Investing for beginners, part three

November 14 2009 by Ellen Roseman

I just finished teaching an eight-week investing course at University of Toronto’s continuing studies. About 40 people attended, including some who had no previous investment experience and others who had been using professional money managers.

They agreed with me that salespeople have many hidden conflicts that taint their advice. They liked the idea of using passively managed index funds and exchange-traded funds to bring down their costs dramatically. They already had discount brokerage accounts or planned to open them imminently.

But here’s the problem. Many people don’t want to do their own investing. They want an adviser to help them create a low-cost index fund portfolio and rebalance it every year.

Do such financial advisers exist? That’s a question my students asked and I couldn’t answer.

Mutual funds are profitable for sellers because of up-front commissions and annual trailer fees. But where’s the money in selling passive portfolios to smaller investors?

I know of a few firms that have their own proprietary index funds, such as Dimensional Fund Advisors and the Croft Group’s Portfolio Index Evolution Solution. They get an income stream from manufacturing and managing funds, not just selling them.

But are there advisers who help you choose the right mix of iShares, SPDRs and Vanguard ETFs? That’s what I’m looking for. Please let me know if you find any.

Meanwhile, you can pay for do-it-yourself coaching to manage your own investments. This is something offered by Weigh House (formerly Second Opinion Investor Services). But it doesn’t recommend individual securities or make buy/sell recommendations. It just helps you make your own decisions.

This week, I met with a class member who wanted advice about her investments. At age 45, she had a “know your client form” with a 90 per cent stock allocation. Her equity funds (mostly foreign) were poor performers. Her only fixed-income investment was a high-yield bond fund. And her $200 monthly contributions went into a cash account, which paid a grand total of 25 cents in interest last month.

In my view, her portfolio was too risky and should have been rejigged after the crash. But her adviser had left the firm and she inherited another one who called her only once a year. She should have been putting new money into the stock market to take advantage of dollar cost averaging. And she didn’t need a few thousand dollars sitting in cash, rather than money market funds.

I’d love to see her take charge of her investments, but she doesn’t have the experience or confidence to do that. And with a full-time job, she probably has better things to do in her spare time.

Canada needs financial advisers to help investors succeed without costly mutual funds that can’t match the market indexes. Is there a business model for such a practice? Until that exists, I’m afraid that passive investment strategies won’t take off in a big way.

7 comments

  1. Cynthia

    Nov 14 2009

    I wish I knew someone like this myself. I’m a little leary of non-associated people as we had our own ponzi schemer here in our city who escaped to england and was finally brought back to face justice. I am an average investor. I manage my investments, which aren’t large, but I would like to expand into stocks, but i don’t like the idea of paying $10 or more to buy stock through different companies, I want a low cost alternative that is good to deal with.

  2. Al

    Nov 14 2009

    This is so true. I dumped my financial adviser after he continued to recommend more and more mutual funds despite the many poor performers. He sure did well during the dot.com era but so did everybody … until the bust. Does the adviser ever suggest staying in cash during a downturn? Not bloody likely. How many mutual funds consistently beat the market? Enough to warrant the fees? Not many. So off to personal investing school by replacing mutual funds (after rear-end loads are beyond seven years to avoid more fees) with ETFs and google reader to provide insight from blogs like yours.

  3. Dave

    Nov 14 2009

    I have to voice my disappointment in the ongoing backlash against financial advisors and their compensation.

    How much should an advisor make in a year? Maybe $75,000? $80,000 maybe? Pretty low for most advisor today, but let’s go with this.

    How many clients can 1 person provide decent ongoing service to? 80? 100? 125? Let’s say 120 for argument’s sake.

    To make $80,000 per year, the advisor is earning $667 per client per year. At today’s trailer fee rate of 1%, that means each client has to have about $67,000 with that advisor.

    So far so good, right? Wrong. The poor advisor has’t covered a single expense yet. No office rent, no phone line, no licensing fees, no assistant, nothing.

    Let’s cut the guy a break and say he rents an office for $1,500 a month, pays another $500 a month for phone line, internet, office supplies, licensing, insurance, etc. That’s $24,000 a year in expenses.

    Would you go through all this PITA for a $56,000 a year income? Neither would the advisor.

    Any advisor with any credentials and experience is not in the business to make $55,000 a year. So people, get real. I know fees suck. I pay them too. But if you have any hope of having any service from an advisor, accept it.

    Don’t want to accept it? Open a discount brokerage account and buy ETF’s. Oh? you’re afraid? No time? You need advice? Please start over at the top and re-read. No fees=no service.

    Now to the advisor community. Advisors listen up. Want to be taken seriously by the investing public? Want to be considered trustworthy, ethical and professional? Get some credentials.

    My doctor, accountant and lawyer all have serious education. Want to be at their level of respect, image and income? Get some serious education. Not a mail-order self-study course on how mutual funds work.

    You should not be let loose on the public to ply your trade until you have at least 1 or 2 major designations – CFA, CFP, FCSI, CLU, CIM, RFP are some good examples.

    And why do people put up with under-qualified advisors anyway? If your advisor doesn’t have at least 1 or 2 of the aforementioned designations, start running in the opposite direction. Fast.

    Don’t fall for the “I have 25 years experience” crap. If they have been in the business 25 years, they have no excuse for not having a designation. What were they doing all that time anyway?

  4. Erick

    Nov 16 2009

    Hi Ellen,

    This reference is slightly dated, but gives you an idea of what’s available.

    http://www.canadianbusiness.com/my_money/planning/article.jsp?content=20080310_110229_7096&page=1

    In the interests of full disclosure, I had positive dealings with Ryan Lamontagne in Ottawa when I was contemplating dumping my current financial advisor.

    In my case, it was well worth the money to get a completely unbiased opinion of my situation. I used their recommendations to construct my own ETF portfolio.

  5. CanadianInvestor

    Nov 17 2009

    There is an alternative for the beginner – ultra simple portfolios of one to four ETFs.

    I reviewed a half dozen or so such funds on my HowToInvestOnline blog today, such notables as the Easy Chair, the Simple Recipe, the Couch Potato, the Lazy Investor, the One-Minute RRSP, balanced mutual funds and two reasonably-priced all-inclusive portfolio ETFs from iShares and Claymore.

    http://howtoinvestonline.blogspot.com/

  6. second opinion mike

    Nov 24 2009

    A firm I’m involved with called Weigh House Investor Services (formerly Second Opinion) has a coaching service for DIY investors. It applies only to investors looking at ETF index funds.

    The service provides guidance on financial plans, target return rates, asset allocation suggestions and a customized Investment Policy Statement.

    The service is provided for one or two year periods and then an investor should be able to confidently handle the DIY investing on their own.

    They will not work with anybody who wants to trade stocks or mutual funds.

  7. Alexandra

    Dec 17 2009

    Ellen — Dimensional Funds are not available to the general public, but only through approved advisors. (And I can’t recall for sure, but I think there are minimums for DFA funds, possibly $10K per fund.)

    In my view, the reason that a robust model for providing low-cost, passive funds and rebalancing services to smaller clients doesn’t exist is that the numbers don’t work.

    Advisors providing advisory services take on a lot of risk in the relationship. It just doesn’t work to provide those services to clients who are not going to pay your bills.