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Investment Pieces
Learn about key pieces of the investment puzzle and simplify the unnecessarily complex world of investing.
Beware of Financial Advisors - 2 of 6
As Cat Stevens sang, "you are young, it’s not your fault". But it does mean you have to be more careful with financial advisors.
Seeking advice on a financial plan, tax, insurance, estate planning, severance packages, divorce, and a mortgage, is always prudent.
Seeking out a financial advisor for investing requires more caution.
A great financial investment advisor can help one map out an investment strategy, provide access to research and information, save an investor time, monitor and rebalance an investors portfolio, and assist with paperwork.
However, some financial advisors have an inherent conflict of interest, may not act in their clients' best interest, and charge significant fees that reduce long-term returns, which in turn significantly impairs long-term portfolio value. Further, most financial advisors can not generate returns after their fees, that consistently beat the market.
Now if an investor has no existing investing knowledge, feels they do not possess aptitude or head space to stay invested when the stock market inevitably will crash, and does not have the time or interest to learn the basics about investing, then by all means, this investor should seek out and pay for financial investment advice rather than go it alone without the appropriate basic investment knowledge and aptitude.
Here is what this investor needs to know to seek out a Financial Investment Advisor:
There are two types of financial advisors:
Those who get paid on an hourly basis, or on a fixed quoted fee, to provide advice. An excellent source to search for this type of independent financial advisor is: https://docs.google.com/spreadsheets/d/1iGzy9kkSXqjGbhXfcfczs9qwSQfI1PdRuNUOMybxvl4/edit#gid=0
Those who will receive some or all of their compensation as a percentage of what you invest, or a percentage of your total assets, (i.e., the money you have invested).
Typically, you need to already HAVE money to get the second type of financial advisor. If you have less than $250,000 of investable assets, (i.e. excluding your house and car), most financial advisors will not even want to talk to you.
If you have between $250,000 - $1,000,000 of investable assets, you will likely have to pay a minimum fee of 1.25% to 2% of your assets each and every year. Now a fee of 2% per year may not sound like much, but that teeny, tiny little fee of 2% per year can cut a portfolio value in HALF in 40 years!
If your account is too small to attract a financial advisor, a third alternative in seeking financial investment advice is to rely on Mutual Fund salespeople that work at RBC, TD, CIBC, BNS or BMO; or Life insurance companies such as Manulife, Sun Life, Canada Life, etc.; and or Mutual Fund companies such as Investors Group (IG), Mackenzie, AGF, CI Investments, Fidelity, Invesco, Dynamic, etc..
Financial advice from Mutual Fund salespeople is the LEAST attractive option, as Canadian Mutual Fund Management Expense Ratios (MERs), tend to be the highest cost Mutual Funds in the world, averaging about 2.3% per year for Equity funds, and 2.1% per year for balanced Mutual Funds.
These high Mutual fund fees go along way to explaining why the vast majority of Mutual Funds fail to meet their benchmarks, and even ones that may exceed their benchmark in one year, typically fail to continue their first quartile performance 4 years later.
Dealing with Mutual Fund Salespeople
Similar to a used car salesman or real estate agent, Mutual Fund salespeople get paid to get you to make a purchase / investment. Thus, their interests are not aligned with your interests. You want a good car at a fair price, they just want you to buy a car, any car. You wouldn’t just buy a car because the salesman said so. It’s the same with Mutual Fund salespeople that get paid a percentage of your assets every year.
For example:
A Mutual Fund salesperson let's call him Bob, gets paid more, the more you invest with him. A typical Canadian equity Mutual Fund has a Management Expense Ratio (MER) of 2.3% each and every year, of which typically 1% or so goes to Bob.
Further, Bob may be restricted to sell ONLY the Mutual Funds that his employer will allow him to sell to you. Bob's employer, (ex. CIBC or Manulife or Invesco), may only let Bob sell his company’s Mutual Fund products, even though those products may not be the best-performing Mutual Funds.
Finally, Bob may sell you a Mutual Fund that generates high fees for Bob, even though there may be lower-cost Mutual Funds or ETFs available elsewhere.
See how Financial Investment Advisor fees can impact your portfolio