Advice versa, pay more – get more
by Arnold Machel, CFP®
“Do not muzzle an ox while it is treading out the grain.”
Last month we looked at changes to statement reporting that will (to some extent, at least) make the fees that you pay to own mutual funds more transparent to you.
In short, most mutual fund investors pay 2 – 3 per cent of their total investments annually. About half of that goes to the fund company for the services of managing a portfolio (buying and selling stocks and bonds within the fund) as well as trust services and sometimes asset allocation services. The other half goes to the investor’s dealer who in turn pays a portion of that to the advisor. The dealer services typically include the more personalized aspects such as helping to determine goals and putting plans in place. Part of that commonly involves determining appropriate risk levels to achieve those goals, applying individualized financial strategies (eg. should one use a TFSA or RRSP) and behavioural coaching along the way.
The big question you have to ask yourself is: “Am I getting value for the fees I’m paying?” So let’s break them down and look at the two types independently.
Fund Company Fees
The first half goes to the fund company and there are two ways that you can reduce those fees. First, if you have the knowledge and intestinal fortitude to decide what stocks and bonds you should own at what price and when to sell them, you can go the do-it yourself (DIY) route. While there are DIYers out there who are able to do this part on their own, it’s been my experience that the vast majority of them get themselves into trouble, but I’ve also seen some do well. The second way it’s also possible to significantly reduce those fees is if you opt for non active managers. Opinions vary on this matter. In some situations, going with non-active management may make sense, but again in my experience, most of the time active managers add value. Talk to your advisor to find out how your investments are managed.
The second half is for advisory fees. This gets split between your advisor and their investment dealer. For that it may be useful to look at research done for the Investment Funds Institute by the Center for Interuniversity Research and Analysis on Organizations titled “The Value of Advice 2012”.
Here’s what their research found…
The quantitative value of advice
Generally, people who work with advisors have more assets – significantly more over time – than those who don’t work with advisors. Compared to unadvised households, households that receive professional financial advice accumulate:
– 1.58 times more assets over four to six years
– 1.99 times more assets over seven-14 years
– 2.73 times more assets over 15+ years
That’s quite a difference! DIYer: $1 million. Advice seeker: over $2.7 million. If an investor’s primary investing goal is to build assets towards a comfortable retirement, clearly on balance having an advisor adds value. Could you do what your advisor does? Could you do better than the examples above without the help of your advisor? Quite possibly. It’s not rocket science. But it does take time and requires ongoing education. If you have the time and the aptitude you can save yourself some fees. If you don’t, that’s when you want the help of an advisor.
The qualitative value of advice
Not all of the benefits of professional advice are immediately measurable. They are, however, tangible over time and equally important as investors work to achieve their long-term financial goals. Below are some of the ways that advisors add value by making people better investors:
Maintaining a long-term investment strategy. From marriages and the birth of children, to divorce and illness – life changes over time, and advisors know how to make adjustments to financial plans while sticking to a long-term investment strategy.
Protecting against poor financial decisions. With all the bad financial advice floating around out there – especially in the media – advisors play a key role in helping investors make intelligent, informed decisions.
Avoiding the emotional investing habits. When markets are volatile, investors often react with a “fight or flight” response, and they can make damaging long-term decisions, such as selling low and buying high. Having a professional investor by their side is proven to mitigate investors’ emotional responses.
Avoiding “the big mistake”. There are times when a single decision can be so devastating that it destroys years of wealth build-up that can never be recovered in the person’s life-time. An advisor can be that second sober thought that stops you before making “the big mistake”.
Advisors can (and should) also help investors select tax-efficient investment vehicles. This may include recommending the best way to use RRSPs and TFSAs, investing in bonds and stocks in a tax effective manner, tax smart charitable giving strategies, creating a portfolio that can generate a sustainable income stream and any number of a myriad of solutions. They can add value by helping investors accumulate more assets, and by sticking to their plan, staying disciplined and avoiding emotional decisions during volatile times.
It’s important to understand, though, that even though you may not see it all that clearly, you are paying for that advice. Don’t be shy to ask your advisor how they get paid and what value they bring to the table. It’s quite alright to demand that you get value for the money that you pay.
Arnold Machel, CFP(r) lives, works and worships in the White Rock/South Surrey area. He attends Gracepoint Community Church where he serves on the Leadership Team. He is a Certified Financial Planner with IPC Investment Corporation and Visionvest Financial Planning & Services. Questions and comments can be directed to him at firstname.lastname@example.org<mailto:email@example.com> or through his website at www.visionvest.ca<http://www.visionvest.ca/>. Please note that all comments are of a general nature and should not be relied upon as individual advice. While every attempt is made to ensure accuracy, facts and figures are not guaranteed.