The price of advice

We’re conditioned to think that financial advice should be free. A far better plan is to buy it by the hour.



From the February 2009 issue of the magazine.


At the very least I expected a Christmas card. “Dear Rob. Um… looks like we goofed. Your investments are worth half of what they were last year. We’re sorry. We’ll try to do better. Merry Christmas.” Guess it got lost in the mail. Yours too?

Okay, I’m dreaming, of course. Even if my investments dropped to next to zero, I doubt my adviser would have called.

Garth Rustand isn’t surprised. Rustand, who lives in Nanaimo, B.C., used to be an investment adviser. He says most advisers are really salespeople. Their job is to sell you mutual funds so their firm can collect fees. If you’re looking to them as sources of investing wisdom, think again.

Most advisers possess no greater insight into the market than you or I do. A 2007 study by Daniel Bergstresser and Peter Tufano of Harvard and John Chalmers of the University of Oregon compared the performance of adviser-sold broad equity funds to funds that investors selected themselves. Between 1996 and 2004, the adviser-sold funds returned 6.1% a year. The funds picked by do-it-yourselfers actually did slightly better, at 6.5%.

Why don’t advisers perform better? Rustand, who now teaches people how to invest through a group called Investors-AidCo-operative of Canada, says advisers suffer from conflicts of interest. For instance, advisers typically earn twice as big a commission for selling their own company’s proprietary mutual funds as they do for selling funds from outside the company. This gives advisers a nearly irresistible urge to put you into their company’s proprietary funds, even if those funds are not particularly good.

Advisers also have selfish reasons to put you into funds that charge high fees and therefore pay the adviser more. A typical fee on an actively managed equity fund is 2.5%. But paying high fees doesn’t result in improved performance for you. Just the opposite, in fact.

You can check the numbers for yourself by looking at the SPIVA Scorecard ( SPIVA, which stands for Standard & Poor’s Indices Versus Active Funds, compares the performance of actively managed equity funds with their benchmark indexes. Over the last year only 23% of actively managed Canadian equity funds were able to outperform the S&P/TSX composite index. Over the last five years only 7% did. The overwheling majority of investors would have been better off buying low-cost index funds that track the market index for minimal fees.

That’s not to say all advice you get from an adviser is bad. It’s just that you should ask yourself how the person across the desk is making his money. If he’s being paid through commissions and trailer fees from mutual funds, be skeptical. Think about ways to get more objective advice.

You may want to manage your own investments. Constructing a great portfolio is much simpler than you realize. MoneySense’s own Couch Potato strategy takes about 15 minutes a year. To learn more, visit or read How I Became a Couch Potato on page 30.

Some issues do require an expert’s touch. It makes sense to visit a pro for advice on highly technical issues such as tax, insurance or estate planning. The trick is to make sure that the person across the desk has no hidden agenda. My advice? Use a fee-only planner, preferably one who charges by the hour. This type of planner is rare in Canada (you can see a list at, but I’m convinced that they are the wave of the future. By billing by the hour—the same as a lawyer or an accountant—these planners can focus solely on offering you good advice, with no thought about selling you products.

Why don’t more of us use fee-only planners? It’s the shock of seeing a bill for $500 to $1,000, says David Stewart, a fee-only planner at Stewart & Kett in Toronto. We’re so conditioned to the notion that financial advice should be free that we faint at the notion of paying upfront for it. What we don’t realize is that we’re already paying traditional advisers for the supposedly free advice that they deliver. We pay for their advice in the form of hidden fees and skewed recommendations. An hourly paid adviser is free of those conflicts. The best news of all? If an hourly paid adviser doesn’t call you, at least you’re not paying him for the privilege of being ignored.

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