Can we get some service here?

I’ve come to realize that many investors need professional advice. Problem is, much of the advice out there is terrible



From the November 2011 issue of the magazine.


I recently got a call from a fellow journalist—I’ll call her Natalie—who wanted a second opinion on her investments. Natalie had been happy with her previous adviser, but he’d retired and passed her account along to a colleague. She wasn’t pleased with the changes this new adviser had made in her RRSP—and with good reason.

We’ll get to the gory details in a moment, but first let me explain why I didn’t suggest that she simply build her own portfolio of index funds. I used to assume that the first step in becoming a Couch Potato was to fire your adviser, but I’ve changed my tune over the years. Many investors can do just fine on their own, as long as they learn the basics of financial planning and have the discipline to ride out the rough patches. Problem is, that’s more difficult than it sounds, and I’ve come to realize that most investors would do better with professional advice.

Besides, Natalie has no interest in being a DIY investor. “I’m not going to manage a $100,000 portfolio on my own,” she told me bluntly. What’s more, she has little confidence in passive investing. “The idea that I’ll just put money in the whole market and only look at it once a year—I’m not sure that’s right for me.”

I’ve spilled a lot of ink trying to convince people like Natalie that index funds offer the best chance of long-term investing success. But the whole “index funds versus active management” debate often misses the most glaring problem with the financial services industry in this country. The big issue here is not that Natalie is using actively managed mutual funds, or even that she is paying too much. When the mutual fund industry’s spokespeople defend high fees, they point out that part of that money pays for ongoing advice. True enough, but as Natalie’s situation demonstrates, that advice is often terrible. Here’s what I mean:

There’s no planning. Natalie is 42 years old and plans to retire in 20 to 25 years. I asked her how much money she thought she needed in retirement, and what rate of return she needed to get there, based on her current savings. She didn’t know, because her adviser had not created a financial plan for her. For him, “advice” meant picking mutual funds and not much else.

Imagine a doctor prescribing medication without a diagnosis—and then collecting commissions from the drug companies. Building a portfolio without a plan makes just as much sense.

The portfolio is poorly designed. Natalie’s RRSP includes 10 mutual funds. There is no reason why a portfolio of $100,000 needs that many, especially since many of her funds have redundant holdings. I asked Natalie what her overall asset mix was, and she thought it was 50% stocks and 50% bonds. (This should appear on her statements, but it doesn’t.) It took me over an hour with a spreadsheet to figure out that the actual mix was 64% stocks, just 19% bonds, and 17% cash.

Choosing an appropriate asset allocation is one of the most important services a good adviser will provide. Your mix of equities and fixed income is hugely important to your risk management and your expected long-term returns. Yet Natalie’s adviser just picked a handful of hot performers, threw them in a blender, and called it a portfolio.

He’s gambling with her money. Natalie describes herself as “very conservative” and says she endured the dot-com meltdown and the 2008 financial crisis because her former adviser had her in a low-risk portfolio. However, when she moved to the new adviser, the first thing he did was sell all her bonds, as well as three well-diversified equity ETFs. Then he put 20% of her money in two highly speculative small-cap stocks that have since lost almost half their value. This is gambling, not investing. How such stocks could ever be considered suitable for a conservative investor’s RRSP is impossible to imagine.

A professional adviser will create an Investment Policy Statement (IPS) that sets the ground rules. One of those rules should be: “The portfolio will avoid all speculative stocks, such as junior mining companies.”

She’s locked in. The overall fee (MER) on Natalie’s mutual funds is 2.31%, which is far more than anyone needs to pay for their investments. Worse, her new adviser made sure that all her mutual funds had deferred sales charges (DSCs), which means Natalie must hold them for at least six years or face hefty redemption fees. She would love to fire her adviser tomorrow, but if she does, she’ll pay over $3,000 in DSCs to get out of the funds he chose for her.

I am the first to argue that investors who need financial advice need to be prepared to pay for it. Even fee-only advisers (who do not receive commissions) typically charge 1% to 1.5%, which is a significant cost. My point is not so much that Natalie and others like her are paying too much for financial advice: rather, they’re paying too much for bad advice.

If you’re comfortable managing your own index portfolio, I encourage you to do so. If you’re not, then a good adviser is worth the fee if she can help you achieve financial goals that you can’t reach by yourself. A bad adviser, on the other hand, does little more than turn your wealth into his own

6 comments on “Can we get some service here?

  1. Another great article Dan. Sadly, you illustrate an all too common experience. Despite the best efforts of yourself and others most people are willing to accept "expert" financial opinions as with medical care or even auto service. Not making the effort to educate themselves to determine what good advice looks like is far easier than going to medical school but could turn out to be more expensive.

    Here's hoping you don't run out of ink.


  2. Once again another great argument for looking for a fee-only financial planner who does NOT sell products. One of the ways that an investor can educate themselves is by getting an impartial professional to look at their situation, help establish the goals they would like to reach and simply establish what sort of return they would need from their portfolio to reach those goals. That is how a couch potato should educate themselves professionally without huge fees, bias and poor advice.


  3. What frustrates me is that the advisor seems like he failed to consider the fundamentals – the client's annual income, age, net worth, investment knowledge, investment objective, risk tolerance and time horizon. Clearly, he should not be advising clients right now. Maybe with additional training he can advise a bit later. But how did was he registered in the first place? I belive it's easy to be registered as an advisor and I wonder: if it were more difficult to pass the course and be licensed, then would only the best of the best remain and be allowed to advise clients?


  4. When we buy a car, we check for reviews. We buy a home and we have a home inspector verify the house quality. These are the biggest ticket items we purchase in our life time, but when it comes to investing too many people tell their advisor, "You;re the expert, you handle it". Why? The DSC issue has been discussed for of 10 years in every publication. As long as people deffer to someone else in handling their money there will always be someone their to take advantage of it. If you buy a Honda Civic you don't expect to tow a boat. If you buy a house, you verify the driveway is on your property. If you say you're a conservative investor, look at what you're investing in! Unfortunately very few people look at the major holding of a mutual fund or an ETF. It's like RBC Dividend fund in 2000 took Nortel Shares which shortly cancelled their dividend and the TD Dividend Fund to the BCE distribution as a special dividend. It's still the reason why I own the TD fund rather than the RBC fund. People need to take responsibility for their actions.


  5. Perhaps I am out of line with this post but this should not be a discussion about fees and expectations. The financial industry is first and foremost a sales industry – note the recent profits announced by the banks this week. Investing is a strategy, financial planning is a strategy and it takes an experienced, professional and well credentialed person to provide good advice and activity. If you go to a mutual fund salesman, you will get mutual funds, if you go to an insurance salesman for advice, you will get an insurance product, etc. Much like any profession, most are terrible, some are mediocre at best and the best ones tend to be the worst salesmen so they don't give you the warm fuzzy feeling that these professional salesmen give you. If you want to pay for the least expensive advice, you will find the cheapest advisor. Don't be concerned about the fees as much as the value that you are getting – pick an advisor who is aligned with your goals and risk tolerance. Using a fee based arrangement not only makes the process more transparent but also aligns their compensation with the success of your investments i.e. if he chooses investments that fall in half, his compensation will fall in half accordingly. As an aside, once an advisor uses the words "back end charges", run the other way. This is a discretionary charge by the advisor and is ONLY in the advisors best interest. Find someone else who is prepared to purchase the mutual funds without the deferred sales charge.


  6. Dan! I've decided that it's time we go all in. We have had a spousal RRSP Index account with TD since fall of 2008, and on Monday we have an appointment to open and move the industry managed account into our Couch Potato portfolio. Woowee! I have spent the last few days checking the rates of returns on all the accounts, managed and passive in the last few days, the managed accounts gained marginally better in 2010 than the Couch Potato portfolio, but lost spectacularly in 2011, while Couch Potato held it's own – just, but held it's own. I've been reading your posts and "The Wealthy Barber Returns" and I am convinced it's the way to go. The clincher was that I realized that we haven't actually met with our advisor since 2009! Thanks for all the wonderful advice!


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