Rich Habits Podcast Episode 119: "What Your Financial Advisor Won’t Tell You"

Release Date: May 26, 2025

In Episode 119 of the Rich Habits Podcast, hosts Austin Hankwitz and Robert Croak delve deep into the often-overlooked truths about financial advisors. This comprehensive episode seeks to empower listeners with the knowledge to discern between different types of financial advisors, understand fee structures, and recognize the investment products that advisors may push, sometimes to the detriment of their clients' financial well-being.

1. Unveiling the Misunderstandings Surrounding Financial Advisors

1.1 Suitability vs. Fiduciary Standards

Robert Croak kicks off the discussion by addressing the fundamental misunderstanding between the suitability and fiduciary standards that govern financial advisors:

• Suitability Standard:

  • Advisors operating under this standard are required to recommend financial products that are "suitable" based on a client's financial situation, goals, and risk tolerance.
  • Quote [03:21] Robert: “The suitability standard allows advisors to prioritize financial products that pay higher commissions to them or align with firm partnerships, creating a conflict of interest for all of you.”

• Fiduciary Standard:

  • Advisors bound by fiduciary duty must act in their clients' best interests at all times, prioritizing client outcomes over personal or firm gains.
  • Only 15-20% of financial advisors adhere to this standard.
  • Detecting Fiduciary Advisors: Look for titles like Certified Financial Planner (CFP) or Registered Investment Advisor (RIA).

Austin Hankwitz reinforces Robert's points by providing real-world examples of how the suitability standard can lead to advisors recommending high-fee proprietary funds over low-cost index funds like Vanguard’s VOO.

Quote [05:29] Austin: “Advisors at large firms might set sales quotas and offer bonuses for promoting in-house products, leading them to recommend higher-fee options that don't necessarily benefit the client.”

1.2 Fee Structures and Their Long-Term Impact

The hosts dissect the three common fee structures used by financial advisors:

1. Percentage of Assets Under Management (AUM):

   • Typically ranges from 1-2% annually.
   • Impact: Over decades, these fees can significantly erode investment returns.
   • Example: Investing $500,000 with a 1% fee versus a low-cost index fund can mean losing up to $270,000 over 20 years.
   • Quote [08:42] Robert: “A 1% fee might sound small initially, but over 20 years, it can balloon to hundreds of thousands in lost returns.”

2. Flat Fees and Hourly Rates:

   • Flat Fees: Fixed rates for specific financial plans.
   • Hourly Rates: Fees based on the time spent, often ranging from $100 to $400 per hour.
   • Advantage: Greater transparency and avoids conflicts of interest associated with commission-based models.
   • Recommendation: Ideal for individuals with smaller portfolios or those seeking specific financial advice without ongoing management.

Austin emphasizes the importance of understanding and selecting the right fee structure based on one’s financial situation and goals.

Quote [15:40] Austin: “The best way to pay a financial advisor, in my opinion, are the flat fees and the hourly fees. These structures are a lot more transparent.”

1.3 Investment Products Pushed by Advisors

The episode highlights the types of investment products that advisors often promote, which may not align with clients' best interests:

1. Actively Managed Mutual Funds:

   • Issue: High expense ratios (1-2%) with 80-90% underperforming their benchmarks over a decade.
   • Driver: These funds generate higher commissions for advisors.
   • Quote [18:02] Robert: “Actively managed funds aim to outperform the market but come with high fees that can significantly reduce your returns.”

2. Annuities:

   • Challenges: High fees (2-3%), complex terms, and surrender charges for early withdrawals.
   • Advisor Incentive: Advisors earn substantial upfront commissions (5-7%) on annuity sales.
   • Austin’s Take: “Annuities are often marketed as retirement security solutions, but they come with fees that can negate their benefits.”

3. Proprietary Funds:

   • Characteristics: Created by financial firms, these funds often carry higher fees and lack the diversification of broader market index funds.
   • Example: J.P. Morgan’s Large Cap Growth Fund with a 0.75% expense ratio versus Vanguard’s VUG at 0.04%.
   • Quote [21:01] Austin: “Instead of putting your money into something that's going to charge you nearly 1% every single year, go put it instead in VUG and pay 0.04% instead for very similar performance.”

2. Listener Q&A: Practical Financial Advice

2.1 Starting Your Investment Journey (Anthony's Question)

Anthony, a 21-year-old utility technician from Florida, seeks guidance on initiating his investment journey despite struggling with savings.

• Robert’s Advice [25:37]:

  • Mindset Shift: Transition from a consumer to an investor mindset.
  • Investment Steps:
    1. Public.com Account: Open and explore the platform’s tools.
    2. Roth IRA: Set up a Roth IRA for tax-advantaged growth.
    3. Low-Cost Funds: Invest in index funds like VOO, VUG, QQQ.
    4. Cryptocurrency: Allocate a small portion to crypto (e.g., Bitcoin, Ethereum).
    5. High-Yield Savings: Utilize Public’s high-yield cash account (4.1% APY).

• Austin’s Recommendations [27:17]:

  • Increase Income: Consider working overtime to boost investment funds.
  • Emergency Fund: Aim for $10,000 in a high-yield account.
  • Debt Management: Avoid high-interest debt and build credit responsibly.
  • Consistent Investing: Even small, regular investments can compound significantly over time.

Quote [27:17] Austin: “Even if it's only $100 or $200 a month, it will just help you so, so much over time as long as you're consistent.”

2.2 College Funds for Children (Pablo's Question)

Pablo C. inquires about the most tax-efficient ways to gift his children money for their education.

• Robert’s Guidance [31:17]:

  • Annual Gift Tax Exclusion: In 2025, up to $19,000 per individual can be gifted tax-free annually.
  • 529 Accounts: Utilize these accounts for tax-advantaged growth towards education expenses.
  • Direct Payment Option: Use direct payments to educational institutions for tuition, allowing unlimited tax-free gifting, though this delays investment growth.

• Austin’s Clarification [31:57]:

  • Joint Gifting: Both parents can gift separately, effectively doubling the annual exclusion per child.

Quote [31:57] Austin: “You can have $38,000 per child per year by having both parents gift separately, maximizing the tax-free gifting potential.”

2.3 Managing Student Loan Debt (Micah's Question)

Micah, alongside her husband, seeks advice on prioritizing student loan repayments after building a solid financial base.

• Robert’s Strategy [35:10]:

  • Aggressive Repayment: Prioritize paying off high-interest student loans at 6% to avoid long-term financial drains.
  • Potential Savings: Eliminating $1,350 monthly payments could have freed up to $1.8 million by age 70 if invested instead.

• Austin’s Perspective [36:09]:

  • Balance: Continue maximizing retirement contributions while aggressively paying down debt.
  • Opportunity Cost: Investing freed-up funds post-debt can significantly enhance long-term wealth.

Quote [36:09] Austin: “Think about it like this: Paying off $120,000 of student loan debt in five years could allow you to invest that same $1,350 monthly payment, potentially growing it to $1.8 million by age 70.”

3. Key Takeaways and Final Thoughts

• Choose Advisors Wisely: Understand whether your financial advisor operates under the suitability or fiduciary standard. Prefer fiduciary advisors to ensure your best interests are prioritized.

• Be Cautious of Fee Structures: High fees, especially those based on AUM or commissions, can erode your investment returns significantly over time. Consider flat or hourly fee structures for greater transparency and potentially better financial outcomes.

• Scrutinize Investment Products: Be wary of actively managed funds, annuities, and proprietary funds that carry high fees and may not offer the best returns. Opt for low-cost index funds and ETFs to maximize your investment growth.

• Educate Yourself: Empowering yourself with financial knowledge is crucial. Don’t rely solely on advisors; ensure you understand where your money is going and how fees impact your investments.

Robert Croak concludes with a passionate reminder of the importance of financial education:

Quote [37:12] Robert: “We are just here to lay out the groundwork and make sure all of you are getting as much of the money in your pockets and not someone else's.”

Austin Hankwitz echoes this sentiment, encouraging listeners to stay informed and make strategic financial decisions:

Quote [37:49] Austin: “If you learned something, please consider sharing this episode with a friend and leaving us a five-star review. Thanks everyone and have a great start to your week.”

This episode serves as a crucial guide for anyone navigating the complexities of financial advising, emphasizing the importance of understanding the standards, fee structures, and investment products that can significantly impact one's financial future.