At the outset, I should confess that I don’t have much experience investing with financial advisors. The only time I invested through one was eight years back, when I picked a labour-sponsored mutual fund from the two that were recommended - the other was a communication fund. To be honest, I picked the labour-sponsored fund because I was getting an extra $1,500 break on my taxes for the previous year but in hindsight, it wasn’t such a bad move because while the labour fund lost 30%, holding the communication fund would have been an utter disaster.
A friend of mine invests through an advisor, though a more appropriate term would be mutual fund salesperson. She is frugal, saves regularly, contributes to her RRSP every year and has accumulated a decent-sized nest egg. But her portfolio is a disaster. It has a motley collection of mutual funds, every single one sold with a deferred-sales charge with no attention paid to the basics such as asset allocation, tax-efficiency etc.
Let’s do the math and assume that my friend has a $200K portfolio and adds $10K to her investments every year. If the advisor is earning 1% in trailer fees and 5% in sales commissions, she is paying at least $2,500 every year for receiving advice. And what does she get in return for this tiny sum of money? Worse than nothing because many of the funds she was holding were “hot” sector funds that have a history of turning stone cold when the retail investor jumps in.
There is a happy ending to this story. After attending an investment seminar at work, my friend moved her investments to someone who at least knows what they are doing and is upfront about the fees. While I’m firmly in the camp that everyone can learn to invest on their own, the reality is that many, if not most, Canadians are not inclined to do so (for whatever reason) and are investing through an advisor. If you are such an investor, you owe it to yourself to ensure that your advisor is providing honest services for the fees that come out of your pocket.
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16 responses so far ↓
1 Pharmadaddy // Feb 12, 2008 at 11:04 pm
I must say I agree with you with regards to most people being able to learn how to invest on their own. I was going to go that route. However, I ran into a situation where something was beyond my scope of knowledge and so I considered an Edward Jones guy. I met with him and he actually was really good. He recommended me low MER funds that are solid performers and has constructed a portfolio for me that really fits my investing style and is something that through this terrible time in the market has been matching or exceeding the performance of a comparable index funds portfolio. On more than one occasion I have asked him for advice on non-mutual fund related issues (taxes, etc.) and received a very thorough and balanced answer, which was confirmed by my accountant sister to be accurate. I must say I have been pleasantly surprised and would recommend EJ to anyone who although may be confident in their investing abilities still wants someone to help them along.
2 tom // Feb 12, 2008 at 11:05 pm
As an advisor and a former DIYer I understand that it is very inportant for me to 1) disclose my compensation and fees and 2) ensure my clients have a sound, diversified portfolio. I really did get into this business to help those who are not inclined to do their own investing. I can only suggest to people looking for an advisor that they sit down and ask a lot of questions until they feel comfortable that the advisor has their best interest at heart. My feeling is that if I do that, in the long term compensation will take care of itself.
3 Four Pillars // Feb 12, 2008 at 11:39 pm
Great story CC - I think you have mentioned your friend before so it’s great to see that she’s seeing the light a bit.
tom - you are an advisor and a former DIYer? Don’t you look after your own finances anymore?
Pharmadaddy - sounds like you have a good advisor - what are the fees on the funds you own?
Mike
4 Quentin DSouza // Feb 13, 2008 at 1:15 am
I have always believed that you pay people well, if they do an excellent job, when they work for you. I have just started out with a financial advisor and have done my own due diligence on the advisor. But time will tell and I am not afraid to move or switch advisors if need be. Yes, I can do things myself, but I’m looking for someone with a little more depth of experience. Really only time will tell, since I have some very lofty goals. I also personally want to focus on real estate investing but still have a professionally managed equities portfolio.
5 CheapCanuck // Feb 13, 2008 at 1:15 am
I think that while most can learn to invest on their own, the taxation consequences of their investment decisions ultimately is too confusing. Though I don’t personally use the services of a financial advisor, I can see how the expert advice of a professional tax planner could be a huge help to most people.
6 fox // Feb 13, 2008 at 11:08 am
CC: This article really resonates with me.
I had the shock of a lifetime about 7 years ago when I learned how MERs, trailer fees, and, loads consumed my hard-earned investments. As a new investor at the time, my financial advisor (commissioned-based sales person) did indeed explain to me what a MER was…she did NOT however SHOW me HOW mutual fund fees impacted my returns. She did not show me the true costs. Since mutual funds statements don’t actually show the investor the total paid (in dollars), I had no clue how insidious MERs really were.
Like your friend, I too saved diligently and trusted my advisor with my money. I am very happy her portfolio is seeing more balance todat. I am a DIY investor these days and will never go back to “financial advisors”.
Since I want people to better understand the consequences of MERs, I wrote a “Portfolio MER Calculator” to SHOW people how mutual fund fees consume their portfolio dollars. I would love to know what you all think. (http://www.squawkfox.com/2008/02/12/new-tool-portfolio-mer-calculator/)
7 Leskie // Feb 13, 2008 at 11:59 am
With any other professional I have dealt with, I recieve an invoice for services rendered. I would personally like to see an anual report from my advisor detailing how much they made in trailer fees and comissions from my account. I am paying them for services but am never told how much (other than the $50 annual fee Edward Jones charges). That makes it hard to determine if I am getting any value for my money or not.
8 tom // Feb 13, 2008 at 12:13 pm
Four Pillars, let me rephrase that, “I started out as a DIYer” and came to be an advisor based on that experience. Very good point by CheapCanuck about the added value an advisor can give. I council my clients on tax issues, finding better mortgage rates, budgeting and debt management, insurance requirements, high interest savings accts etc. I don’t technically get compensated for doing this but I feel it’s part of the job of being a true FA and not just a mutual fund salesman.
9 Rob // Feb 13, 2008 at 12:27 pm
I think those wishing to adopt a passive style can learn enough to buy ETFs and hold them without the job being too much to handle.
At the same time, there is more to financial advising than just keeping your costs low. Taxes, insurance, debt management, managing investor behaviour, wills and POAs, the different types of plans and the myriad of rules and strategies for each is confusing. That doesn’t mean every “advisor” is well-versed in these other areas, or willing to spend unprofitable time helping clients in these areas.
I’m a reasonably bright guy, and have been an advisor for 17 years yet I am still learning things, and still look stuff up. I often think when doing my own stuff that I don’t know how people do this effectively on their own.
I think to properly DIY you have to be interested in it, and almost make it a hobby. The CC for example is a DIY that is better than 99% of the advisors I have ever met. He comes across as disicplined, birght, willing to studies issues, analyzes things , and fortunately for many, he shares what he learns. The CC definitley does not need an advisor, in my opinion. But to just go in ETFs, and neglect these other areas of personal finance (like so many do) is a recipe for disaster.
You hear a lot of stories about people’s bad experience going the advisor route. They tell you how bought some labour sponsored fund, or some hot fund of the week…really trying to make a quicker buck as opposed to strategizing out a plan and hiring competent help. Let’s face it, if you don’t care what you pay in fees, what you buy in terms of quality, or the advice you receive, then there are a tonne of salespeople willing to sell you crap. But this is true in EVERY industry.
I explain to every client exactly what they pay on every recomendation. I don’t want any secrets with my clients. Only if they understand exactly how and what they are paying can they determine whether they are getting value. If anyone feels they aren’t receiving value for what they pay, then they should transfer their account to someone else.
It really is simple. You must know what you’re paying so keep asking questions until you do understand. Make notes so you don’t forget. If you don’t feel you are getting more value than what you are paying, then change advisors or try it yourself. Simple.
10 Dan // Feb 13, 2008 at 1:15 pm
Fox: how can we best educate ourselves about the “true” cost of owning mutual funds? My advisor has put me into a mutual fund (which has a GlobeFund two-star ranking) and which has lost 6.5% in the past 6 months (however there has been market volatility), but I still don’t understand completely *how* the MER is charged, when that money is deducted from my account.
Where can I educate myself on how these fees are calculated? So that I can better understand how this all works? I’m confused by all the literature and “advisor speak” when it comes to these things. My advisor said something to the line of “it’s a straight 2% off the top”. But I’m still not sure what ALL of fees really are, and non of my statements seem to reflect this. (The MER on my fund is 2.37%).
What are the right questions to ask my advisor to get the straight goods on all the fees?
11 squawkfox // Feb 13, 2008 at 1:56 pm
Dan: By reading blogs like the Canadian Capitalist you are indeed educating yourself. I started my “financial education” by learning how to read my fund prospectus. Look up your mutual funds and read about the load, the trailer fee, and the MER (which you know already). Then input these numbers into a Mutual Fund Impact Calcualtor (http://www.investored.ca/IefCalculators/Calculators/MutualFundFeeImpact/default.aspx)
I also learned about investing from buying “Personal Finance For Canadians for Dummies”. This was the best $20 I ever spent. I also found the Financial Webring (http://www.financialwebring.com/) and this article called “Can you afford to invest in mutual funds” ( http://www.bylo.org/affordmf.html).
I was so shocked when I learned how much my fees were costing me. Basically, I cried.
Once I got over the shock and horror, I got educated and smart(er). I learned how keeping costs low is very important. If mutual funds are your interest, there are fund companies like PH&N (www.phn.com) who offer exceptional value for very low cost. There’s also the index method the CC employs. The trick is to read lots, and decide what is best for you.
12 Canadian Capitalist // Feb 13, 2008 at 2:23 pm
Rob, thanks for your comments. I should clarify that this post is not meant to generalize a few examples to an entire profession. Obviously, there are many honest advisors who provide valuable services for which they should be fairly compensated. I think everyone understands that advisors need to put bread on their table too.
Also, your point on financial advisors providing value in other areas of financial planning is well taken. My comment on everyone can learn only applies to the investment part. Unless an investor’s affairs are quite simple, they might need help in other areas and might have to seek out a fee-only advisor.
My point is it is the investor’s responsibility to educate themselves enough to at least be able to tell who is a competent advisor. My friend, for instance, has no problem paying for investment advice (she has no inclination to educate herself). The fees are transparent and the advisor provides honest services in return that includes other areas of financial planning that you mention.
13 Canadian Capitalist // Feb 13, 2008 at 2:30 pm
Dan: You don’t pay the MER directly - it comes out of the assets of the fund you are holding. In your example, if the fund has $100 worth of assets, every year the fund managers would deduct $2.37 as a MER. Note that the MER does not cover other fees such as loads, trading commissions etc. You can check out some of the books in the recommended reading section from the library.
14 Rob // Feb 13, 2008 at 6:35 pm
CC - financial advisors fully deserve the reputation they have because there are lots of bad ones. There are certainly good ones, although they can be hard to find.
Finding the advisors who are well versed in the areas beyond just investments is harder still….but I believe it in these areas where most of the value is delivered. The search is worth the time, in my opinion.
The fee-only thing is nice in terms of transparency, but I am not sure they are always the most talented. Certainly there are some good ones out there but I think finding them is just as difficult. Lastly, biases certainly exist in the fee-only model as well.
CC is absolutely right that one has to educate oneself to the point one can at least pick out a good advisor. If you don’t at least do that much, your chances for success are pretty limited.
15 KS // Feb 14, 2008 at 11:43 am
The way I see it, if an individual has to spend time to understand the MERs, mutual fund fee structures, and get to know their advisor, and be educated enough to ask the right questions, and learn about the different type of funds and where the funds invest their money…..The individual would be better off to spend that time to learn how to invest on their own and avoid mutual funds altogether.
I went thru 5 different advisors over a span of 10 years and accomplished nothing, that was 8 years ago. Then I started educating myself and investing on my own for the last 8 years and I haven’t looked back.
For all the engineers out there I submit to you two formulas based on my experience:
Formula #1:
A = B
where:
A = effort spent on learning about mutual funds, MERs, and finding the right advisor
B = effort spent on learning about value investing
Formula #2:
V > M
where:
V = the return on my investments over the last 8 years using value investing
M = the return on my investments by investing in mutual funds, spanning 10 years
16 Canadian Capitalist // Feb 14, 2008 at 12:04 pm
KS: My opinion is that the first formula is more like B >> A. But fortunately, there is a much easier method: one of the “lazy” investing methods that will give you the same great results that the markets in general provide. However, I do realize that investing is one area where there are many roads to Jerusalem, so it’s best to pick a road that you find is personally comfortable.
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