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April 20, 2016 | The price of advice

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.


Matt has a problem. Too little money. Or is it too much?

“Fifty grand,” he says. “I can’t manage it myself, but neither can I find someone half decent to do it.

“From talking to different investment firms in my small town, most indicate that to have a fee based advisor you usually must be investing $100,000 or greater to start. So, what are the rest of us to do? Just accept MERs, with your Sun Life’s/Investors Groups of the world? I’d prefer to avoid a self-directed investing fund, as not sure what to pick.  Any advice would be appreciated!!!!”

Good question. Most people have no idea how to find an advisor, what the hell the letters after their names mean, what kind of service they provide, how they’re paid or what to watch out for.  That has led millions of us into the warm embrace of [email protected], where she seduces you with the enveloping sexy simplicity of mutual funds, complete with their embedded and nigh-invisible insidious fees.

No wonder advisors are considered as trustworthy and ethical as, say, used Kia salesguys, politcians or Kevin O’Leary.

There are basically three flavours of advisors. Fee-for-service guys will analyze your situation, draft a financial plan and a suggested portfolio, then charge you about $250 an hour. The process will probably take ten hours or so, to meet, get the facts, discuss your goals and risk tolerance and run over the draft portfolio. Then, of course, you’re on your own. You’ll have to invest on your own, monitor assets,  rebalance things as necessary and move assets around for tax-efficiency.

Then there are the commissioned guys. Like the ‘advisor’ at the bank who says, “I don’t charge you directly for anything!” Or the mutual fund salesperson at IG. In fact, over 95% of advisors are compensated by collecting commission, which puts them in an inherent conflict-of-interest situation (why the regulator is pondering how to end this). The question investors need to ask is, are you selecting stuff for me to own because you get paid a better trailer fee, or because it’s correct for my situation?

Naturally, most commissioned advisor-salesguys drift toward mutual funds with fat fees in the 2.5% range (called MERs – management expense ratios) because they pay well, whether the client makes money or not. That’s human nature, and many advisors licensed to this level do not actually have a fiduciary duty to the people they serve. (That means, by law, they must put their client’s interests ahead of their own.)

Not all are self-centred, naturally. Lots of advisors paid by commission are honest, effective and trustworthy people. Bot lots aren’t.

The kind of advisor Matt is seeking, fee-based, eschews commissions and charges the client a management fee to look after their portfolios and financial plans. That normally varies by account size, so the more you have the lower the overall percentage. Where possible, never pay more than 1% annually of the value of your portfolio, but over a million that should drop to about 0.85%. All fees on non-registered accounts can be deducted from your taxable income (mutual fund commissions cannot), and normally come out of growth in your account monthly. Plus a fee-based advisor should do the same kind of plan a fee-for-service guy does, but for free.

(Disclosure: I’m a fee-based dude when not writing a pathetic blog and beating off xenophobes, house-horny moisters, lefties, realtors and outraged Moms.)

Now, how much money do you need to have an advisor? Matt’s right – fee-based guys are normally best if you have $150,000 since (at a 1% fee) that covers the financial planning, investing, monitoring, rebalancing, tax and retirement planning advice they shell out. Mutual fund advisor-salesguys who sell you an off-the-shelf fund will gladly handle smaller accounts because they don’t actually manage your money (a fund manager does that, for the MER charged). A fee-for-service guy will help anyone, but the one-time cost is substantial.

Two alternatives: self-investing and robos. The latter, like WealthSimple or BMO’s Smartfolio are options, but not without cost. For example, the bank’s robo has an annual fee of .7%, plus embedded ETF charges, while WealthSimple is half a per cent. Of course, with this approach you’re trusting your money at an algo, not a person.

Or, you can do it yourself, opening a trading account with an online outfit like TD Direct or QTrade. Expect no investing or tax advice, no management fees and to shell out ten bucks a trade. You also get to claim all the credit or take all the blame. Obviously the best route to go here is ETFs, not individual stocks, if you’ve got a relatively small amount.

What assets to buy? Keep reading.

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April 20th, 2016

Posted In: The Greater Fool

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