Rebalance

Charley Ellis on the new rule that will save retirees millions

Something is terribly wrong when the President of the United States takes the podium to “blow the whistle” on misbehavior by a large group of salespeople for mistreating innocent people who cannot afford to have their modest retirement savings mistreated.

As President Obama said last year when endorsing the “fiduciary standard” rule that the U.S. Department of Labor came out with today: “It’s a very simple principle: You want to give financial advice, you’ve got to put your client’s interests first. You can’t have a conflict of interest.” The White House Council of Economic Advisors estimated that these conflicts of interest add up to about $17 billion a year.

Yet financial services firms have been crying “foul!” and lobbying Congress to block this regulation, which would require retirement advisors to abide by a “fiduciary” standard and put their clients’ best interests before their own. Jeff Zients, director of the White House’s National Economic Council, said “there were relentless efforts to block the rule from going forward.” This, even though the Department of Labor held hundreds of meetings and reviewed over 3,000 comments on the proposed rule for the $24 trillion retirement investment market.

Essentially, the rule, which takes effect fully Jan. 1, 2018, is designed to protect the abused by requiring everyone to play fair.

Remembering The Golden Rule

Those financial firms and the hard working people who work for them have, as a group, done important good for many people for many years. But that does not mean that all financial services practices are “best practices.” And some practices are far, far removed from the way any of us would want our parents and children to be treated.

The Golden Rule is well worth remembering when Americans’ retirement savings are being exposed to overpriced or risky products.

Here’s an example: My elderly aunt called me with a need for a second opinion. She had been approached by a “mighty nice” young salesman representing a national financial organization who’d visited and called a few times, strongly recommending a specific investment action. My aunt was “so impressed” by his confidence that his recommendation for receiving more retirement income would be suitable to her.

His recommendation? She should sell her blue chip stocks and Treasury bonds and start writing risky call options on a new portfolio the salesman would suggest. If the stocks went up a lot, they would be called away, but she could easily buy more. If the stocks did not go up a lot, she would continue to own them and in addition, he said, she would collect all that money from selling the calls. And the “mighty nice” young man would monitor everything so this would take no time or effort for my aunt.

While experts may debate whether this young salesman was within the limits of “suitability” or not, it was clear to me that the proposition was wrong for my aunt who was in her eighties and wrong for the way Americans want other Americans to be treated.

Time to Change the Rules

If we want to change the way innocent folks get treated, we need to change the rules.

However, the “self-regulatory” process has taken no action and the economics of the business have dominated the values of service professionalism. That’s what President Obama was talking about and why the U.S. Labor Department developed its new regulation.

Lots of financial “products” are hard to understand in detail or evaluate in comparison to cost. How many of us really understand the arcane complexities of annuities or commodities or REITs? How many of us could look at several alternatives and decide with confidence which was the best value for money? I’m a Chartered Financial Analyst (CFA) and I couldn’t.

So what’s wrong with insisting that any salesperson selling financial products to people with retirement accounts has to treat those people in ways that are really right for them? We certainly do not want some slick, “mighty nice” young man to take advantage of our senior citizens.

Why Commissions Are High

Looking at life as it is for salespeople, anyone can see that it must be terribly hard to make a good living convincing folks you do not know and will often never see again to buy complex financial products they have trouble understanding, particularly when they have only modest amounts of savings.

The average retiring person with a 401(k) has an account of only $65,000 to cover expenses, along with Social Security, for an average retirement period of 23 years. Any harm done to this tiny nest egg will have large negative consequences for that retiree. That’s why commissions have to be so high, in order to motivate the “mighty nice” young men and women who call on folks who cannot always protect themselves.

Those who would argue that the salespeople need to have their incomes protected need to take another careful look at the harm they have done and would do without the regulations that simply require treating your Mom and my aunt and all those other older folks the way they would want to be treated when they are in retirement.

Major changes are continuing to come to the world of financial services and to investments. Robo-advisors and index funds are important advances in lowering the cost and increasing the value that American savers and investors can get.

Two forces are driving increasing numbers of people to these more modern, more effective services. One is positive: better value for money. One is negative: past mistreatment.

The old, high commission system that forced poor products through has got to go, even if it causes pain to those who have been abusing Americans depending on their modest savings and hoping for secure retirements. As Labor Secretary Thomas Perez said in announcing the rule: “This is a good day for Main Street and for the middle class of America.”

Charles D. Ellis is a key member of the Rebalance Investment Committee. This article was originally published in Forbes on April 6, 2016.

New federal ruling will save retirement investors millions in fees

U.S. Dept. of Labor forces brokers to disclose hidden fees

In a historic pro-consumer move, the U.S. Dept. of Labor today approved a landmark federal rule requiring those who advise retirement investors to disclose hidden fees and act in the best interests of their clients. This measure is expected to save hard-working Americans billions of dollars while driving much needed reforms of the stock brokerage, mutual fund and insurance industries.

After years of debate, the U.S. Department of Labor issued a new rule on Wednesday that requires financial advisors who handle retirement accounts to act as “fiduciaries,” which means putting the best interests of their clients first.

The ruling is complex, but the following are some answers to some of the most basic questions on retirement savings, fees and the kind of advice you should expect in the future.

1. If I do not have a financial advisor, am I affected at all?

The new rule focuses on retirement savings. As a result, it will impact your point of contact with any Individual Retirement Account (IRA) you have, as well as your workplace 401(k), if you ever need to roll it over after changing jobs or upon retirement, says Karen Nystrom, the director of advocacy for the Financial Planning Association.

Your taxable investment accounts are not affected by the new rule.

2. How do I know if the financial advisor I have is a fiduciary?

Financial advisors with designation like Certified Financial Planner (CFP) or Registered Investment Adviser (RIA) are fiduciaries from the start. They typically charge either per hour or yearly based on a percentage of your assets.

If you have an IRA at a large financial institution and mostly interact with a person assigned to your account, the fiduciary answer could be more complicated. That person may earn commissions for placing your investments in certain mutual funds and for products like annuities.

The best thing to do is to just ask. Nystrom says this is an easy yes if the person is fiduciary. If you get a waffling answer, keep pressing.

3. What will change right away?

The rule has some components that go into effect within a year and another set that will take two years.

Eventually, your financial advisor will ask you to sign a document called a “best interest contract,” which will establish a fiduciary relationship between the two of you. Once that is in place, any advice you get on retirement savings will have to meet a standard that is about your needs, and not what makes the advisor the most money.

“You’re not going to get a sales pitch that’s disguised as advice,” says Micah Hauptman, financial services counsel for the Consumer Federation of America.

Until then, however, it is business as usual. To make sure that the investment guidance you get meets the new standard, ask your advisor these questions as provided by the FPA (bit.ly/1WcQWFI).

4. Will I save money?

If you were previously dealing with an advisor who was steering you toward high-priced investments, you may end up saving a bundle.

Your fees may fall if you go for low-cost index funds instead of higher-priced mutual funds, particularly when you are rolling over a large amount from a 401(k) into an IRA.

“It’s going to take a lot of egregious transactions off the table,” says Stewart Massey, chief investment strategist for Massey Quick, an investment firm of RIAs based in Morristown, New Jersey.

You will still pay fees for an advisor to manage your account and fees for the investments in the accounts and trades. The typical investor pays 1 percent of assets under management for investment advice.

5. Will my advisor dump me?

If they do not want you, it is likely that you do not want them.

“You should not take it as an insult, you should take it as a wonderful event in your life,” says Mitch Tuchman, Managing Director of Rebalance, which is already covered by the RIA fiduciary standard.

“There are a lot of new options out there that are one-third the price you are paying now,” Tuchman adds.

NPR: New rule will save retirement investors millions

After more than a year of study, the White House on Wednesday finalized tougher requirements for retirement investment advisors.

The changes are intended to help Americans build bigger nest eggs while reducing fees and sales commissions they pay to advisers — keeping more money in workers’ retirement accounts instead of advisors’ pockets.

Critics say the changes will create burdensome legal requirements that could squeeze out brokers who earn commissions from working with small investors.

Labor Secretary Tom Perez, whose staff wrote the rule updates, says the new requirements will encourage long-term investing by making sure savers’ financial interests get top priority in any decisions.

Under current rules, advisors “say things like, ‘We put our clients first,’ ” he said. Going forward, “this is no longer a slogan. It’s the law.”

This rule-making process began in February 2015, when President Obama told the Labor Department to act upon the findings of a White House Council of Economic Advisors study. Those economists had studied the rules involving 401(k) accounts and IRAs, and concluded advisors’ conflicts of interest were resulting in collective annual losses of about $17 billion for consumers.

Take this example: Say you need guidance on transferring money from an employer’s 401(k) plan to your own individual retirement account. If your advisor were operating under the old rules, he would only have to recommend a “suitable” investment, such as an annuity, with no regard for the size of the commission, which can range from 1 to 10 percent.

Perez says the old rule meant that an advisor “can steer someone into a product that gives [the broker] a bigger commission at the expense of the customer’s return. That’s wrong.”

In the future, an advisor will have a fiduciary duty. In other words, he or she has to act in the best interest of the client and put that duty ahead of the broker’s own personal gain.

Retirement accounts get tax breaks, so the U.S. government has a big say in how they work under federal labor laws.

But many in the financial industry strongly object to the tougher fiduciary standard, saying it will raise their regulatory and liability costs, and make it tough to work with investors with low-balance accounts.

Republican House Speaker Paul Ryan sides with the brokers, tweeting last week that the final rule would become “Obamacare for financial planning.” He promised to push congressional action to hold up the rule, which will not be fully implemented until January 2018.

Ryan says the new rules are too complex, costly and harmful to small investors who may get less service from advisors.

Bartlett Naylor, a financial policy expert for Public Citizen, a consumer advocate group, scoffed at such objections.

“Wall Street has argued that the hidden fees and commissions are necessary to serve lower-income investors. In effect, they’re saying, ‘If we can’t scam them a little, we’ll ignore them altogether.’ This deceptive mentality is exactly why a new rule is needed,” Naylor said in a statement.

Not all financial firms are against the rule. Scott Puritz is Managing Director of the firm Rebalance. “I’m a card-carrying capitalist,” he says. “And I believe that the free market, if operating properly, can offer the best benefit for the lowest cost.”

That’s why he thinks the new rule will help firms like his that he says are more competitive on price. Puritz says his advisors don’t have offices all over the country. They talk to clients over the phone, which lowers costs. And he says there are no hidden fees or commissions. “The retirement investment world is really stuck in the last century, with a very expensive highly commissioned sales force selling expensive products,” he says.

Some prominent investors are hopeful the rule will change that, too. David Swensen is chief investment officer for Yale University. “In the world of finance, you’re dealing with an incredibly rich and powerful set of companies who aren’t interested in serving their clients, they’re interested in making profits,” he says.

Of course, Swensen says, some financial advisors do right by their clients. But the Department of Labor requiring all advisors and brokers to be fiduciaries when it comes to retirement accounts — “it’s a huge deal,” Swensen says. “If you do have a true fiduciary standard, it’s going to make a radical difference.”

That “if” is important, though. Swensen and other experts worry there might be loopholes.

The National Association of Insurance and Financial Advisors, a trade group, says it will take up the fight in Congress. NAIFA President Jules Gaudreau said financial advisors will “pursue a legislative alternative that will ensure the best interests of retirement savers without obstructing their access to much-needed advice.“

Open letter from Rebalance's Burt Malkiel and Charley Ellis to President Obama

Dear President Obama and Secretary Perez:

As members of the financial advisor community, we are writing to express our appreciation for the leadership and hard work that you have devoted to the fiduciary duty rule just released by the U.S. Department of Labor.

This extraordinarily important reform will protect millions of hard working Americans from the conflicts of interest that annually siphon away billions of dollars of hard-earned retirement savings due to inflated commissions and poor returns. With the rule in place, everyday Americans will be much better equipped to meet the difficult challenges of investing for a secure and dignified retirement. Moreover, we firmly believe that the rule will result in fundamental and positive changes in the entire advisory market, raising the standard of loyalty and care for the benefit of all retirement savers.

Our firm, Rebalance, is part of a broad trend of companies harnessing technology and new business models to provide American savers with alternatives to antiquated high-fee investment services. We believe that a regulatory “level playing field,” combined with enhanced disclosure and strict limits on conflicted investment advice, will accelerate this process, unleash the transformative power of the free market system, and provide American consumers with a wider array of high-quality, low-cost retirement investing options. By ensuring that all financial advisors must give retirement investment advice that is in their clients’ best interest, the new rule brings us closer to achieving these goals.

In conclusion, we applaud your leadership and celebrate this historic victory for Americans saving for retirement.

With much gratitude,

The Rebalance Investment Committee

Dr. Charles D. Ellis
Dr. Burton G. Malkiel
Scott Puritz, Managing Director
Mitch Tuchman, Managing Director
Jay Vivian

U.S. Department of Labor forces brokers to disclose hidden fees

A new regulatory standard requiring those who advise retirement investors to act in the best interests of their clients was approved today. This measure is expected to save hard-working Americans billions of dollars in fees while driving much needed pro-consumer reforms of the stock brokerage, mutual fund and insurance industries.

Rebalance, a leading investment firm, played a central role in helping to achieve this pro-consumer victory. The Firm is a key member of the Save Our Retirement coalition, and Managing Director Scott Puritz testified before the U.S. Senate (view testimony) as it evaluated the new rule. During his testimony, Puritz noted: “The story we see over and over again is all too familiar- a client at a brokerage firm who is stunned to find out that their so-called trusted retirement investment advisor does not have a fiduciary responsibility.”

Most American workers assume that their retirement advisor acts in their best interest, exercising what is known as a “fiduciary” responsibility. Unfortunately, the reality is that investment advisors often recommend the funds that pay them the largest commissions and fail to disclose a second level of fees charged by the mutual funds and shared with the advisor, observed Puritz.

The U.S. Department of Labor finalized the landmark federal rule today, ending an epic five-year political struggle against armies of lobbyists and multiple congressional bills aimed at derailing the regulation. The current, vague requirement that an investment be “suitable” to a client will be replaced by an unequivocal standard that requires anyone offering retirement investment advice to clearly put clients’ interests ahead of their own.

“This is an extraordinary victory for the American consumer,” said Puritz. “The U.S. Department of Labor has estimated that consumers lose over $17 billion through excessive fees every year, draining investment accounts of money needed for retirement.

“Regrettably, this is an industry built upon hiding fees and offering conflicted advice,” Puritz continued. “When fully implemented, the U.S. Department of Labor’s new rule requires putting the interests of retirement savers first and mandates a much higher level of disclosure regarding fees and potential conflicts of interest. Once consumers finally are armed with accurate information, the transformative power of the free market system has the potential to drive fees lower and dramatically expand the quality of retirement investing options.

“Labor Secretary Thomas Perez and his team should be commended for persevering in the face of serious opposition by the brokers,” he concluded.

“All too often, investors in retirement plans pay higher fees than they should and their accounts contain high-cost funds that reward the provider of advice rather than the client,” observed Professor Burton G. Malkiel, one of America’s foremost economists and a member of the Rebalance Investment Committee. “Business models that depend on selling high-cost, low-value retirement investment products aren’t going to cut it any more. The fiduciary standard will accelerate the process of changing outmoded and ineffectual financial business models to better address the needs of small investors.”

About Rebalance

Rebalance is one of America’s leading investment firms that is at the forefront of providing consumers with a fundamentally different and better set of retirement investment options: lower costs, “endowment-quality” globally-diversified retirement investment portfolios, and systematic rebalancing. This investment approach is combined with a team of sophisticated and highly credentialed finance professionals who provide advice that is unbiased and focuses on the client’s long-term retirement investment goals.

The Firm’s Investment Committee is anchored by three of the most respected experts in the finance world: Princeton Economics Professor Burton Malkiel, author of the classic investment book, A Random Walk Down Wall Street; Dr. Charles Ellis, the former longtime chairman of the Yale University Endowment; and Jay Vivian, the former Managing Director of IBM’s $100+ billion in retirement investment funds for more than 300,000 employees worldwide.

Rebalance’s innovative, pro-consumer approach to retirement investing has garnered high profile coverage. The Firm, and its leadership, regularly have been featured in The New York Times, The Wall Street Journal, NPR, Fox, PBS, Forbes, USA Today, CNBC, Nightly Business Review, CBS, The Washington Post, The Economist, and a wide range of other national and local media. Managing Directors Scott Puritz and Mitchell Tuchman are acknowledged industry thought leaders, and Mr. Puritz recently testified before a U.S. Senate Committee evaluating the U.S. Department of Labor’s new fiduciary rule.

Rebalance is headquartered in Palo Alto, Calif. and Bethesda, Md., and currently manages more than $360 million of client assets. For more information, visit www.rebalance-ira.com.

Better, lower cost retirement investment advice

Full transcript

Announcer: It’s the weekend, which means it is time for Jill on Money. The show that makes money fun and just happens to answer all your financial questions. Here’s your host, Jill Schlesinger.

Jill: Welcome back. It is hour number two of Jill on Money and, as promised, we have a fantastic guest who is making a reappearance. I think you have been on the show a couple of times before, but not for a while. Mitch Tuchman is the Managing Director of Rebalance and on the forefront of the entire robo-advisor movement. So, without further ado, Mitch Tuchman. Welcome back to the show. How are you?

Mitch: I’m great Jill. How are you today?

Jill: I’m great. Do you feel like you were one of the first people to say “Hey I knew about this before it was famous and, you know, what’s going on here?” You were really the guy weren’t you?

Mitch: Well, you know, they say pioneers are the ones with the arrows in their backs.

Jill: Oh dear!

Mitch: I think so far we have avoided that, but no, we have been at this for a while and I think what we are now witnessing is a general retooling of the whole financial services industry where consumers are going to be getting a better deal. Not only have we been advocating a different way of investing for retirement investors, but now even the U.S. Department of Labor is about to win a David and Goliath style fight that’s going to get everyday investors more information about what funds their brokers have been putting them into and I think all is going to be better for the retirement saver and the investor.

Jill: That’s so great. So Mitch, let’s just go back a little bit. Tell us about your background first of all and what made you form this company called Rebalance.

Mitch: Basically, I was an entrepreneur for the first 15 years of my career here in Silicon Valley. I built up a company, sold it and had money to invest. I think I told you my personal story, but my son was born about that time with severe disabilities and I realized I better figure out how to invest this money not just for me, but for 50 years after I’m in the ground. If I did not save money there would not be enough to take care of him so it was a very, very personal and deep issue for me. I began to look for my options and I have a background in finance; I got an MBA many years ago at Harvard, so I knew something about the advice I was being given by people in financial services and none of it really made a lot of sense to me. So, I asked a friend who ran a hedge fund and through a very back-ended way I got into this business. I ended up managing money for about 8 years and I learned what the big institutional investors do, the ones managing endowments and retirement funds and paying IBM retirees their money every month, those sort of investors. They spoke a completely different language than Wall Street financial services people and they thought about investing completely different. I realized, again, as an entrepreneur that there was a way to bring this to everyday investors. That was the genesis of all of this; we first launched an automated robo-investing service, however, by listening to our clients we learned that they wanted a more human touch. The clients were mostly over 45 years old, they were baby boomers and needed somebody to talk to them about how to put all of the pieces together, and when you’re over 45, life gets a little more complex. Rebalance is the answer to that need; we have human advisors on the phone with our clients, but still have the benefits of the low-cost, “robo-investing,” as the investment management tool for the money that we handle. We formed Rebalance in order to address a broader need of people who really want to hand this over to somebody, but want to do it in a way that makes sense for them financially.

Jill: So, presuming that, you know, you do-it-yourself. You go to Rebalance360.com. Walk us through a process of what occurs there and then we’re going to go more in-depth about the service.

Mitch: Rebalance is where a credentialed, seasoned financial advisor will get on the phone with you, take you through what we call a “diagnostic,” a whole series of thoughtful questions, try to understand who you are, your family, your needs, the money that you have to invest, all of the things that a good planner would do. You used to do that, Jill.

Jill: Oh yeah, 152 years ago.

Mitch: Exactly. Query the client, find out what they need, recommend a course of action and then, if the client wants to proceed, we move their money into an account at Schwab or Fidelity. We do all of the management of the money, and are in continual touch with the client, to make sure that if there are changes in their life or different decisions that need to be made that might impact how their money is invested, we have a seat at the table with them in helping that happen.

Jill: That’s great. So, we’re talking to Mitch Tuchman, of Rebalance. You are the Managing Director of Rebalance, correct?

Mitch: Well, yes. My partner Scott Puritz and I both manage the company together. We’re now managing about $360 million and it is going great.

Jill: Wow, that’s amazing. When we come back, we are going to talk a little bit more about Rebalance. We will link to that in our show notes so don’t worry that will be there, but we’re going to make sure that you understand why this model, this sort of a hybrid model, this can be a lot cheaper than going to a traditional brokerage firm. So, when we come back with Mitch Tuchman he’s going to explain some of the perverse incentives that exist in the universe of financial services.

Jill: You’re back with Jill On Money. We have a great guest here, Mitch Tuchman. He is the Chief Investment Officer and Managing Director of Rebalance. Mitch, I’m just laughing because, you did mention the U.S. Department of Labor Rule and we’ll get to that in a second, but I wonder – did you see how the industry was going to change when you first came up with this concept of using technology to help investors – did you think that there was something brewing in the investment world that you knew that we didn’t?

Mitch: Basically, whenever you have an industry that makes way too much money for providing very little value there is something great about our American economy and innovators and entrepreneurs that seek and destroy that inefficiency. In having lived in Silicon Valley for over 30 years, I’ve watched this happen in industry after industry after industry. So when I got involved in financial services I began to realize oh my God, this industry basically syphons a third or more of the available returns out of people’s pocketbooks year in and year out (tens of billions of dollars) and not only do they provide nowhere near the value commensurate with the amount they charge, but they are actually hurting people and I know, as I’ve been around for a while, that will cease to exist through innovation. So, maybe I was one of the first to see it, but I’ve been followed by other great companies that have been funded by hundreds of millions of dollars of venture capital and finally the financial services industry is having to retool itself. You know Jill, the way I look at it, I was around in the early ‘70s when I got my driver’s license and you’re a little younger than I am or a lot younger …

Jill: A tiny bit.

Mitch: … but I was in line waiting for gas. When the gas prices hit, and when your eyes would water because the pollution was so bad, the auto industry had to retool itself and get regulators involved. To get the car makers to get gas mileage up and pollution levels down, there had to be competing forces that exposed what was wrong with the current model. I see firms like ours doing something very similar to this market of financial services, in terms of causing a change.

Jill: Well, I mean then how do you compete if Schwab just turns on its services? Would that be hard for you? In this environment all of the big firms are starting to do acquisitions, whether it is an insurance company buying a robo or, just even recently, Goldman Sachs bought Honest Dollar, and that was for retirement services. Is it your intention to kind of maintain your independence or would you sell out to someone who wants to come along and say hey this is a great idea we’ll buy you, we’ll scoop you up?

Mitch: Well, that is not our intent. My partner and dear friend, Scott Puritz, and I have already had very successful careers as entrepreneurs and while we would like Rebalance to make a profit, we call it a social double bottom line. We want to do some good in the world, so we may not make the best acquisition target because we are not charging the kind of fees that are exciting to those who would want to acquire us. While there are new companies coming out and acquisitions happening, the fact is, Jill, people listening to this show right now likely are using a broker or an insurance agent to manage their retirement money. Likely a friend of yours that you play golf with, someone you met at the school or the country club, who is very trustworthy, who convinced you to let them handle your retirement money; and those folks still manage a predominant amount of retirement money out there. And they are doing it with a flawed model and the flawed model is now under scrutiny and being changed by the Department of Labor. Firms like ours have retooled to operate under these new regulations, which effectively bring people’s fees down by two-thirds in most cases. There are a lot of winners that are going to be out there over the years, but still the brokers and the commission-based sales people in this business dominate how most money is being managed and I do not see that changing for at least a decade.

Jill: Really, that long? I’m actually surprised – a decade. Is that because assets are sticky in this business meaning that it is hard to change?

Mitch: Yes. I had a woman on the phone yesterday and we demonstrated to her that we were going to save her at least two-thirds in fees and this is an older woman and she had been working very, very hard for many years and she had several hundred thousand dollars, but you know this was a substantial amount of money that we would save her every year. Also what happens, as you know Jill, is when a commissioned-based person is managing your money over time your portfolio begins to look a little bit like a yard sale; they are not focused on how much should this client have allocated to the U.S. market or foreign markets or bonds, which is really where all of the money is made in those decisions. Rather, it’s “what can I sell to this client today to make some commission.” That thought process leads to these horribly out of line portfolios. We showed this potential client how we could lower her fees dramatically, how we would manage her money in a superior way and she said “Oh my God, I want to do it. I’m ready to go but then I got to call Keith and tell him and he’s like a son to me at this point. I just don’t know that I can do that” and literally she has been wringing her hands for over a month just trying to pick up the phone to break up with her broker and that’s the answer to your question, that’s why this is going to take at least 10 years.

Jill: That’s amazing.

Mitch: These relationships are strong and they are full of trust and unfortunately not in the best interest of the client in many cases.

Jill: So let’s just talk a little bit about those fees because your fees are south of 1% at Rebalance, somewhere like a ¾ of 1% is that about right?

Mitch: A half of a percent

Jill: A half okay. Is that all-in a half of a percent? In other words, the cost of the underlying investment is how much?

Mitch: Well, so when we buy funds for the clients and the average fees in all of the funds that we buy are 0.15% to say 0.2% in that range, if you add it all up we’re in the kind of two-thirds of 1% range, all-in.

Jill: Oh man, you calling me a liar for two-thirds versus 0.75% – all right I love you anyway. Listen, that fraction adds up over time so I’m with you.

Mitch: You and me, we’re precise people.

Jill: Indeed.

Mitch: I have to go toe-to-toe with you.

Jill: I love it. I mean it’s just amazing. That is such a huge difference than say, you know, even if you just look at the average investor who buys a managed fund without any advice, just buys a managed fund and has a portfolio with funds costing them close to 1% maybe a little bit less that’s pretty amazing. So, when we come back with Mitch Tuchman, Managing Director of Rebalance, we’re going to figure out how it is that he can provide his service so cheap, because that must be what you are thinking and it’s not that cheap is always better, but boy in this case it is. So, Mitch Tuchman will continue to join the program, and we’re also going to get him to weigh in on the U.S. Department of Labor’s new proposed rule and how that might impact his business

Jill: You’re back with Jill On Money. This is the program that takes the mystery out of your financial life. I’m Jill Schlesinger. We are so happy to have Mitch Tuchman join us. He is the Managing Director of Rebalance and before we went to the break Mitch was telling us about the fees for managing a retirement account at Rebalance which all-in are about two-thirds of 1%, so, Mitch, how do you do it? I mean if you look at the average advisor whose got, maybe let’s just talk about half a million dollar account, I would say that most advisors are charging about 1.0% to 1.25% for that and then the cost of the funds inside of it, maybe it’s 1.5% and you are doing it for so much cheaper. How so?

Mitch: Well, let’s not gloss over that point, Jill. At Rebalance when we talk to prospective clients, they think they are paying the advisor 1.0% or 1.25%, but what the advisors generally do not make super clear are what the fees are in the funds that they are buying for the clients. We have this conversation daily with people and it is very difficult for people to get their heads around this, but when you open up your account and look at your portfolio look for those line items. They will say, for instance, Franklin Templeton Global Growth Fund, I’m not pointing them out, but when you see an amount of $44,280 or whatever, that particular fund is syphoning money out of that amount every year. You’ll never see it, but it is being taken out and you need to know what that is. That is a fee you are paying in addition to the money you pay your broker to put the portfolio together and manage it and keep it in balance for you.

Jill: I mean just to put that in perspective though also, even if you are managing your own money, I just popped into Fidelity for a second and said okay what happens if I bought the Fidelity Focused Stock Fund …

Mitch: Right.

Jill: … has no transaction fee. I buy it for myself. Just for the fund I’m paying three-quarters of 1%.

Mitch: Yes.

Jill: I mean even at Fidelity, or any managed fund, you are paying up for that staff, who is trying to do research and find value, but that’s not what Rebalance does, you stick to the index/exchange traded fund universes, right?

Mitch: Yes. For most brokers, and the way they operate, they need their 1% of your money every year and they need to put you in funds that are 1% or more. Because, the funds make deals with the brokers and say “Hey Mr. Broker, if you buy my fund for your clients I’m going to charge them 1.0% or 1.25%, but then I’m going to kick back a 0.25% to you every year for getting my fund into your clients’ accounts.” That is what is called a conflict of interest. Your broker likely isn’t just being paid by you, he’s being paid by the funds that he is buying for you and that’s a conflict. That leads to you not getting the best deal, and so at Rebalance we do not operate under that model. We believe it is conflicted. We are paid only by the clients, but we use funds that are different than what most brokers use. They are called index funds, and they are not run by rock star stock pickers, they are run by computers that firms such as Vanguard employ, and those funds cost usually an eighth or a tenth of the price. When you asked me, Jill, how do we provide a better service for one-third the price. We just don’t use funds that are not in the client’s best interest, rather we use index funds; which are better funds that also happen to be a lot cheaper.

Jill: I was just interviewing a big economist and he said he thought that this concept of buying and holding even just a cheap fund was going to come under pressure in this next period and he said “I think that we’re going to have to see a little more tactical asset allocation” meaning that you are going to have to move your asset allocation around a little bit more and I still don’t get that – how do you know and where’s the proof that that actually works over time. I mean you guys don’t do that correct?

Mitch: We don’t, and there is no proof and I’m not sure who the gentleman was on your show, but generally people who say things like that, have incentive to have that belief. People like that get paid higher fees to make predictions of what is going to happen in the world and then they reposition portfolios accordingly. Usually, they sound incredibly smart and bright, and they are, but there’s no evidence to say that they are right. The other problem is that when they are wrong, the investor loses, but we do know what the markets are going to do over long periods of time. There’s a lot of science and evidence that markets are going to continue growing at certain rates of return. So, I know that if I can just capture that for our clients and charge them as little as possible to do that, it is a much safer way to go.

Jill: And frankly, I guess even if you did know where they were going to go, and you were right for the first decision, to continue to make those decisions seems like such a fool’s errand. I guess there are some big hedge funds who do it and there’s maybe some folks who can do it now and again, but consider that we mere mortals would do it seems a little crazy. Mitch, can you stick around for one more segment?

Mitch: Of course.

Jill: Oh sweet. So, we’re talking to Mitch Tuchman. When we return we’re going to have Mitch talk a little bit about how this new rule that the U.S. Department of Labor is about to announce around the fiduciary standard could change the industry and why it is good for him and Rebalance specifically. I think this is going to be a complete bonanza for you guys, but that’s just my thought.

Jill: All right, we are trying to keep Mitch Tuchman, the Managing Director of Rebalance here for as long as possible because he is a wealth of information. Mitch, we received the announcement that the Department of Labor rule will be coming out anytime I hear. I heard that maybe the first week of April, but could be sooner, and this is the rule that would require any retirement account provider to adhere to the fiduciary standard. How is that going to affect your business?

Mitch: Let’s just define what the fiduciary standard is because I do not think a lot of people understand this whole idea. Yes, what you said is completely accurate. The Department of Labor is raising the bar, raising the standard for anyone who gives financial advice on a retirement account (meaning IRAs predominantly). The person managing or giving the advice on your IRA has to operate at what is called a “fiduciary standard”, which means that I have to operate and put your interest ahead of my own and if I don’t, and you can prove that, you can sue me. Now, you may think that that sounds obvious, of course my financial advisor would do that, but brokers who are managing lots of money for people’s IRAs do not. Brokers who buy client’s annuities, who buy them high-priced mutual funds are not held to that standard. They are held to a lower standard today called a “suitability standard,” meaning if you’re a widow and I buy you a bunch of highly speculative tech stocks, you can sue me because that wasn’t suitable for you, but you cannot sue me for taking commissions on the funds I buy for your account. So, I don’t really have to demonstrate that I’m operating and putting your interest ahead of mine, thus the Department of Labor said we need to enforce those higher standards, these fiduciary standards with people’s employer accounts, such as 401(k)s and 403(b) accounts. But once the money moves out to an IRA, those standards are not enforced and all hell breaks loose. Evidence shows that as a result, people are getting much less lower returns in IRAs, which are retirement accounts, so we need to change that. We need to have regulation and oversight over IRAs; the DOL has been fighting for 4 years and, in a couple of weeks, the new regulations should finally be coming out. What that will mean, for the listeners, is that your broker is going to start being much more upfront with his disclosures about the fees you are paying in your accounts and the commission he is getting from the funds that he puts into your accounts. The fact that this is about to happen is causing firms to get out of the business, it is causing firms to say “we’re not going to service people anymore; we can’t do this because we can’t make enough money doing so.”

Jill: But you can?

Mitch: But we can because we have been waiting for this. So, first of all one way we do it is we use these lower priced funds I’ve mentioned, but I think it’s mostly a matter of how we run our business. We do not have offices where people can come in and get a cup of coffee and chat about the market, so we do not have a lot of brick and mortar out there and that lowers our costs. We do all of it on the phone. Secondly, there is a lot of technology that one can use to build an investment services business today that keeps down lots of costs like paperwork. You know, people have probably heard the term “cloud-based services”, but we built our company from the ground up with all kinds of innovative ways of running a business that way and I think last, and most important, our profit thresholds and requirements were just set much lower than a publicly traded or investor owned investment services firm. We think we have put a great package together so that people do get ahead with a level playing field and pure transparency and that alone begins to get a life of its own and now most of our business is coming through referrals. That alone shows we are able to do business like this, with the word still getting out without a lot of additional marketing expense as well.

Jill: Now, we just finished up with Mitch Tuchman, the Managing Director of Rebalance and one of the things that he mentioned in that last segment is a conversation about the fiduciary standard. I want to let you guys know that next week we’re going to devote an entire hour to really diving into this issue and we’re going to have a special guest join us and I think it’s really important, if you have your money managed by anyone in the universe out there, if you work with a financial sales person, an insurance person, anyone in the industry next week’s show will be the most important show that you could listen to. It is going to be huge. So, we’re waiting to see when the Department of Labor releases this new rule. There’s still going to be efforts to squash it when it comes down. Again, this is a rule that is going to make those who serve retirement investors conform to a standard that puts your best interest first. This is so important. It is a key issue. It is not about how the advisor is compensated; it is about the standard under which that financial professional must operate and, again, you know that there are people in the financial services industry who are wonderful people, they sell commission based products, there are folks who do fee-based planning and they stink. It doesn’t mean that one is good or bad it means that we want to put the odds in your favor that you are getting the very best advice that you can get, that is in your best interest. If you have inherited a big portfolio of a bunch of ETFs and you don’t need to do anything you might want to let it sit there. Maybe you don’t need a fee-based advisor. You might not need that okay. I get it, but we really need an industry that has to put clients first. That’s absolutely first and foremost in any reasonable industry. All right, thanks again to Mitch Tuchman for showing up today and thank you for listening.

Back in the day, investors paid a pretty penny for professional help in building a retirement portfolio of stocks, bonds and cash, and on managing it as the years went by. Now it’s easy – and cheap – with a single target-date fund matched to one’s retirement schedule, whether that’s 10, 20 or 30 years off.

But target-date funds got a black eye in the financial crisis, when some investors nearing retirement suffered losses in funds they’d thought were safe.

So what’s the thinking on target-date funds today?

“Target-date funds are not the silver bullet retail investors dream of when they think about saving for retirement,” says Aaron Gilman, president and chief investment officer of IFP Wealth Management of Tampa, Florida.

But he says target-date funds have been effective at “promoting responsible investor behavior,” such as focusing on long-term goals rather than reacting to the markets’ short-term ups and downs.

During the market hysteria from the end of June 2008 to the end of May the next year, only 3.5 percent of target-date investors using T. Rowe Price funds changed their holdings, a rate only a quarter that of holders of non-target-date funds, says Joe Martel, asset allocation portfolio specialist and member of the Target Date Investment team at T. Rowe Price, one of the largest providers of these funds.

“So because the vast majority of target-date investors stayed invested, they benefited from the rebalancing that occurred and participated in the market recovery we have seen over the past several years,” he says.

Because target-date funds hold other funds in varying proportions, depending on the managers’ strategies and the investors’ retirement dates, it’s difficult to generalize about the funds’ investment performance. There’s no simple benchmark to measure against.

But a 2014 study by Financial Engines, an investment-advisory firm, and the consulting firm Aon Hewitt found that investors who used target-date funds earned 3.32 percent more per year than investors who managed investments on their own. That edge would produce a substantially larger nest egg over many years of compounding.

The typical target-date fund owns a basket of index-style mutual funds, which in turn own stocks and bonds. The investor buys a fund with a target date matching the expected retirement date. For a young investor, the fund is heavy on stocks, emphasizing growth over safety. As the years pass, more and more of the fund’s holdings are switched to bonds and cash, to emphasize safety. And the portfolio is adjusted each year to stick to the desired asset allocation as market conditions change, a task many investors dread.

All this is automatic, making the target-date fund a true fire-and-forget investment, appealing to those who want to leave decisions to the pros. Many target-date funds also include stocks in foreign companies and small companies, sectors difficult for many investors to understand on their own. Fees vary but can be quite low, much less than an investor would pay a financial advisor to build and manage a tailor-made portfolio.

Assets in target-date funds have grown from about $10 billion in 2006 to more than $700 billion in 2015, according to Morningstar, largely because the funds have become popular in 401(k)s and similar workplace retirement plans. Many employers now use target-date funds as the default, the investment chosen for an employee who does not opt for something else. The biggest providers are Vanguard, Fidelity and T. Rowe Price.

In 2008, investors’ faith in target-date funds was shaken by sizable losses in funds aimed at people retiring only two years later. In fact, many of these funds performed as designed, losing less than the broad stock market thanks to the dampening effect of the funds’ bonds and cash. But many investors had not realized that a target-date fund would continue to hold so many stocks that close to the target date. The funds do that to offset the risk of inflation during a 20- or 30-year retirement.

“One misunderstanding involved a set-it-and-forget-it reputation that some target-date funds seemed to have at that time,” Martel says. “Some investors may have misinterpreted that reputation as a sort of implied guarantee that fund prices couldn’t go down, which is not the case.”

Under pressure from regulators and Congress, funds revamped marketing materials to better explain how target-date funds work.

Still, the landscape can be confusing. Mitch Tuchman, Managing Director of Rebalance, a retirement management firm in Palo Alto, California, says the layers of fees are often poorly disclosed.

“Many TDFs charge a fee for the fund itself, but the fund buys other funds, so some fund companies do what we call ‘double dipping,’ meaning they buy their own funds so they get fees for the TDF and [also] the funds within the TDF,” he says. “It is very hard to get a good handle on whether or not a TDF is double dipping, so they are not transparent with fees at all.”

Investors who get target-date funds through workplace plans are stuck with the limited options the employer offers. Those who buy on their own, in IRAs or taxable accounts, can benefit from shopping around.

So the rule is: study up. Not only will fees vary, but the asset mix of two funds can be very different even if they have the same target date. The pace of the shift from stocks to bonds is called the “glide path.”

Some funds – the “to” variety – aim to be relatively safe when the target date arrives. Others – the “through” funds – keep a large stock allocation even after the target date, to provide some growth throughout retirement.

T. Rowe Price, for example, uses a 90 percent stock and 10 percent bond allocation for investors 30 years from retirement, and a 20 percent, 80 percent stock-bond mix 30 years after the retirement date. But some of the firm’s funds are more conservative at the retirement date, with a 42.5 percent stock allocation, while others are more aggressive, leaving 55 percent in stocks. Other providers mix stocks and bonds differently.

“There is no standard formula that is used by all managers,” Martel says, “just as there is no standard formula across managers for non-target-date funds.”

Rebalance‘s prudent methodology is gaining momentum and helping more and more people maximize their nest egg through low-cost index funds and periodic rebalancing. In this compilation video, watch Managing Director Scott Puritz, Chief Investment Officer Mitch Tuchman, and key members of the Firm’s Investment Committee Burt Malkiel, Charley Ellis, and Jay Vivian as they spread the word on how you can retire with more.

Hidden Mutual Fund Fees That Are Robbing Your Returns

So you’ve accumulated a nest egg by investing in mutual funds. Congratulations! That puts you ahead of the game.

But to grow an even bigger stash, try squeezing out the fees.

“Make sure you pay as little of that gross return in fees as you can,” says Mitch Tuchman, Managing Director at Rebalance, a financial services company in Palo Alto, California. Fees ultimately eat into any gains made by the mutual funds you own.

But mutual fund fees are only about 1 percent of the assets, right? Wrong – on three counts.

Mutual funds can be expensive. The average mutual fund annual expenses for equity funds was 1.33 percent in 2014, according to the latest data available from the Investment Company Institute that tracks these things. That 1.33 percent is equivalent to $133 dollars per year for each $10,000 invested.

Bond funds’ annual expenses averaged 0.99 percent a year, or $99 per $10,000.

For someone with a heavy stock allocation, which most young people should favor, the annual expenses for the entire portfolio will average more than a percentage point.

Fees cut into your returns. Annual fees of only $1 out of $100 may sound puny, but they’re not. The broad stock market, such as the Standard & Poor’s 500 index, can be expected to grow by 6 to 8 percent a year, Tuchman says.

If you give away 1 percent of that return, you reduce the return by one sixth to one eighth. It’s worse for bond funds, where returns are likely to be more like 2 to 3 percent. In that case, you’d be reducing your gains by up to half, each and every year.

Know the different types of fees. The fees you may possibly pay are not solely the annual expenses. There are plenty more which can crush your portfolio returns.

Sales loads are a percentage of the money that is charged before it is even put to work. For instance, a 5 percent sales load, which is common for stock funds with such fees, would reduce a $10,000 investment to $9,500 immediately. You’d already be down $500 on day one!

Some people may pay a smaller load if they are investing a large dollar amount. Still, lower isn’t zero, which is the best size of any fee.

“There is no research showing load funds perform better than no-load funds,” says Bob Stammers, director of investor education at the CFA Institute. “You want to avoid the sales load.”

Instead, look for so-called “no-load funds,” of which there are many.

Sometimes the load charge happens when you cash in your investment rather than at the very beginning. Again, it’s something you want to avoid, so read the fine print.

Short-term trading fees get charged when investors sell a mutual fund after holding it for less than a certain period. That length of the period when you’d pay the fee can be as little as 30 days, but such stipulations vary. Investors may see a note by a fund which states a 1 percent charge on sales of shares held less than 60 days, for example.

“The idea is to discourage short-term trading,” Stammers says. Most retail investors simply do not have the skill to profitably time the market.

If you think there is a chance that you might want to bolt from a fund quickly, then avoid funds with such provisions.

A 12b1 fee can be confusing to investors, partly because not every fund has it. The fee is disclosed in the fund prospectus and is used for marketing or distribution costs. It can vary from 0.25 percent and 1 percent.

But you don’t have to add that to the annual expenses because they are already included in that total, says Russ Kinnel, director of manager research at Morningstar.

Look at the overall expense. The good news is that many investors are catching on to the idea that fees should be avoided as much as possible. For some though, the big psychological problem is that in much of life you get what you pay for.

For instance, a prime porterhouse steak at a restaurant is going to cost a lot more than a hot dog from a street vendor, but many would say the price difference is worth it. But for investors, the less you pay, the more you get. “Generally with investing it goes the other way around,” Kinnel says.

The trick is to find funds with low overall expenses, such as index funds. Many fund companies make such offerings, two of the biggest are Vanguard and Fidelity Investments.

One fund is the Vanguard 500 Index Admiral fund (ticker: VFIAX), which has annual expenses of 0.05 percent, or $5 a year per $10,000 invested.

Likewise, Fidelity Investments has the Fidelity Spartan 500 Index (FUSEX) fund, which has annual expenses of 0.1 percent.

There are low-cost funds that do not simply track an index, but it’s worth noting that much research has shown that few if any funds can manage to beat their benchmark indices over the long term.