relationship feels toxic, or you're in a neighborhood or an environment that does not support you or affirm your identity in some way, and you're sitting on this mountain of an emergency fund just waiting to be laid off from your job and thinking, well, if I use this, then it won't be available for that imagined eventuality down the line. And I think it's really important to change that language and change our approach to that kind of savings, to give ourselves permission to not only be prepared for the unexpected, but also to be prepared for opportunities and to take care of ourselves in different ways and use it toward comfort that we deserve to have in life.

[Kimberly Palmer]

And going back to what you said before, I think the word emergency can also trigger feelings of maybe shame or feeling bad or like you made some big mistake when you really, it's not helpful to stir up those feelings.

[Dana Miranda]

Absolutely.

[Kimberly Palmer]

Let's talk about investing for a minute. You also say, I mean, we hear all the time people might feel pressure that they should open an investment account, but you say that's also not one size fits all, and maybe you shouldn't open one, or maybe that doesn't apply to you. Tell us about that.

[Dana Miranda]

Writing about investing was definitely the hardest chapter in the book to write. Because I cannot say as a financial educator, you don't need to save for your long term future because we live in a culture in the United States that doesn't support people long term. Right. We don't have a strong enough safety net that's going to take care of people. And that's largely the change that needs to be made. But the advice for dealing with that is mostly just a lot of shaming about not saving for retirement. There's a lot of studies and surveys about how much people are not saving for retirement. And the easiest way for an individual to feel in control of that would be to just put that money aside. And so that is good fiscal advice. But we have data that shows that the vast majority of people are not saving for retirement. And so just telling people to save more when they don't have the money to save or they for some reason don't have the ability to save the money they have isn't helping. And so just giving a lot of investment advice is not helping people to prepare for retirement. So I wanted to pull back from that. I also wanted to talk about why you're being told that you have to put money into a 401k, right? Why people say that you're stupid if you don't do that, to get into kind of, how does this product work? Where does it come from? What is the history of this? How does it fit into our culture? And to understand, you know, why you're hearing that advice and what you could maybe do instead. I've talked to a lot of experts and, you know, financial planning experts, they don't have a ton of alternative advice other than a lot of us are probably just going to have to rethink retirement and rethink the way that we work in old age. That's kind of where we are now. Folks on the political side can push more for that kind of change in our public safety net that we need.

[Kimberly Palmer]

So as consumers in this world, and you basically alluded to this, we are exposed to so many different kinds of advice. Some of it is not a good fit for us. Some of it might be. How do you recommend we filter the information that we're exposed to about finances?

[Dana Miranda]

I liken the relationship that we have to money to the relationship that we have with food and dieting in our culture. So a lot of people are familiar with the term diet culture. And I talk about budget culture in the book. And so I recommend something that's akin to intuitive eating in the kind of anti diet movement called conscious spending or intuitive spending, which is that sort of rather than taking a rule of like how much money can I spend on certain things? Or setting a budget plan for yourself where you're allowed to spend money to think more about what do I need in this moment, in this season? And how can money support that? You can create a money map for yourself to make sure that you understand where you want to go with your money, what you want to do with your money. But in general, sort of rather than trying to set this stringent kind of path for yourself and how you'll use money, try to do that more intuitively and decide on spending that works for you.

[Kimberly Palmer]

That makes so much sense. Spending that works for you. That's a big theme. Dana Miranda, thank you so much for joining us on Smart Money.

[Dana Miranda]

Thank you so much for having me.

[Sean Pyles]

And thank you, Kim. We're about to get to this episode's Money Question segment. But first listener, take a moment and think. Just pause and ask yourself where you need some nerdy guidance with your money.

[Elizabeth Ayola]

Maybe you're trying to figure out how to save more money each month when your expenses keep getting more expensive, or you see the holidays creeping closer each day and want tips for how to prepare. Speaking for myself, Whatever your money question, we nerds are here to help. Leave us a voicemail or text us on the Nerd Hotline, 901-730-6373. That's 9017-30, nerd.

[Sean Pyles]

And a reminder that we love talking with you, our listeners, live on the podcast. Whether we're answering your money questions or helping you figure out your budget with one of our budget rehab episodes, we would love to chat with you live on the show. So one more time, leave us a voicemail or text us on the nerd hotline at 901-730-6373. That's 901-730- nerd. You can also shoot us an [e-mail].

[Elizabeth Ayola]

Moving along swiftly, let's get to this episode's Money Question segment. That's up next. Stay with us.

[Sean Pyles]

Today's episode is sponsored by Rula.

[Elizabeth Ayola]

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[Sean Pyles]

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Thousands have already trusted Rula to support them on their journey toward improved mental health and overall well being. Head to rula.com smartmoney to get started today. After you sign up, they'll ask you where you heard about them. Please support Smart Money and tell them our show sent you.

[Elizabeth Ayola]

Go to r u l a.com smartmoney and take the first step towards better mental health today because you deserve quality care from someone who cares. We're back and we're answering your money questions to help you make smarter financial decisions. This episode's question comes from a listener's voicemail and here it goes.

[James Bashel]

Hey Sean and Elizabeth, this is Margaret and I have a question around fees with investing. I use a financial planner and I know they charge a specific fee according.

[Elizabeth Ayola]

To how much of my money they're managing.

[James Bashel]

But I also know that individual funds that are getting managed have their own fees. And I also believe if my financial planner is using a broker such as Schwab, there are probably fees coming on there. So I would love to hear a session around this topic of fees. What is a high fee? What is a low fee?

[Elizabeth Ayola]

What happens when they all come together?

[James Bashel]

And at the end of the day I'm a firm believer of you get what you pay for. So are high fees if that's the issue, are you getting the equal amount of value out of paying those high fees? Thank you. Love the show.

[Sean Pyles]

To help us answer Margaret's question on this episode of the podcast, we are joined by James Bashel, financial advisor with NerdWallet affiliate NerdWallet Wealth Partners. Hey James, welcome to Smart Money.

[James Bashel]

Hey guys, thanks for having me.

[Elizabeth Ayola]

Before we get into the conversation, a quick note from our legal team. We need to say NerdWallet Wealth Partners is the investment advisor and has the ability to discuss investment advice generally subject to the marketing rule under the Advisors act, this will keep an arm's length distance from the investment related topics. For NerdWallet to support its publisher's exemption.

[Sean Pyles]

Let'S hope that people understand what that actually means. Carrying on, James. So to start I'd love if you could outline the various fee structures that advisors use and how they work. I'm thinking here of assets under management, also known as aum and then fee based and fee only. So can you give us an outline of those? Oh, also I should add that there's commission based. So let's talk about these different options.

[James Bashel]

It's so difficult to navigate because some of those are legal terms and some of them are more colloquial terms. So I think if we start top down, there are two standards within the industry. You've got the fiduciary standard and the suitability standard. And those are important as far as fee only and fee based go. So fee only means that the only fee they're going to charge you is the fee that they quote you. That's the only income that the person's going to be earning.

[Sean Pyles]

And that could be maybe at an hourly rate or perhaps like per financial plan.

[James Bashel]

I kind of can go into that a little bit. So the way that those fee only can look is a percentage of your assets under management. So you have $100,000, they charge 1%, that'll be $1,000 a year. If either a fixed fee, maybe it's hey, a single planning engagement, it's going to be $3,000 and we give you a plan at the end of that. It's exactly what you see is what you get. There is nothing behind the curtain. In many ways that fiduciary standard is the legal obligation to act in your best interest at all times. So there's no conflict of interest. They have to do what is best for you. The fee based side is what falls under what they call the suitability standard and that is more around is this product suitable for the client? Not necessarily the best product. And the reason they might not give you the best product is because the advisor might be getting a commission from a third party for that on top of the fee that you're paying them. So in the case of it can still be a percentage of AUM, right? It can still be 1% of $100,000. Plus they might put you in a mutual fund that gets them some kind of commission off the back end.

[Sean Pyles]

I think a lot of people would hear oh an advisor's not recommending the absolute best product for me because they're getting a commission and have some problems with that. But I wonder from a practical standpoint whether it may actually matter that much to a person. If they're getting the product and the advisor is helping them get it and manage their finances, maybe that's the trade off for getting the absolute best product for them. But at the same time, I tend to lean more toward fee only in my firm. That's how I have things structured at an hourly per plan basis. Because I am really wary of any conflict of interest, especially with my work here at NerdWallet. So it gets a little bit thorny.

[James Bashel]

Yeah, 100%. And I think if you go back in history, it's always interesting at a fees level to dig into where and how we got here. The origin of fees was really in the brokerage world where you would get cold, cold. You think of Wolf of Wall street or something like that. Like someone phones you and wants to sell you a stock or something, and they make you a client and they were earning a fee for every stock they sold as a percentage of the amount you invested. That has morphed through the years into more of an advisory type model. If you think of the Wolf of Wall street, they definitely weren't acting in the best interests of the people at all times. There was no fiduciary standard at that time. I mean, maybe there was, but there certainly weren't fiduciaries. In that case. We've tended towards FID fiduciary because there was an inherent conflict of interest when there was a sales benefit through one product over another. That conflict of interest, exactly to your point, might not be a problem if the alternative is not getting any advice at all.

[Elizabeth Ayola]

Yeah, right.

[James Bashel]

And in most cases, I mean, the suitability standard is still strict. Right. They're not going to sell a hedge fund to someone who has no risk tolerance. You still aren't allowed to do that. But you might get a situation where they could buy you S&P 500 ETF at three basis points with like 0.03% is what that looks like. Or a mutual fund that tracks the S&P 500 at 1% fee. That's clearly not in your best interest. They're both going after the same return profile. However, the salesperson or the advisor might be getting a commission by putting you in the more expensive product. That's clearly the conflict of interest you might be dealing with. Now, in your case, it was a really good point. You Made like maybe it's still better than not having any advice. Absolutely. I think that still applies.

[Elizabeth Ayola]

Well, James, speaking of fee structures, what might be a high fee and what might be a low fee for each of the structures that we've discussed?

[James Bashel]

That's a really good question. I've dug into this extensively because I always want to make sure that where we at is fair and competitive. And I think we're seeing margin compression across the whole industry, which is inherently good for the consumer. And the reason for that is a competition, but B just efficiency.

[Sean Pyles]

Can you outline what that term means? Margin conversion?

[James Bashel]

Yeah. So the fees people are charging are getting smaller and smaller over time. I think it wouldn't have been unusual to see a fee north of 2% of AUM 10, 15 years ago, whereas now you'd almost never see that. So it's very difficult to pin down what people are actually charging. Very few people disclose their fees. All fees are quote unquote negotiable, which means often on their regulatory filing there'll be a fee. But who knows if people are actually paying that fee? There are some pretty good resources online who have tried to aggregate these. There's one advisory HQ is a source that I've gone to a few times which ranks advisors so they have access to what people are actually charging. Let's talk in two buckets. So we've got the fixed fee side or the hourly side and then the percentage of AUM side, which is more variable with the amount of assets that we're managing. AUM is assets under management, for context. So on the percentage of AUM side, the average fee across all asset levels I've seen quoted is around 1.05%.

[Elizabeth Ayola]

So what's important about that, James?

[James Bashel]

I think what's important is different asset levels have different complexity. So higher assets are going to be more complex. So at a total you expect to pay more fees. Like if you have a $10 million account, you've come with a lot more risk and a lot more considerations than someone who has a hundred thousand dollar account. However, you would be far stretched to say that a $10 million account is proportionately more complex. Like it's not 100 times more complex than $100,000 account. So what you'll see is at the $100,000 level, the fee might be 1.2% of assets under management. So $1,200 a year at the 10 million you might see it's at 0.5%. So a lower fee as a percentage of the total, but a higher Fee in total because it's of the percentage. And that's a bit mind boggling to get your head around. But the way I try and explain it is there's an increase in complexity with the amount of assets. However, that complexity increases at a decreasing rate. So it's not linear, the relationship between the amount of assets and the amount of complexity.

[Sean Pyles]

So when a client is shopping around for an advisor and they're considering these different fee structures, when might they prefer maybe fee based over Aum or fee only versus fee based, what do you think they should be thinking about?

[James Bashel]

The reason you're getting a financial advisor is because you need help and the fee you want to pay needs to be justified by the value you get out. How that fee is calculated is less important than the actual fee you are paying. So a lot of people see the AUM model as well. My fees are going to go up the more my assets go up. That's inherently bad. It's like, well, not necessarily because your complexity is going up. Is the service you're going to receive as a result better, which then justifies the higher fee? I think what's important on the fixed fee level is often the fixed fees are actually banded by AUM. So you'll see something like $3,000 under 500,000 in assets and then $5,000 up to a million. And if you double back, they're very similar fee levels to the percentage of aum. So the preference really lies in certainty. And I think a lot of people like to know how much they're going to pay, which is where the fixed fee makes sense. However, it is quite nice not to have to renegotiate the fees every single time your assets go up, in which case the AUM makes sense.

[Elizabeth Ayola]

Now let's talk about fees that an advisor might sneak into a contract that might not be necessary. What should people be looking out for here?

[James Bashel]

I think we are in a good regulatory world where there are fewer of those now than there used to be. One thing that I see quite a lot is advisors charging an upfront planning fee and then an ongoing fee thereafter on top of the planning fee. And it seems like you might be paying twice for the same thing. So it's really important to ask the question, what are the bounds within which the fees apply? Which service is the planning, which service is the ongoing, and how can you differentiate them just to make sure you're not getting charged twice for exactly the same thing.

[Sean Pyles]

All right, so something our listener didn't ask about, but that I think is really Important in this conversation is hiring a properly credentialed advisor. The term financial advisor itself is not actually regulated, which I always find a little bit baffling. And I don't think a lot of folks are truly aware of that. You know, any random social media financial influencer could call themselves a financial advisor and in fact many do. But being a certified financial planner, a cfp, or a Chartered Financial Analyst, a cfa, or a certified public Accountant, a cpa, which you are, James, those are true marks of knowledge and professionalism. So can you talk about why hiring an advisor with a designation, particularly a CFP for financial planning is important? And of course, full disclosure of my personal bias here is that I am a cfp.

[James Bashel]

Yeah, I think that's a really good question. There are so many letters that go out to people's names. I think it is important to step back and look at the regulatory framework and that is to be an investment advisor you do have to pass an exam. It just doesn't have a name. So you have to pass a Series 65 exam. No one's got that on their resume, but it is important that they are credentialized to that extent. The three letters are above and beyond. So this is a differentiating feature. The bar to get in the 65 is much lower than the bar to getting at CFP, CPA, CFA. I think what they show is two things. And I recently wrote the CFP exam, so I've got really good sort of recent knowledge of it. And that is passed.

[Sean Pyles]

Congratulations, I passed.

[James Bashel]

Thank you. Yeah. And the CFP is the most specifically geared towards financial planners, so there are of course holes in everything. So you could say some are going to be better than others. But as a broad grounding, it is probably the safest place to go from a branding perspective that, you know, the person has really done the hard work to understand the nuance and the detail behind their profession.

[Sean Pyles]

And something else that you alluded to earlier is the fiduciary standard. CFPs have to put their clients interests ahead of their own. That and the code of ethics that CFPs have to follow I find to be really compelling from a financial planner and client perspective. You know that this person has your best interest in mind. And sure there are some shady CFPs out there, that's why they have a regulatory body to catch people who do things that aren't great. But it's just a nice assurance that this person knows what they're talking about and that they are again, putting your interest out of their own.

[James Bashel]

Yeah, 100% and that's that alignment of interest. It's so important that your advisor wants you to succeed. And there's unfortunately, I mean, it's bait into pretty much any service you get in life. But it is potential. There is so much potential for them to put their own interest ahead of yours. CFP holds them to a standard that they can't do that, which is really reassuring.

[Elizabeth Ayola]

I do have a question for people who don't go for a CFP and they're typically going to these finance professionals because as we said, they need help. So how do they know whether you know this person has their best interests at heart? Especially if they don't know much about finances and what the best financial product is?

[James Bashel]

I think experience speaks volumes. So where did the person get trained is so important? Did the person study finance is a pretty good place to start. But secondarily, where have they worked? Look at their LinkedIn profile, look at their website, try and understand their experience. Because there are actually a lot of very highly qualified and capable people in the industry who don't have three letters after their name. And the reason for that is they've been in really good training programs working under really good people.

[Sean Pyles]

I would also ask for references. If someone is a financial advisor of some sort and they have years of experience, like you were saying, James, see if you can talk with their other clients and just get a feel for how they work. Just that way you can help vet them in a more holistic way. So I want to pivot a bit because so far we've just been talking about human advisors. But robo advisors are a big player in the investment space and some folks may be even turning to AI chatbots for financial planning and advisory services. Can you talk about how these more electronic elements fit into planning and maybe what their fees might be compared to human advisors?

[James Bashel]

If you break up the fees that you would get from a financial advisor, there is a planning piece and then there's often an investment piece. The robo advisors really just do that second part. And so there's not the same rigor of getting to what are your goals and how you can achieve them. But they are very well constructed portfolios that make the process of investing much easier. As a result, if you take a step back, their fees are going to be much lower than a holistic planner's fees. You're getting much less in the service. So I think I said the average fee for financial advisors around 1% of assets. The average fee for a robo Advisor is about 0.25%. So a quarter chatgpt is only or deep seek. They're only as good as information you give them and it's not prompting the right questions of you. Whereas an advisor is going to be asking the right follow up questions to get to the answer we're looking for. So the depth of answer is going to be somewhat different and probably more tailored to your specific situation.

[Elizabeth Ayola]

Margaret says that she's a believer that you get what you pay for when it comes to fees. Now I'm taking that to mean that higher fees might mean better returns on an investment, for example, but we know that's not always true. Some folks pay advisors to actively manage their investments, regularly buying and selling stocks. But we've seen that this type of investment management often underperforms passive investment and it's generally more expensive than passive investing. So James, what are your thoughts on the idea that you get what you pay for?

[James Bashel]

The activist passive debate at the tail end of your question is so important and I think it goes back to some fairly complex financial principles. The reality for us as consumers is that the efficiency of markets by virtue of there being loads of participants in the markets. Think of all the big banks. Just think just like Visualize New York City, like all those tall buildings are all people who are trying to beat the market. It means that all known information is baked into markets. It means it's really difficult to outperform the market on an individual level. There are two really good studies, one by Morningstar and one by the S and P Global Group, that basically track the last 25 years, the performance of active managed portfolios, which means they're buying and selling individual stocks to try and beat the index, versus passive portfolios, which just track the index. And what they've found is over 10 plus years, over 80% of the active managers underperform the market. So the fees that you're paying for those mutual funds tends to be the reason they actually underperform the market. So the logical conclusion, just by the market, which is what we get through ETFs. So that's the first thing. So you don't necessarily get what you pay for. However, this isn't all about investment returns. And that's where it's really important to differentiate. If no one beats the market, being invested is the number one most important principle. But the second thing is the psychological benefit. And Vanguard's done some really interesting research in this respect. And they talk about three things that people get from being with a financial advisor. They say greater peace of mind, which is huge fewer negative and more positive emotions. That's really speaking to financial anxiety, like quietening down that negative emotion. And the third thing is getting time back for what matters and outsourcing the job to someone whose single job it is to make sure your finances are looked after and gives you more time to go and live your life. So paying the fee does make sense to get those pieces back.

[Sean Pyles]

That makes me think about how so often with managing your finances or life in general, it's not just about the exact dollars and cents, but what you are getting as the emotional benefit of to your point, can you sleep better at night just because you are paying someone to manage your finances for you? For a lot of people the answer is yes and it's worth that cost 100%.

[Elizabeth Ayola]

Thank you so much for sharing all this knowledge on fees. James, do you have any final thoughts you want to leave with our listeners about how they should navigate the various fees associated with working with a financial advisor and investing?

[James Bashel]

I think shopping around is the most important principle. So meet multiple people because the fees might look different on paper, but you're probably getting different things. So find the solution that you're looking for and find the best fee for that solution and that's where you should go. Comparison between similar services is what's going to get you to the best endpoint.

[Sean Pyles]

Well James, thanks for coming on and sharing your insights.

[James Bashel]

Yeah, you're welcome.

[Sean Pyles]

And that's all we have for this episode. Remember, listener, that we are here to answer your money questions. So turn to the Nerds and call or text us your questions at 901-730-6373. That's 901730, nerd. You can also email [e-mail] join us next time to hear us talk with a listener about whether they should sell their house to pay off their $100,000 credit card balance. Follow Smart Money on your favorite podcast app, including Spotify, Apple Podcasts, and iHeartRadio, to automatically download new episodes.

[Elizabeth Ayola]

And here's our brief disclaimer. We are not your financial or investment advisors. This nerdy information is provided for general educational and entertainment purposes and it might not apply to your specific circumstances. This episode was produced by Tess Figlen. Hilary Georgie helped with editing. Nick Karisimi mixed our audio and a humongous thank you to NerdWallet's editors for all their help.

[Sean Pyles]

And with that said, until next time, turn to the Nerds.

[Elizabeth Ayola]

Okay, before we let you go, Sean and I want to give another reminder about our giveaway, you could be one of seven winners of some really nice smart money merchant. One person's going to get a pair of Sony Ult wireless noise canceling headphones, and six winners will get the Bagu Cloud Carry on bag, which I heard Sean has, and it's really nice. All you have to do is fill out our listener survey, which only takes a few minutes. You'll not only be helping us make the Smart Money podcast even better, but you'll also be entered for a chance to win those awesome prizes. Just go to nerdwallet.com podsurvey and complete the survey form by September 15th for a chance to win. You can read the official rules for more details, which again can be [e-mail] PodSurvey thank you and good luck.