Some investors eventually leave their commission-based advisors and opt to set up a simple portfolio of index funds or ETFs on their own. There are plenty of compelling reasons to do so; the reduction in fees alone can save investors thousands of dollars a year, and academic research shows that the lower your costs, the greater your share of an investment’s return.
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In my fee-only planning service, many clients end up doing exactly that. I always enjoy hearing the rebuttals from bank and investment firm advisors whenever they hear their clients want to move to a lower-cost portfolio. Here I’ve tried to capture some of that conversation with sh*t my advisor says:
Sexism: When my husband told him we’re choosing simple index investing and that I handle the family finances he smirked and said to my husband, “What credentials does your wife have to manage money?”
The real enemy: Our investment company is being vilified when the true villains are credit card companies with their interest rates.
Proof of concept: I have tons of clients with assets over $500,000 so I must be doing something right.
Working for free: My advisor told me she basically worked for me for free for the past eight years and accused me of dumping her just as my assets were growing.
It takes a professional: People think they can trade mutual funds or ETFs on their own but it’s not as easy as you think. Plus, you don’t have anyone like me to call up and ask if you’re doing the right thing. Re-balancing a portfolio is easy if you have the background, but doing it like you’re thinking about (indexing) is very tough without the training and knowledge.
What’s in a fee?: The fees are at 2 per cent (Ed. Note: actually, 2.76 per cent) because this isn’t just about buying and selling. We created a complete portfolio with you for your tolerance in the market and deal in actively traded mutual funds that most of the time outperform the market.
Nortel: ETFs aren’t all that great. When you buy an ETF you buy the whole fund. In the late 90s when Nortel owned 30 per cent of the TSX it crashed. If you purchased that ETF you’d be down 30 per cent too! But with a mutual fund you can’t buy that much. You are only able to purchase up to 10 per cent of any one company. So you would have been fairly safe with the crash of Nortel.
Downside protection: If the market goes down 20 per cent your ETFs will too. You are much more protected with mutual funds.
Apples-to-apples: All of our fees are wrapped up together in our MER. We do not charge account fees, transaction fees, advisory fees, admin fees or fees for our service. It is just the MER.
Clairvoyance: The bond market has likely reached its peak and appears to moving in a different direction. The equity markets are very risky at this time. In my mind the only safe place left is guaranteed deposits.
Final thoughts
I’ve had some fun dumping on commission-based advisors, but the truth is that most of us do need some kind of advice when it comes to managing our finances. But a $250,000 managed portfolio at 2.76% MER will cost you $6,900 per year. That same portfolio of, say, TD e-Series funds costs just $1,050 per year.
What kind of added value do you get from your commission-based advisor for that extra $5,850 per year?
We need to get past this notion that an advisor can add value by picking superior investments that beat the market. The evidence is clear that a passive investment approach that tracks broad market indexes at a very low cost will outperform over the long term.
In that case, investment advice should be ‘commoditized’ enough by now that the lowest cost prevails. A good advisor, then, must provide value in other areas such as financial planning, goal setting, tax minimization, and optimal retirement withdrawals, to name a few. That’s advice worth paying for.
Can you afford to hire an independent, fee-for-service planner to help build you a complete financial plan and give ongoing advice throughout the year on all financial matters, not just investing?
Many advisors are simply salespeople working on behalf of their bank or investment firm. When choosing an advisor, you need to find one who has your best interest at heart, and who can bring something else to the table besides picking so-called ‘winning investments’.
In addition to running the Boomer & Echo website, Robb Engen is a fee-only financial planner. This article originally ran on his site on June 13, 2018 and is republished here with his permission.
