Don't Get a Financial AdvisorPart II

My earlier posting about not getting a financial advisor provoked considerable comment, much of it in e-mail rather than in the comments section of the blog. But in the comments section, there were two comments that I want to draw to your attention.

1. Rick pointed out, quite correctly, that there is more to financial advice than just investment. He's right. I'm sure there is a great deal about financial planning that is not covered in my posting. Unfortunately, I'm not sure I'd learn some of the important things in that posting from a financial advisor, which is why I wrote that advice to a friend and why I incorporated it into a blog posting. To be honest, every time I have talked with a financial planner/advisor, I've felt as if some religious cult was trying to separate me from my savings. Most of the content of that post, however, rang true with many of the readers.
2. Ironman provided several links to some of his work that has been fascinating and useful for those who want to delve into equity indices in more detail. 

In e-mail, Tim Worstall wrote,

"The Worstall Invesment Strategy. Buy beer and cigarettes. What retirement?"

which I'm sure will strike a chord with many readers.

And a close friend who works in investment banking sent this lengthy response (somewhat anonymized on his/her behalf):

I would argue that a lot would depend on how interested the person is in looking after their own finances. The easiest way to achieve diversity with low fees is to open a brokerage account, buy a bunch of ETF’s and walk away. This means that you need to do all your own portfolio management, which is relatively easy, but still takes time. If they don’t know their ETFs from their GICs from their MERs, I wouldn’t recommend this approach, because you need to rebalance, and do estate planning, retirement planning, etc.

The next step up is to go with a bank. The advice is free, but the MERs are higher on the “actively” managed funds (I use the quotation marks, because there isn’t much “activity” that you are paying extra for) [EE: but as I noted in the original posting, most banks also offer low-MER index funds and I recommend looking for those.]. However, an advisor will call every year and rebalance your portfolio for “free”. Several banks also offer discounts for bundling, or higher AUM [accounts under management]. For example, one bank provides a programme whereby if you have >$100K under management (easy to do, since you roll your mortgage into the $100K). You get your own investment advisor for “free” as part of the service. The Edward Jones, etc of the world make all their money providing packages that are essentially auto re-balances, and is the easiest, but also the most expensive.

So when do you get a financial advisor? When you have a large enough portfolio that the delta of the MER is offset by gains you can make through investment. [emphasis added. EE: I wonder if this is ever possible in the long-run, and that was a major point of my original posting.] An investment advisor can get a “sophisticated investor” (as defined by the Ontario Securities Commission, and as I recall having a >$200K annual household income, or a large amount of assets under management) into deals that others can’t participate in. These include private placements, hedge funds, fund of funds, etc. The average person does just fine with their bank's advisor, but has to deal with a lot of cross selling each year. For someone that actually spends time on their finances, a brokerage account works better. Therefore, as is usual with these things, the answer is “it depends”.

For me, I have Reuters, Bloomberg, and access to all the analysts that cover all the sectors of the major equity markets. I’d also consider myself to be reasonably financially literate. Therefore, I use a brokerage account that has a lot of ETFs, but also some equities that I like. I also look at it every day. I can also do all my tax planning and retirement planning. As you get closer to retirement, you move more from equities to fixed income, but I’m not ready for much fixed income at this stage in my life. The rates of return are also currently too low to keep my interest, and I’m waiting for the next shoe to drop on the credit markets, and would expect that much of the fixed income market has not correctly priced in this risk (looking at corporate bonds, especially).

 If I were still working in my previous occupation, I would just go with the bank, and go with fairly plain vanilla investments. I would tend to shy away from too much “diversification”, since many of the products are intrinsically diversified, so a portfolio of 10-15 funds means you’re paying the bank too much. In most cases 2-3 is more than enough, I think. Remember that there are transaction fees to deal with, too.

[EE: I wonder if this next part is somewhat tongue-in-cheek] My current long-term career plan is eventually to become one of the branch investment advisors. The hours are great. The work is pretty easy, and you get enough walk in business that the sales component is limited. You can also do exceedingly well out of the job. Of course, that is still a long way off.

I’ve met enough of the Edward Jones, Primerica type people that I know they are constantly pounding the pavement for new sales, and they are just selling a standardized product that is relatively easy to replicate. Of course, if your friend is quite wealthy, but not super financially literate, or is time constrained, there are wealth management specialists that do a good job of these things. So there you go, a few hundred words with no significant outcome at all. Maybe I should have gone into law…….

More from others in a future posting.

Comments

[Rick]

At the risk of repeating myself... most people don't know what they don't know

The ETF/no load index fund strategy is for the DIY crowd. Buyer beware! There is no one-size-fits-all solution. Here are a few of the more obvious reasons to pay for financial advice.

- invest with less risk
- generate tax-efficient income
- better fixed rates than the banks
- need help shifting gears from growth to preservation and income at retirement
- invest in the markets with a principal guarantee
- reduce taxes
- plan estate and transfer of wealth
- the list is quite long and broad...

Each item in this list concerns investing.

Go ahead and follow the MoneySense Couch Potato investment strategy. It works. BUT, most people are not going to spend the time and effort required to manage their own investments beyond simply selecting the investments.

I'm not trying to convince anyone to get a financial advisor. I'm simply stating that DIY is not for everyone.