Last month, a friend wrote to my wife, saying she had a friend who wondered about signing up with a financial advisor. Ms. Eclectic passed on the request to me.
Here is my response. I'll be happy to update/alter it if you have any further suggestions.
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[Ms. Eclectic] says you have a friend who is looking for a financial advisor.
My advice is “Don’t”.
Financial advisors don’t work for nothing. They tend to put their clients into things that earn them (the financial advisors) lots of money.
Things to avoid:
- · Anything that has “trailer fees” or “loads” or “front-ends”. These are typically mutual funds where the financial advisor gets a bunch of your money before any of the rest of it is invested or after you try to take it out.
- ·
Anything with a high MER (Management Expense Ratio). The
evidence is overwhelming that managed funds, on average, do no better than
index funds (stock funds that mirror the movement of some stock index) and once
the MERs are taken off, they do worse on average. MERs are typically in the
range of 2% - 3%. This means they take 2% or more of your money before you earn
anything. Every year. So they have to out-perform the market by more than 2% to
justify their existence. Most of them don’t, especially not over the long haul. Insist on things that have an MER under 2% and preferably under 1%.
So here’s my advice (and it is pretty similar to what I’m
doing).
- · Don’t get a financial advisor.
- · Go to your bank (actually do this with several). They will have someone who will be happy to help you for no charge. However, they might not know a whole lot, and be on guard because they have been trained to steer you into high MER mutual funds, since that’s where the banks make their money.
- · Go through all the questions about investment goals yadda yadda yadda with them.
- · Then tell them you want to put your money in an index fund with a low MER. They should have at least one with an MER that is less than 1.5%. An index fund will move with the stock market, as I said, so don’t watch what happens to it on a week-to-week or even month-to-month basis. Just keep saving. They may have to look through their brochures for awhile to find these funds, and these funds are often at the backs of the brochures in unappetizing print style.... the banks don’t make much money on them, so they don’t push them.
- ·
Banks often have several different index funds: Canadian,
Global, Green, blah blah blah. Which one to choose is often a very difficult
decision. My own preference here is to diversify, if possible and depending on
the minimums that the bank imposes for opening an account with one of these,
and put about half in Canadian funds and about half in a Global index fund. Your friend may want to diversify even more than that.
There’s no charge for this service at the banks, and she can set
up an automatic check-off with the bank that will put more money into these
funds on a regular basis.
One other thing to consider. If she doesn’t want to do much work and doesn’t
want to mess around or take much risk, or especially if she thinks she might
want access to the money in a few months or so, the banks now have electronic
savings accounts that compete with the ING savings accounts, paying decent
interest rates. We try to flow some of our alleged savings through one of
these. Alleged.
I just looked at the past 3 years’ performances of index funds
at Globe Fund, and they ain’t all that great. But don’t decide just on the basis of the past three years (and
keep in mind that the future will not be the same as the past).
As an example, consider the RBC Canadian Index Fund (I’m not
necessarily recommending this one, but it looks slightly better than average to
me; I selected it because it really illustrates what I’ve been trying to say.):
RBC Canadian Index one month % change: -6.59
3-month % change: 28.53
6-month %
change: 13.68
One-year % change: -27.22
Three-year % change:
-1.66
Since inception
annual % change: 7.70 (over 11 years)
Here are more details on this fund.
Also note that the MER is only .68, plus a “management fee” of
.5, for a total of 1.18%, which is decent enough for a bank’s index fund. And I
see that you can start an account with this fund for as little as $1000, and
they let you add to it in $25 increments --- great for us small fish who can’t
put away huge chunks of funds at any given time. It’s also available for Registered Retirement Savings Plan
contributions.
This is a good example of what I was trying to say:
if she is investing for the long haul, index funds are probably the way to go.
This fund lost money over the past year; in fact it lost so much money last
year that over the past three years it lost money. But since inception 11 years
ago, it has averaged 7.7% with a very low MER, and that’s not at all bad.
Others may be better than this, but it gives you an idea of what might be
typical with index funds.
Because of their big swings, index funds are riskier than GICs
or most money market funds, but on average they tend to do better over long
periods of time. But be prepared for some ups and downs, and those can be
scary.
One more thing: It’s not unseemly to shop around before you
decide.
I hope this helps.
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Warning to financial advisors: Don't mess with seniors.