The value of hiring a financial adviser

April 7 2008 by Ellen Roseman

How did up to 2,000 Canadian investors get caught holding asset-backed commercial paper? Would they ever touch such a product unless a financial adviser recommended it — or at least introduced it to them as an option?

This is one of a long list of financial innovations that have exploded in investors’ faces. I was amazed to see how many people held principal-protected notes linked to risky hedge funds, which became clear after the collapse of Portus and Norshield.

As with ABCP, these products were exempt from prospectus disclosure. So even if you wanted to know more, you’d have trouble finding out anything, other than what your adviser said.

I’m not against using financial advisers. I have a long fruitful relationship with my stockbroker, who listens and never pushes me into anything. But then, I know her business almost as well (and sometimes better) than she does.

I also have a discount brokerage account for my non-RRSP funds. I can see the attractions of doing it yourself, but also the temptations of getting too involved (even addicted).

There’s research showing that people with advisers have a more patient, long-term approach. They don’t move into and out of investments as quickly. They’re more interested in planning for the future. Their results are better.

Still, a significant number of people get burned from following poor advice. When I get their complaints, I can see how they are led astray. Some don’t shop around and deal with a friend (always dangerous). Do they put too much trust in their advisers? Are they blind to the need to protect their own interests?

In my CBC radio commentary last week, I said that a lesson learned from the ABCP mess is not to trust your financial advisers or assume they have done research on their recommendations. They’re salespeople, first and foremost, trying to flog whatever makes them the most money.

That resulted in some interesting reactions, both from advisers and from clients. You can see comments below. Please feel free to add your own.


  1. Rob in Madrid

    Apr 7 2008

    What most people don’t realize is the your average FP is really just a commissioned salesman. You don’t buy a vacuum, he doesn’t make any money.

    I personally recommend Canadian MoneySaver. It’s 100% Canadian and even rarer, it’s ad free. It’s also very inexpensive and written with the average joe in mind.

    Secondly, if you’re interested in investing in stocks, forget the newspaper and go straight to blogosphere. I highly recommend “The Dividend Guy Blog” (google that and you’ll get his link).

    Note I’m not connected to either, other than being an avid reader.

  2. Advisors Not Salesmen, Yes

    Apr 9 2008

    In a word SALES, driven by profits! Advisors my butt…I fired mine and haven’t looked back. I’m doing better myself. Never hear from these ferrets when there is a downturn, can’t even find them.

    If you do want to use a so-called Financial Advisor who knows ALL YOUR personal finances (advantage to him and disadvantage to you with this knowledge), then if you really want to see if they “walk the talk,” do what I did.

    When one wants your business, say to them: “OK, you are recommending I invest in X. Great Mr. Salesman, then show me that you believe in this company and products and SHOW ME your personal portfolio and where you’re invested!”

    After all, it’s only fair since you want to know my financial situation to advise me. And then watch the back pedalling…you will never see their personal account in front of your eyes. Egg sucking ferrets…the lot.

  3. VIVA Las Vegas Better Advice

    Apr 9 2008

    The stock market…forget it…guaranteed losers for the long haul and even the short haul. Your return in Las Vegas is better and more assured. You will lose 99.999% every time.

    Advisors and the stock market are worse than Vegas…you will lose 100% every time, plus your dignity and your trust in real human beings. Do yourself a favor and invest in a cemetery plot because you’ll be needing it after being ADVISED by this unprofessional ilk.

  4. objective third party..hahahah

    Apr 9 2008

    JK says: objective third party. I wet myself laughing on this one> I can’t stop laughing…stop it!

    Objective third party…then who is the second objective party,,,the company and product you are flogging to the first objective party..that would be me! Ahh, where is the objectvity? What great knowledge do you possess to handle my money?

    You say you are a Certified Financial Planner. I am not impressed. Interestingly, you didn’t say PROFESSIONAL. Why not? I see very little difference between your sales and that of the very loud Billy Mays (Oxyclean). Perhaps we should use Billy’s product to clean up the financial mess caused in the past, present and certainly the financial future.

  5. MIchael J. Norris

    Apr 20 2008

    Hello, Ellen. You and I met at the Cartier conference many years ago and I am sure that you will recall the tirade that I went on over the ridiculous service that we received on our skull-crushingly expensive Sony DVD and TV.

    I should say at the outset that I am on the distribution side of the industry and am head of compliance at a small MFDA-governed boutique. To sing our praises for a moment, we are rare if not unique in that we have no sales quotas and have been known to fire reps who push product on unsuitable investors. Mercifully, the type of person that we attract tends to be more concerned with serving than pushing the highest paying product.

    I am writing you today prompted by your Star article about doing it yourself. I do agree with several of the points made, but wanted to pick you up on a few:

    1) I read often about how Canadians pay the highest MER’s in the world. I do not know about the world, but I am told that in the US, the most likely comparison, the MER is lower, since the advisor charges the client directly, while the mutual fund charges for marketing, overhead, regulatory costs and, of course, investment management. As I say, this is what I am told. If that is the case then a direct comparison cannot be made.

    Of course, in Canada, we cannot buy US-manufactured mutual funds, so I have no direct experience.

    One of my favourite hobby horses is the unequal tax treatment of financial advice given on RRSP investment portfolios versus open accounts. Given that most working stiffs have all their money locked up in a house and anRRSP, the only way for the advisor to be paid is out of the money charged by the fund company.

    Were it not so, the advisors could charge a tax-deductible fee and use F class shares and even index funds and negotiate a trailing commission based upon the work load burden for each client individually. I do not think that it would change the tax revenue, as the RRSP portfolio would grow to a larger number and be levied more tax when the money was withdrawn. I think there is a charter argument there somewhere, due to unequal treatment under the law.

    Generally, the average MER for a Canadian fund is something slightly north of 2.5%. Roughly 50-60 basis points goes to meeting regulations. The best indicator of this is to examine the MER of an EFT. They are unburdened by much of this cost, as they never waste a stamp or kill a tree sending you required information telling you how you are doing. About 1% goes to the fund company for management and about 1% goes to the fund dealer who splits this with the salesperson (who might also provide cogent financial advice beyond the sale of the product). In my case, I tell my clients how to calculate roughly what I make, so that they can assess whether they are getting value.

    2) The quality of advice is all over the map. When I worked for a large foreign-owned bank (I was not in fund sales), they proudly proclaimed they had the highest per capita number of people licensed to sell funds. Many of those people were quietly advised that if they wanted a job in the future, they had better get on that bandwagon as their current job could be replaced with an automated teller or perhaps a data processing centre in India. With the tens of thousands of new licenses issued, Pareto’s Law, or worse, might apply.

    3) In a paragraph above you say, “I’m not against using financial advisers. I have a long fruitful relationship with my stockbroker, who listens and never pushes me into anything”. I suspect that your broker is just that and not a financial advisor, nor do you need them to be. You are almost an industry insider and get the scoop on lots of things that most people don’t have time or inclination to pursue. But I cannot count how many clients I have picked up because of the non-portfolio advice that I am known to dispense and for just plain holding their feet to the fire on such matters as wills, etc. I have learned, as a result of this work, that procrastination and rationalization are the twin demons of human existence. It amazes me that we have survived to 6 billion (I guess that making babes is fun).

    I have asked my clients why they deal with me and they generally give the same three answers:

    a) I trust you;

    b) I do not have the time or inclination to stay informed the way that you do about a wide variety of matters financial;

    c) You are my “go to” guy. Almost every decision has a financial implication. Given your age (white hair, what is left of it) and experience, I like to use you as a sounding board. I wear this high compliment proudly.

    I cannot resist touching on education here. I have seen self-educated reps do a fabulous job and people with university education and CFP’s do nothing more than push the product with the highest trailer. And vice versa. The same as realtors and contractors, I am told.

    4) Investing is a tug of war between intellect and stomach and the stomach usually wins. You know the stats; people rarely enjoy the fruits of a successful manager’s labours. You know the Peter Lynch story.

    There is not an advisor alive who has not had this experience. Clients sign on to an investment strategy that calls for regular rebalancing, only to fight them on it later, as in “tell me again why are we selling the winners and buying more of the losers? Just buy funds that go up”!

    I am not kidding. This is one of the good reasons for wrap accounts (they also suit the lazy advisors), since few people can tolerate seeing the sausages being made, even though it has been shown as one of the keys to success.

    5) The market is not the question. A day does not go by that I do not weigh two issues for my clients:

    a) Their financial ability to tolerate risk (i.e., volatility)

    b) Their emotional ability to tolerate risk.

    Even people with good advisors cannot resist piling into the winners. The stories of a flood of cash killing a fund are legion. You will remember the name Tony Massie, a fund manager with Global Strategy, swamped by his own success.

    As with any industry where there are tens of thousands of people working, there are bound to be some bounders. There are also some people doing good work and helping people in many areas such as tax and estate law (all covered by the trailer fee, as we Canadians hate to pay directly for anything) and a myriad other questions.

    I asked a friend of mine, who has been in the business since 1992, what was the toughest question that he had ever been asked. He recounts the following story without hesitation: A client and her husband had been through a rocky patch and she took comfort in the bed of another man. As luck would have it, she and her husband were on the mend when she discovered that she was pregnant. However, the husband had been vasectomized some years before. In her words, the only person she could think to turn to for clear, reasonably unvarnished and reasonably unbiased advice was her financial advisor. Keep the baby or not; what should she do? I did not ask him what he said, but I certainly thought about what I would say in similar circumstances. A sounding board indeed.

    In my own case, I have had clients tell me that if their mate did not sign on to a financial plan that they would divorce them, and divorce them they did.

    All the best to you and thanks for the forum,

  6. MFN

    Apr 21 2008

    When did “stockbrokers” become “investment advisors”? The OSC, in their zeal to complicate and confuse consumers, started referring to “brokers” as “advisors” . “Brokers” was at least truth in advertising.

    JDT is wrong to think “brokers” have a fiduciary duty to clients once a prospectus is pushed across the table to a client. Investment counselors are the only OSC registrant category that have the duty to “treat a client’s money as if it were their own,” as far as I am aware, but they only deal with institutions and the wealthy.

    However, JDT may be onto something to suspect that the IDA, the OSC and the big banks are in an unholy league to obfuscate. The banks control 60% of mutual fund distribution and the lion’s share of retail brokerage in Canada through their subsidiaries, RBC DS, Scotia McLeod, CIBC Wood Gundy, TD Waterhouse and BMO Nesbitt Burns. Could it be that having “advisors” rather than “brokers” suits their marketing needs best? Bank subsidiaries pay huge registration and other fees to the OSC.

    To be fair to the brokerage industry, they have been pushing their “brokers” to sell fee-based products in recent years. These so-called “wrap” accounts are still very expensive (upwards to 5%/year with all the asset allocation and management fees, I hear). At least these accounts place the broker on the client’s side in principle. The only way the broker makes more money every year is if the client’s portfolio grows (or if the broker devises new fees!).

    As for Certified Financial Planners (CFPs), we should go a little easier on these folks as long as they are fee-only planners. CFPs can provide a valuable service by helping clients with estate planning, tax planning, budgeting and other useful things that many people need. But if they take compensation by selling financial products (i.e. mutual funds) and receive trailing commissions, beware. Their motivation may be in the right place, but they have a huge conflict of interest.

    To summarize, caveat emptor, buyer beware. In his working paper, The Cost of Active Management, Kenneth R. French (of Fama French fame), Tuck School of Business, Dartmouth College, 2008, calculates that $100 billion is the cost of active money management in North America. Our job as consumers is to pay as little of it as possible.

    Nevertheless, we need to be aware that an industry taking $100 billion off the top will be ruthless and needs to be watched carefully, particularly if regulators are compromised by provincial attitudes and their larger sources of revenue.

  7. Boris BetOnOff, Responds

    Apr 21 2008

    When anyone touches your money, you better believe they care more about themselves than you! Call them advisors, FPs, brokers, and on and on. Bottom line…SALES! They want your money.

    Some honest, some dishonest, all worth watching closely, including the overseeing agencies who have time and time again dropped the ball and who are confused about who they should be protecting.

    Governance… a new word for 2008 to create a smokescreen of “you can trust me” and “we’ve changed and improved, cleaned house, so to speak.” All BS…they want your money and couldn’t care less including regulators.

    Listen to the name…REGULATORS…sounds like CARBURETORS…all smoke and hot air!