Investors Group Update: Lower MERs

Slowly but surely, those who are preaching the low MER fees Gospel (and I will proudly number myself among the faithful) are winning the battle for the hearts and minds of Canadian investors. Despite the fact that we still pay the highest mutual fund fees in the world (2.1% on average), we are slowly becoming aware of the fact that fees and commissions on financial products can quickly eat away at the investment returns you need in order reap the full benefits of compounding. The evidence that this trend is starting to get noticed is the recent news that Investors Group Inc. (a subsidiary of the massive holding company Power Financial Corp) has recently slashed its MER fees on its line of mutual funds in a bid to stay competitive.

There is Plenty of Fat to Cut

Now no matter how much Investors Group cuts their fees, I’m fairly certain I will never recommend their line of mutual funds. I love these quotes by Investor Group’s CEO, Murray Taylor. “There has been greater consciousness around the fee questions,” as well as, “Our strategy is to get our fees more into the middle of the category as opposed to the edges.” So basically you still want to gouge your clients, just not so much that you stand out from the rest of your mutual fund-selling brethren? The arrogance of these people is unbelievable. They repeatedly send out their slick-talking salesman and take advantage of people who just, “want to buy RRSPs,” by throwing buzzwords like “diversification” and “professional money manager” at them.

Investor Groups MERNow Investors Group and other people in the mutual fund industry will tell you that when you buy a mutual fund, your MER fees pay for the advice and services you are receiving as well. Please do not listen to this garbage. Any information you need on personal finance and investment planning is readily available online these days, if not on this site than one of the ones that we feature on a weekly basis. For most people, a very simple plan that focuses on the long-term is all that is needed. What definitely IS NOT needed, is the latest mutual fund on the market that your “expert” financial advisor is pushing. Check out my eBook for a full run down on this debate, but to summarize, the vast majority of mutual funds do not beat the market average. In fact, after their fees are calculated in, less than 1% of mutual funds beat the market average that you can guarantee yourself through ETFs and/or index funds.

A Case Study: Fancy Mutual Fund vs Simple ETF

Let’s take a look at the massive ($13 billion in assets) Investors Dividend Fund for more an example on why the mutual fund industry is banking on us Canadians not waking up to reality. Here are the main holdings of the fund as of February, 2012 (the latest update on the Investors Group website):

  1. Royal Bank of Canada
  2. Bank of Nova Scotia
  3. Bank of Montreal
  4. TELUS Corp.
  5. TransCanada Corp.
  6. CI Financial
  7. Power Financial Corp.
  8. Husky Energy
  9. Manulife Financial
  10. Sun Life Financial Inc.

Now the “diversified” yield of this fund looks pretty decent at 3.7%. That is until we take a closer look at these claims of diversification and true investment yield. This fund is horribly unbalanced, with over 50% of the holdings in Canada’s financial sector. Obviously the banks are a great place to look for income-producing companies, but don’t preach diversification if you’re really a collection of financial companies with a few other Canadian blue chips thrown in. Now that 3.7% yield that the fund produces every year would be nice, if it wasn’t held back by an obscene MER fee of 2.7%! That effectively means that the overall yield (or money generated for you) is 1% + the meagre capital gains you will see as a result of buying mature companies. I sure hope you’re getting some great investment advice and handholding from IG if they’re going to charge you that much!

Let’s compare that fund with my favourite way to get exposure into Canadian equities – the iShares S&P TSX 60 ETF. Here are the main holdings (which are not as concentrated either):

  1. ROYAL BANK OF CANADA
  2. TORONTO-DOMINION BANK
  3. BANK OF NOVA SCOTIA
  4. SUNCOR ENERGY INC.
  5. BARRICK GOLD CORP.
  6. CANADIAN NATIONAL RAILWAY CO.
  7. BANK OF MONTREAL
  8. POTASH CORP. OF SASKATCHEWAN INC.
  9. CANADIAN NATURAL RESOURCES LTD.
  10. BCE INC.

This extremely basic ETF that allows you to track Canada’s main index has a decent dividend yield of 2.9%. While this may not stack up to the 3.7% figure above, when you calculate in the very reasonable .17% MER fee, you’re laughing! The bottom line is that this basic ETF will produce an overall yield that is more than 250% higher than that of a huge mutual fund that purports to be specialized in dividend stocks!

While it is encouraging to see IG scale back their fees, I still wouldn’t recommend any of their products. Young, has a more in-depth commentary on her personal experiences with the company here.

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56 Responses to Investors Group Update: Lower MERs

  1. I didn’t know that Investor’s Group is a subsidiary of Power Financial (explains why they are so huge)!

  2. Juan says:

    You got to love those fees. 2.7% yield is really high, right now thats about the same as the US 30 yr.

  3. young says:

    Yeahh! Finally Investors Group is starting… to listen!

    There is power (no pun intended) in collective complaining! :)

  4. SavingMentor says:

    Nice article TeacherMan! I go back and forth on the funds vs indexing thing as my Dad is a financial advisor at one of the big banks investment divisions. I believe in his ability to make money for people because he has done a good job of it over the years typically beating the market even after fees (they can obviously run reports on these things).

    He does some of individual stock selection and sometimes recommends good funds where he believes the fund manager has good knowledge and isn`t just being a closet indexer or over-diversifying to the extend that you might as well just pick a broad-based ETF.

    That said, I think that both investing approaches have a place for different people but there are definitely a lot of people investing in those 99% (that number does surprise me – I thought it was very high but less than that) of funds that under perform the index. Those people would definitely be better served investing in index funds.

    I personally have chosen to invest using the ETF approach and try to do it myself. After several years of doing it (started in 2007) and learning I honestly think I would have done much better letting my father handle it for me. But, I did learn a lot in the process so I don`t regret it too badly.

    • Teacher Man says:

      Interesting story Saving Mentor. The study I referred to was pretty thorough. The 99% figure comes after fees are accounted for btw. Do you think you could show which fund your father was controlling? I really don’t want to sound like a jerk or offend anyone, but if your father has proven he can run a mutual fund of any size and beat the market over an extended period (10+ years), then he should be making millions as a hedge fund manager. There are a few fund managers out there that tend to beat the market if they favour a certain style that meshes well with that time period, but eventually the vast majority revert back to the mean, and then below when fees are calculated in.

      • SavingMentor says:

        I’m not sure you understood me completely. He isn’t controlling any one fund. He is an investment advisor himself with normal clients like you and I. Depending on the client, he will sometimes invest in individual stocks and bonds and in other cases will help them select a mutual fund that he thinks has a good fund manager and that will perform well.

        The information I have is only general in that I asked him about the performance of his entire portfolio of clients compared to a benchmark. They have software that compares the performance of their clients based on their asset allocation to a relevant benchmark and I’m pretty sure he told me that his overall portfolio typically outperforms. It was only a high level discussion though as most of the specifics he keeps confidential as he should. If it were to be examined with a magnifying glass there might be some weakness that could be spotted.

        One thing I do know though is that his clients to get to benefit from investing in new issues which can often be profitable. You don’t typically get that opportunity with ETF investing. It also doesn’t hurt to have somebody you can call and to help you make decisions about investing. But finding a trustworthy advisor can be as hard as picking a good investment or figuring out how to do it on your own.

        • Teacher Man says:

          Very interesting Saving Mentor. I sometimes unfairly brand all investment advisers with the same “mutual fund salesperson” label. Your dad sounds like a stand up guy. I obviously understand his reasons for confidentiality as well. I think the real value that most advisers bring is the ability to hold someone’s hand through a market crash. That might sound condenscending, but that kills so many portfolios. So many people believe they have a high risk tolerance, until a crash hits. If you need someone you trust to “talk you down from the investing ledge” so to speak, they likely earn their paycheck that way.

          I know for a fact that the software most companies use slants statistics their way and fails to take their fees into the benchmark calculation. Also, if you’re dad is say only investing 30% of the portfolio in equities, and then others in bonds and money instruments, then obviously that index will look very conservative.

          I think you’re definitely on to something with new issues. I honestly believe there are a solid number of people who manage funds out there that can beat the market consistently. The only problem is that there services are only really available to the elite. I’m talking about the hedge fund guys, and the people that aren’t even on most people’s radars. They can get in and out of positions in a hurry, hold cash, and use shorts to play with the information advantage they have. I just don’t think it’s possible for most people to have access to that level of investing advantage.

          Does he take it personally when you have told him you like the idea of ETF investing?

  5. Also Young says:

    A couple of things to point out for you and your readers in response to diverseification. This fund is actually about %57 financials in terms of holdings no argument there but one must remember that when investing in Canadian equities %70 of the market is financial, energy, and resources. So it is truly difficult to be well diverseified staying within Canadian borders. Also this fund is not a stand alone product and should be part of a well diverseified portfolio. Dividend paying stocks or funds are great as they pay no matter what the market does but by forgoing small cap or value funds you may be missing out on some real growth. Furthermore by staying in Canada you miss out on some of the fastest growing economies in the world… If i asked you what the number one performing economy was in 2011 would you have guessed Venezuala? I doubt many of your readers held any Venezualan funds or stocks. This is the beauty of actively managed funds such as an INternational equity fund or Pan Asian fund or even a European Fund. They are able to diversify us globally. When I look at my own portfolio I am about %50 Canadian, 15-20 in the U.S, 10 in Europe, 10 in Pan Asia (excluding Japan) 10% precious metals. I am considering lowering my exposure in Canada and getting more emereging markets as well such as Latin America.

    By being exposed to these countries I gain better exposure to the tech sector, health care, pharmaceuticals, industrials, and consumer staples that just aren’t available to the Canadian Investor. For example any tech based etf in Canada is going to hold RIM how is that doing for you lately? Whereas a Pan Asian fund can hold Samsung, HTC, etc. More importantly an ETF can only ever track the index minus fees, while i would agree that not ever fund beats the market every year a well diversefied portfolio designed to beat the market ie %100 equities should beat the market even at the MER’s that are quoted here.

    Some people are to conservative to use the market as their bench mark. I will explain. A moderate investor who has a well diversefied portfolio of %60 equities and %40 fixed income should expect an average return of %5.5-%6 or %2.8 below the average annualized return of the TSX however this investor will have a much less volatile experience (thus the more conservative approach).

    I find alot of people focus too much on the returns and not enough on the expected experience. If you can’t handle the bumpy ride you should smooth it out by increaseing your fixed income portion of your portfolio. I think this is one area a GOOD advisor will help you with.

    • Teacher Man says:

      I’m sorry, “Also Young” but these are terrible talking points that are always pedalled by the mutual fund company (which I kind of believe you might be a part of). I’ll answer you in point form to save a little time:

      1) You could be justified in holding 30-40% of the fund in Canadian financials (given your parameters), but 57%? Come on, those banks will all be affected by similar market dynamics, so its a terrible strategy.

      2) HAHA stand alone product or part of a portfolio? Really? What a load of huey, investing in 6 different mutual funds when a simple broad index will do the trick for a much lower MER. No matter how you slice it, it’s still donating money to IG.

      3) Please please don’t try and mislead my readers into thinking they have to purchase mutual funds in order to get international exposure. For your information, any of my readers that had basic emerging market ETFs or world ETFs probably had some exposure to Venezuela. How many of your international mutual funds beat their index consistently? *chirping of crickets* that’s what I thought! Ridiculous argument.

      4) “More importantly an ETF can only ever track the index minus fees, while i would agree that not ever fund beats the market every year a well diversefied portfolio designed to beat the market ie %100 equities should beat the market even at the MER’s that are quoted here.” What do you mean that they should beat the market even with the MERs? THEY DON’T BEAT THE MARKET!! There is no “should’ve” or “could’ve” or “under circumstances” they don’t beat their index over an extended period of time even without calculating the MER in! It is literally that simple.

      5) The only point we agree on is that an investment advisor can help you through bumpy investment periods if you need your hand held. For this I recommend a fee-based advisor and not paying out a ton of money through MERs!

      Please come with some actual studies and examples if you’re going to try and call down a guy who has written an ebook on the topic of passive investing through ETFs.

  6. Great post!

    Then again, you can always own the companies outright, and pay no fees?:)

    I own 8 of the IG top-10.

    Then again, I also own thousands of shares of XIU :)

    • Teacher Man says:

      and round and round we go again eh Mark? ;) If you own 8 of IG’s 10, you should basically be running your own mutual fund right? Plainly you did a ton of research to come with the same results as a “professional money manager”.

  7. Ha, your comment made me laugh :)

    Yes, tons of research….ah, no. Maybe I should charge myself 2.5% for all the work.

  8. Scott says:

    Admittedly, I just requested your eBook today so I haven’t done much more than skim it but I didn’t see anywhere on the table of contents that addresses the following (taken from the Financial Planning Standards Council, https://www.fpsc.ca/node/309)

    Identify any problem areas or opportunities with respect to your:
    Capital needs
    Risk management needs and coverage
    Taxation
    Retirement planning
    Employee benefits
    Estate planning
    Special needs (i.e. adult dependent needs, education needs, etc.)

    If you’re going to knock Investors Group and their costs for comprehensive financial planning, shouldn’t your “solution” talk about more than just ETFs?

    • Scott says:

      teacherman, I guess that’s what I’ll have to call you because you refuse to publish your real name in either your eBook or on the About section of this blog, Which is strange, I’d proudly attach my name to something that supposedly helps people even if it isn’t my line of work. As a financial planner, I certainly wouldn’t expect anyone to work with me if I refused to give them my name.

      In your eBook you mention, “full-scale, all-encompassing, 360 degrees financial plan” that they draw up for you (in an hour).” Have you actually ever done one of these? It can take over an hour just to enter in all the data to do a comprehensive plan, let alone analyze and run different scenarios.

      You also offer this interesting tidbit, “out of the hundreds of studies done on the topic, there is absolutely no correlation between MER fees (essentially,your cost to buy the fund) and results.” I’m confused, if high MER fees hurt performance, then shouldn’t there be an inverse correlation between the MER and performance? Sure this, “the percentage of funds that beat the market average was 0.6%!” sounds bad, but considering that ETF that replicate an index have some expenses, tracking errors and trading fee as well, wouldn’t 0.0% of ETFs beat their respective market index?

      • Teacher Man says:

        Scott, please grow up a little if you are going to continue to comment on this blog. My anonymity allows me to publish financial details about my life, and express opinions on topics that would likely hinder my career path in the future. If I was 55+ and retired I would likely publish my name, but I still have many working years left and I don’t need someone Googling my name only to find I have expressed an opinion I disagree with. I’m also not a financial planner. Clearly if I was going to provide a service like that I would provide my name. I often preface any investing advice with “I am not a financial advisor” so you don’t need to feel so threatened.

        I have personally never done one of these for someone (since we have established I’m not a financial advisor), but I have had one done for me. It took an hour and a half. It really isn’t nearly as hard as you make it sound. As Malcolm Gladwell says my friend, the information advantage is shrinking, and 99% of what a financial advisor can offer can be found in a few books and blogs for a negligible fee these days.

        Your quote to my tidbit shows how little you actually understand about the very products you likely (I’m guessing here since you are a financial advisor) recommend to your clients on a daily basis. I have always maintained, and outlined in my eBook that there are people out there who can pick stocks better than others. I believe that very few are good enough to do this after fees, and the ones that can are working for hedge funds. The point of the quote was that mutual fund managers charge high fees for funds that don’t do any better than funds that charge low fees. There is no correlation between how good the fund is and what you are paying. If you dispute that you are arguing with John Bogle and Vanguard my friend, not me.

        You are absolutely correct that 0% of ETFs will beat their respective index. My portfolio, all in (with discount brokerage commissions and the small MERs that ETFs have) trails its index by about .3%. This is better than all but possibly 1-3% of mutual funds, depending on a few variables. Regardless, it is pretty tough to argue with those odds, especially when no one has come up with a guaranteed way to pick who will outperform going forward (past results do not guarantee future ones etc.)

        • Scott says:

          Keep throwing up that straw man of financial planning as only trying to beat the market. If that’s all there was to financial planning, why does the CFP exam only comprise of 20% questions related to investments? Do some planners tell clients they can, absolutely, but they aren’t the good ones. True financial planners know that it’s not about picking the “right” fund but the discipline that comes with regular saving, diversification and sticking through in the bad times. As they say, time in the market, not market timing.

          If you are so confident that 99% of what a financial planner can offer is found in a few books and blogs, which I assume you read, you should have no problem passing the CFP exam? How’s this, I will go through my CFP course material and post the questions for you to answer here on your blog. When you pass (after all, you know 99% of what we know) you can show the world what you really know.

          I understand quite fully the products I recommend to my clients. You clearly state that “there is no correlation between how good the fund is and what you are paying.” Remember, mutual fund performances are reported net of costs (MER), so if those fees don’t make a difference, why not take advantage of the financial planning aspect that comes along with it? If self serve and full serve gas were the same price, I’m sure some people would still fill up themselves but most would probably sit back and let someone else do it. .

          While I absolutely agree that this is your site and you are free to let anyone comment, it’s quite telling that when people start to question you, you resort to threatening to kicking them off the site.

          • Teacher Man says:

            Scott I’m starting to think you don’t even read my responses to your questions. Keep throwing out the straw man that because you can read a manual you are smarter than other Canadians. Buddy, honestly, what you do isn’t that hard. Can you honestly sit there and say that if the average Canadian read The Wealthy Barber, The Wealthy Barber Returns, Rob Carrick’s column, Jonathon Chevreau’s column, and a few blogs including this one, they couldn’t plan 99% of their own finances? Come on man, give your head a shake. Just because you have “CFP” behind your name doesn’t make you a superhero.

            There are definitely benefits to having a financial planner help you through the mechanics of certain things. The point I’m trying to make is that the commission-based model that is pushed by IG and other companies like it is totally dishonest, and hides the true cost from the consumer. A fee-based advisor makes much more sense, and you have never actually responded to my main point on that! Doesn’t your conscience eat away at you at night knowing that essentially you are tricking Canadians into giving up a huge percentage of their investment returns in exchange for you telling them to make sure they have a will and decent amounts of insurance?

            “I understand quite fully the products I recommend to my clients. You clearly state that “there is no correlation between how good the fund is and what you are paying.” Remember, mutual fund performances are reported net of costs (MER), so if those fees don’t make a difference, why not take advantage of the financial planning aspect that comes along with it? If self serve (sic) and full serve gas were the same price, I’m sure some people would still fill up themselves but most would probably sit back and let someone else do it.”

            Do they make you guys memorize this stuff at IG brainwashing school or what?! This is the most ridiculous statement I have heard from a financial planner yet and it so obviously invalidates your vaunted credentials that I feel very sorry for your clients. The whole point of that sentence is to show that you don’t get what you pay for with mutual funds. Your gas pumping analogy is almost clever (the idea of sacrificing 20 cents being equivocated with sacrificing thousands of dollars in investment returns), but your logic is so far off the mark it sickens me. MERs obviously make a difference to the overall investment returns of individuals, my eBook illustrates this plainly.

            Listen Scott, here is the bottom line, show me all these mutual funds IG has that have beat their benchmark over the last 15 years? I look forward to that list…

            The motivation behind what I allow on my site or not is always about what provides value to readers. I have no problem disagree with people and debating things as long as they are logical. I often debate the merits of passive investing vs dividend investing and stock picking, and I often learn a lot from people that specialize in these fields. They back their findings up with solid stats, and we have good discussions that provide value for our readers. Frankly, the only reason I still publish your posts is so that my readers can see what sort of completely flawed logic they are getting when they sign up for a commission-based financial advisor. Thanks for participating in their education.

    • Teacher Man says:

      Scott, unlike Investors Group, I don’t purport to be a financial advisor. It seems like you can’t quite comprehend that. I actually do address issues such as taxation and risk management in my book, and in regards to the other topics you actually will find substantial amounts of information on those topics throughout this blog, but that is irrelevant. The debate is ETFs vs Mutual funds and why ETFs are so much better. There is no debating this. If you’re trying to say the real value of having a financial advisor is in the above concepts, my response as always is that you will have much more success paying for this advice up front as opposed to trying to understand the complex fee structure that a mutual fund salesman – sorry, Investors Group financial advisor will give you.

      • Scott says:

        I’m sorry, what pages were the taxation stuff on in your eBook? I must have overlooked it, which is understandable as I’m slogging through a 500 page Advanced Taxation text book for my professional development.

        Absolutely, the debate is about ETFs vs Mutual Funds. However, it should be about the full value of each of those products not simply the cost. When you shop for other things in life do you only look at the sticker price or do you also consider the value received? If you aren’t going to talk about the comprehensive financial planning services built into the MERs of, in particular, Investors Group mutual funds then you aren’t doing a full comparison.

        • Teacher Man says:

          I’m sorry, I guess my book got labelled “A taxation guide for everyone” without me realizing it.

          I must have overlooked that since I’m writing for several nationally recognized financial blogs at the moment.

          I find it hilarious that you truly think you are special because you can read a 500 page manual. Trust me Scott, hundreds of people do it everyday.

          You honestly believe that the thousands and thousands of dollars MERs would cost the average investor over their lifetime are equivalent to the advice you give them? You are pretty delusional in that case brother. Does it bother you at all that every personal finance author out there right now is recommending basic passive investing strategies? Crisis of conscious perhaps?

          • Scott says:

            I never said I was special because I’m reading a 500 page text book on Advanced Taxation, I was merely rebutting your claim that anyone can do what financial planners do by simply reading a few books and clicking around on a blog for an hour.

            No, it does not bother me that many (certainly not every) personal finance author out there is recommending a basic passive investment strategy. I flat out tell my clients that I’m not there to pick “winners” and we use a portfolio builder that isn’t unique. My problem is your misrepresenting what financial planning entails. If all you say is look at their high MERs, buy an ETF and do it yourself then you are completely ignoring all the added value that comes with investing through Investors Group. Does an ETF give you tax advice, does it even provide you with a tax slip? Does an ETF tell you if you are saving too little or too much? Does an ETF help you restructure your debt repayments to pay those off as quickly as possible?

            Look, I’m not saying that everyone has to use Investors Group services. Absolutely there are people out there, like yourself and many commenters on this and other financial blogs, that are just fine doing it on their own. BUT, you need to recognize that not everyone has the time nor inclination to develop those skills so unless you are going to actually help them out (and not just tell them to read your ebook or blog) then you aren’t really helping them out.

            You’re a teacher, how would you feel if I was telling everyone that the current school system should be abolished because to me it wasn’t ideal. I am, and was, a self learner preferring to go at my own pace (sometimes fast, sometimes not at all). The school system 20-30 years ago with it’s teacher at the head of the class, hand in your assignments on this day, etc wasn’t suited to me. When I was in university, distance learning (i.e., internet based, go at your own pace) was just beginning and I flourished. Now, I’m sure you would agree that it would be foolish of me to argue that EVERYONE should go that route simply because it worked for me. Different people have different learning styles and no matter how well intentioned you and other personal finance authors are, not everyone is going to do it themselves.

          • Teacher Man says:

            Scott either you or your “co-worker” “The other Scott” from IG quoted me in the other thread that the typical investor has under $50,000 in investable assets. If this is true then literally 99% of what they need to know would easily be covered in the resources I labelled. All that talk about corporate class mutual funds and exotic insurance plays are totally irrelevant to your self-described “average investor”.

            I think it is hilarious that you don’t worry that every personal finance writer out there that is outside the mutual fund industry thinks that what you do for a living is non-productive at best, and downright fraudulent at worst.

            The again you draw these ridiculous parallels between things that are not comparable. The idea that a public ran education system is in any equivalent to a private-ran insurance company is just illogical. To be honest, I’m extremely critical of our current system and would love to see a huge change, but that is irrelevant.

            We agree that you provide a service to people that is valuable. What we disagree on is how valuable it is, and specifically what it should be valued at. I believe it should be fee-based upfront, you believe that your compensation justifies MERs around the 2.5% range. Here is the math people:

            Here is the extremely basic math that supports my claim:

            If hypothetical Investor A has $20,000 in equities at the age of 30 in a registered account, and we assume an 8% benchmark equities annual average return over the next 35 years, a broad-based ETF, with all-in commissions and MERs calculated would return 7.7%. A 2.5% MER that is fairly average at IG would give us a 5.5% average annual return (assuming it is an above-average mutual fund that can actually match its benchmark index which the VAST MAJORITY DO NOT!) While you might be able to justify your services to many investors with those relatively small percentage numbers, let’s take a look at the difference to the overall equities portion of Investor A’s portfolio over the next 35 years, and this is assuming he doesn’t invest a single penny in equities the rest of his life! (Just to keep things simple.)

            Investor A with IG – 130,276.50
            Investor A with low cost ETFs – 268,274.63

            Now you can try and spin those numbers however you want (which you will no doubt try to do), but those are the basic mathematical facts behind the compounded returns that you destroy with high-MER mutual fund recommendations.

            You (and many other mutual fund advisers out there to be fair) are fond of pointing out the many other services you provide clients with. I’m not debating that these services do hold some value. While I believe people would be much better off educating themselves, we can agree to disagree on that point and simply agree that the other personal financial information that you provide clients with does have some value. The question simply becomes:

            IS THAT INFORMATION WORTH THE SACRIFICE that is undeniably shown above. It is extremely difficult to make that case. You can talk about investing to beat the tax man through insurance, and corporate class mutual funds (see my post on why those are bogus) all you want, but it simply DOES NOT make financial sense for the vast majority of individual investors to go with a financial advisor that recommends high MER mutual funds!

  9. Scott says:

    This is the most ridiculous statement I have heard from a financial planner yet and it so obviously invalidates your vaunted credentials that I feel very sorry for your clients. The whole point of that sentence is to show that you don’t get what you pay for with mutual funds.

    What is so ridiculous about my statement? You stated that there is no correlation between MERs and performance. So, how is it ridiculous to say that if you pay a high MER and get financial planning or pay a low MER and get no financial planning but get indistinguishable returns, why not go with the financial planning that will help you with tax planning, cash flow planning, retirement planning, estate planning, etc.

    I have NEVER stated that IG mutual funds beat their benchmarks. Should I ask you to show me the ETFs that have beaten their benchmark over the last 15 years? I don’t recommend IG funds because they are better than other products, I recommend it because of the value added services mentioned above.

    I can honestly sit here and say the average Canadian doesn’t WANT to read The Wealthy Barber Returns, Rob Carrick’s column, Jonathon Chevreau’s column, and a few blogs including this one. You need to realize that you are in the minority of people who enjoy reading that material for fun (I used to be like that, then I decided to do what I love and get paid for sharing my knowledge). I’m sure I could spend hours reading automotive books and blogs and be able to fix my car myself, but I prefer not to. Many folks feel the same way about financial planning.

    Finally, since you seem to be so eager to show true costs to consumers, does that apply to your own occupation? Do you think the average Canadian knows what it costs to put a child through the public education system (in Alberta it’s over $10K per student). If you want to talk value for money, I could spend days going over the problems with your industry. The difference is, if I chose to do it myself and home school my children, which shouldn’t be that hard since I already know the material, do you think I would save on my taxes?

    • Teacher Man says:

      Ok let me break this down for you a little bit further Scott:

      ETFs are not “indistinguishable returns”. In fact they will return higher than mutual funds 99.4% of the time according to the Dalbar study I reference in my ebook. That is pretty distinguished in my mind!

      Where we seem to disagree once again is the value of your compensation relative to what you are giving people and the dishonest approach of being compensated through the recommendation of the very products you are supposed to be recommending to people without bias!

      I definitely believe it applies to my own occupation! Check out my posts on criticizing the current school system. I have even went so far as to recommend the private system right now. My views on this are published on 4 or 5 of the top finance blogs in Canada (a major part of why I’m anonymous). I totally agree with you there are problems in my industry and I think you should make your voice heard on this! But this again irrelevant. Here is the math behind what mutual funds actually take from you in return as compensation for IG financial advisers’ advice. You decide if you are willing to pay it or not:

      Here is the extremely basic math that supports my claim:

      If hypothetical Investor A has $20,000 in equities at the age of 30 in a registered account, and we assume an 8% benchmark equities annual average return over the next 35 years, a broad-based ETF, with all-in commissions and MERs calculated would return 7.7%. A 2.5% MER that is fairly average at IG would give us a 5.5% average annual return (assuming it is an above-average mutual fund that can actually match its benchmark index which the VAST MAJORITY DO NOT!) While you might be able to justify your services to many investors with those relatively small percentage numbers, let’s take a look at the difference to the overall equities portion of Investor A’s portfolio over the next 35 years, and this is assuming he doesn’t invest a single penny in equities the rest of his life! (Just to keep things simple.)

      Investor A with IG – 130,276.50
      Investor A with low cost ETFs – 268,274.63

      Now you can try and spin those numbers however you want (which you will no doubt try to do), but those are the basic mathematical facts behind the compounded returns that you destroy with high-MER mutual fund recommendations.

      You (and many other mutual fund advisers out there to be fair) are fond of pointing out the many other services you provide clients with. I’m not debating that these services do hold some value. While I believe people would be much better off educating themselves, we can agree to disagree on that point and simply agree that the other personal financial information that you provide clients with does have some value. The question simply becomes:

      IS THAT INFORMATION WORTH THE SACRIFICE that is undeniably shown above. It is extremely difficult to make that case. You can talk about investing to beat the tax man through insurance, and corporate class mutual funds (see my post on why those are bogus) all you want, but it simply DOES NOT make financial sense for the vast majority of individual investors to go with a financial advisor that recommends high MER mutual funds!

  10. Scott says:

    I posted a more detailed reply in the other IG post.

    One further point I will add is that your 7.7% is not reasonable as it does not account for the tracking error. This article from Rob Carrick (wow, now I’m using “propaganda” from one of your own gods) Watch out for tracking errors when buying ETFs(http://www.theglobeandmail.com/globe-investor/investment-ideas/watch-out-for-tracking-error-when-buying-etfs/article1392160/) shows that some ETFs have a tracking error 1%-1.5% over and above their MER. Perhaps 6.7% is more realistic for your numbers.

    • Teacher Man says:

      Again you take a fact and spin in terribly Scott. Some exotic, or massively world-based ETFs do have some tracking error (which does not automatically make returns lower by the corresponding amount – which I’m fairly certain you know, but just aren’t telling people), but the error is in the .2% range for most ETFs. Just like I chose a fairly average IG mutual fund for my comparison, please try to be fair when we use numbers. There are many funds in the IG banner that are the 2.75-2.8% MER range, but I didn’t cherry pick my numbers.

      The other thing you are completely failing to address is just how badly most mutual funds trail their index even BEFORE the crazy MERs are calculated in. Again, I gave you the benefit of the doubt, but since you want to cherry pick on ETF index-tracking numbers, please also be fair and explain that the average equities mutual fund trails the index by a much more substantial margin that the average tracking error on an ETF.

      For goodness sakes man, listen to the commenters on here that are seeking to tell you that you are butchering their retirement accounts all in the name of your commission. If you truly want to use your knowledge to help people, why not set up an easy-to-understand fee-based financial advisor business on your own, and use all of this energy and knowledge for good.

  11. Ella says:

    - If you had done your research you would find that IN ADDITION to mutual funds Investors Group offers their clients the ability to purchase ETFs, stocks, bonds, GICs etc. Not only that but they have experts in all areas of planning to help with insurance, your mortgage, estate planning and a lot more (which I was surprised to find when I first met with my consultant). I have actually been converted from a self manager to a client and I could not have made a better decision. The taxes I saved in the first year alone (and for years to come) speak for a reason the MERs exsist.

    - If you needed to hire a lawyer to get you off a first-degree murder charge would you hire the lawyer who would do it pro bono or would you hire the BEST of the BEST even if it came with a cost to you? Furthermore, when year end rolls around would you let your neighbour do your taxes for free with the software he purchased at Costco or would you hire (and pay) a professional who would ensure everything was done correctly? Teacher Man you are truly comparing The Keg to McDonald’s.

    - Research has shown time and time again that an actively managed plan built with good advice and filled with professional management will always outperform a self directed plan. I will say the lack of respect people give to professionals these days is horrible and I would love to know what YOUR profession is so I can find many (unreasonable) arguments to tell people NOT to pay you. I will say if you are a teacher you are missing an education probably because you refused to pay for it… because afterall, why pay for University when one can learn everything that they need to know off of the internet for free?

    • Teacher Man says:

      Absolutely ridiculous argument Ella. Please see my argument with the other three IG employees on here. Please do YOUR RESEARCH since I assure you I have done mine. My research (unlike that which you obviously read) was conducted by impartial individuals with nothing to gain. Here is my response yet again for the benefit of my readers (also once again, this is not only going after IG, but the entire industry model as a whole):

      1) IG does offer other investment vehicles, but you can’t tell me that most investment advisers are recommending low-cost ETFs when their income comes from recommending high MER funds.

      2) You can easily find experts in the areas you highlight that operate on a fee-only basis and can give you impartial advice instead of trying to steer you into IG products that have ridiculous profit margins. Nice try though.

      3) So the taxes you saved (because you didn’t do your own research) will make up for the hundreds of thousands in compounded MERs over the course of an investing lifetime?

      4) Mutual fund salesman are not the best of the best. To say they are is absolutely ridiculous. I have several academic studies conducted by Eugene Fama, and decades of research conducted by DALBAR and Vanguard that conclusively show that a money manager DOES NOT add value to your portfolio. To claim anything else is ridiculous.

      5) “Research has shown time and again” – what are you talking about? What research is this? The pamphlet you got from IG? This is completely false. As my boy John Bogle has said (and is supported by the likes of Warren Buffett, Peter Lynch, Charlie Munger, and a host of others): “It is amazing how difficult it is for a man to understand something if he is paid a small fortune not to understand it.” The average return of a fund recommended by advisors over a lengthy study by Vanguard was 2.9%. The average self-picked fund was 6.6%, and the index returned over 9.5% over the same period. The reason behind these FACTS is because advisers steer you into products with HUGE fees. Please open your eyes.

      6) I give great respect to solid investment professionals that offer advice to their clients that is not bias and if they have they the proper credentials which most advisers don’t. Most are not this. They are simply people that are leeching off of the basic investment system.

      7) If you seriously can’t figure out what my profession is by my pen name then you need to become a little more observant.

      8) I actually think that schools could learn a lot from internet delivery, but I have no idea what you are talking about when you say “missing an education.” I have two degrees on my wall that conclusively prove my education. Again, another ridiculous comparison.

      Any further comments please refer to the fact-filled conversation between myself and advocates of mutual fund-based investing in this article and the other IG one on this site. Also, please Google “John Bogle” and “Vanguard” before you come at us with “studies show” because they quite simply don’t.

  12. Ella says:

    I think it would be wise for you to truly understand a compnaies compensation model before you attack it.

    Why would anyone want to see 5 different “fee based” experts when they can get everything from one person? Do you not value your time at all?

    And yes I saved taxes… the taxation system is not black and white. To say anything different would be an insult to the good accountants who study very hard to master their craft as well as the advisors who do the same day after day. Most people would actually save tax money by sitting down with their accountant and a good advisor.

    To classify an IG advisor as just a mutual fund salesman is another mistake. Clearly you are proving your ignorance to this subject time and time again. Have you ever heard of Ipsos Reid? Ipsos is a leader in Canadian market research and is a company with MANY individuals who have DONE the research on this. The research I was referring to was conducted by them.

    For someone who is supposed to be very educated you certainly get very defensive when people have other very valid points that go against yours. My eyes are very much open, and it may be time that you do the same with yours. I do not disagree that there are individuals out there who take for granted their positions at various financial institutions across North America HOWEVER, there is an art to creating a good/sound financial plan and where people should be doing their research is on choosing a good advisor. Maybe then you would not have to knock the financial advisor.

    It is quite obvious that in my first post I commented “if you really are a teacher” therefore I think it is YOU who needs to become more observant as if you were you may have noticed this. Further proof that you barely read or consider someone elses opinion you merely skim through a post and focus on things you believe you can argue.

    The industry has changed since J. Bogle’s time. Born in 1929 I’m sure he’s been through quite a run but his opinions are a little outdated. Not only that but the man made his fortune owning a mutual fund company. As far as E. Fama goes, his hypothesis has also been absolutely torn apart by most economists after the activities that transpired between 2007-2010 so I suggest you get some new role models.

    By the way, if you had no idea what my last comment meant you clearly are a very ignorant individual with not a drop of whit about him.

    • Teacher Man says:

      Wow this post is full of such ignorance I don’t even know where to start. “There is an art to creating a plan” So ridiculous. You have yet to refer to a single credible piece of information. You talk about Ipsos Reid but there is no link or reference to any solid piece of information. You points are not valid in the least. Yet again:

      1) I understand the compensation model, it is what leads to people who provide little value making hundreds of thousands of dollars, on behalf of people people who make millions off of the financial illiteracy of the general population.

      2) Tax deductions are not rocket science. Go ahead and sit with an accountant – accountants are not investment advisers.

      3) Clearly you need to read a little more Bogle, I repeat the time-tested adage “It is amazing how difficult it is for a man to understand something when he is paid a fortune not to do so.” Point, set, and match.

      4) You commented “if you are a teacher” CLEARLY I AM! Then I responded to your post in precise point form, yet you believe I skim? Wow… please give up commenting on blogs with your Investors Group pamphlet beside you, our readers deserve better.

      5) WOW!!!! This proves how off-base you actually are. Fama is still taught in business schools all across the world. The fact that there was a large market bubble does not disprove his theories in the long-term. There are always short-term inefficiencies caused by human emotion, but long-term the market obviously responds to fundamentals. Plus this is almost totally irrelevant to the fact that mutual funds severely underperform indexing and there is simply no debating that FACT!

      6) Everyone from Fama and Bogle to Warren Buffet, Charles Schwab, Charle Munger and even Peter Lynch at the end of his career have advocated for basic indexing strategies as opposed to mutual fund investing, so I have no shortage of role models thanks.

      Where is your proof, where is your academic research, where are your experts? Oh that’s right YOU HAVE NONE!!

      Thanks and goodnight.

  13. Ella says:

    My points are more valid than you’d like to admit.

    1) Clearly did not understand compensation model because you’ve shown no proof that you do and have just tried to brush it off with that ridiculous comment. Good researching skills.

    2) Accountants and investment advisors most often work together as they have different types of expertise. If it’s not rocket science do you do your own taxes too? (There you go insulting ANOTHER industry).

    3) This is a nice quote however it does not win your case. Although I’m assuming you are also your own lawyer.

    4) Your response was not precise at all. Just because you numbered your points in your response does not show any type of attention to detail on your part.

    5) Yes the mutual funds will underperform indexing because a mutual fund includes more conservative investment vehicles but not everyone is prepared to take that risk based on their time horizon and comfort with a market decline.

    6) It’s great to hear that those people are your role models however just like I did with Ipsos Reid all you are doing is mentioning a name. Where is your detailed research? Oh that’s right YOU’VE POSTED NONE EITHER. Wow. Ignorant, uneducated individual. There may be some truths in your posts but the fact of the matter is look at your actions! Who would EVER take advice from you?!

    7) Maybe you should stop focusing on mutual funds and focus more on the planning each advisor takes the time to do…

    “You need a plan to build a house. To build a life, it is even more important to have a plan or goal.” Zig Ziglar.

    Thanks and goodnight. ;)

    • Teacher Man says:

      Ella, give it up, you’re just wrong.

      1) The compensation model isn’t hard to figure out. Salary plus commissions. The higher the MER on the product you sell the greater incentive you get to promote it. Not rocket science, also the definition of bias advice. How else do you think terrible mutual funds that collapse (and many do) ever get sold to anyone?

      2) The point is that accountants do not get compensated in the same way commission-based advisers do. Thanks for trying to distract from the point though.

      3) So now your investment adviser is also a lawyer and an accountant? Man, that is some commission-based investment adviser you have there with 3-4 certifications and multiple degrees. I also have no idea what lawyers have to do with this argument.

      4) Not worth responding to.

      5) Another absolutely wrong statement. The really funny part of this argument is that you are blatantly and conclusively wrong. There is no grey area, you are just wrong. The FACT is that the vast majority of equity-based mutual funds are closet indexers that own most of the same stocks as the index, they just get in and out of positions at in opportune times. A Harvard Business school study looked at mutual funds from 1996-2002. During this time, the average self-directed adviser that picked mutual funds for themselves received an annual return of 6.6%. The average return on the funds that they were put into by “expert” money managers returned a whopping 2.9%!!! Oh, and that boring old index? Well it returned 10.48% annually. Even if you take a couple tenths of a percentage point off for transaction fees, it still isn’t even close. This is conclusive proof that the vast majority of funds that investment advisers who work on a commission basis will recommend to you are ridiculous and will steal your money. It is also what common sense would dictate since advisers have huge incentives to line their pocket with the worst MER offenders their company offers. Mutual funds have the same underlying asset as index funds (that’s why we have this little thing called benchmarks), therefore they have EXACTLY THE SAME risk.

      6) I have posted several direct quotes and responses to direct studies. Please read my ebook for visual cues since clearly reading isn’t your thing. The best part is that people don’t have to take advice from me, I encourage them to read everything. Why do think 95% of the personal finance bloggers out there recommend index funds and crash on mutual funds? It’s basic math that everyone can agree on. I don’t know what else to say, you come on here insulting a person that has obviously done their research and you don’t expect to get called on the carpet for it? Wow…

      7) So you routinely ignore what you pay for services then and just focus solely on the product? I have no problem with people using advisers of any kind, I do have a major problem with the compensation model in the commission-based industry. Again, it is quite easy to see the intrinsic problems someone has when they are paid based on what investments they put you into. This is the definition of advice that is not neutral.

  14. Case for Advisors says:

    Teacher man. First off…those who can’t do, teach. Secondly, I am willing to bet you applied to work with Investors Group and they turned you down.

    There are many strategies an advisor can employ to save clients taxes…not simply looking for deductions or credits offered by the government.

    If your ETF does 6.7% and an IG fund does 5.5%, but that IG advisor effectively saves their client money on their taxes EVERY YEAR, or thousands in interest by helping them pay their debt off in a more effective manner, or re-route savings so they are not clawed back on government programs in retirement and in turn they invest those savings to earn another 5.5% they are much farther ahead than investing for 6.7%. Not to mention the individual investor is likely still sitting on the sidelines waiting for the market to go up before they reinvest after they pulled out after markets crashed. The average return rate of an ETF is one thing…the average return of an individual investor is quite another.

    Also – clearly you are someone who is paid a salary and knows nothing of what it takes to build a business and create a living for yourself. The compensation structure at IG is set-up with the clients best interest in mind. It is actually structured so that the consultant is paid according to the success of the clients, as their monthly income is based on the amount of money they manage – so if the clients are not happy they move the money and the advisor’s paycheque gets smaller. Only a small portion of the funds offered pay an upfront commission. The name of the game is the relationship the advisors have with their clients and providing valuable information on an ongoing basis, not just a one time shot. The average IG advisor will have about 400 clients and will hold 90% of them for the long term, so clearly a living is not made off of upfront commissions but the ongoing servicing and value brought to the table. Sometime on recess google the redemption rate of Investors Group, and google the redemption rate of the industry – the value that IG brings to the table is clear.

    I do my own job 50 hours a week. Let them do theirs.

    • Teacher Man says:

      Wow… Never been accused of wanting to work for IG before. I have definitely never applied at IG. To be honest, just from a compensation perspective, it would take years to build up a big enough client base where I would make anywhere close to what I currently do as a teacher.

      Plus I have a conscience… so there is that.

      Here is a great story about a blogging friend of mind who did try to work for Investors Group and I think it speaks volumes!

      Very original teacher joke by the way. It’s about as groundbreaking as the teachers out there who think they are the most important beings on the planet because, “They make a difference.”

      I have been right upfront in stating the most important thing an advisor can do in my mind is hold your hand when the stock market inevitably crashes. At the same time, paying 1.2% in compounded returns over a lifetime is hundreds of thousands of dollars in lost revenue, and trust me when I say the average mutual fund vs a basic index will lag that number by substantially more than that. I’m sure you don’t have to worry about that though because your advisor has you locked in only to the best funds that always beat the market and have “five gold stars” right?

      Clearly I must have been born a teacher eh? Our side business manages several internet properties and other revenue streams just FYI. That’s ok I could see how you could miss that detail… except your on a blog that I co-own that is one of the largest personal finance blogs in Canada so a more observant person might have thought twice before making all-encompassing comments like that. My father has owned his own logging business since he was 25, so trust me friend, I’m often a vocal critic of my union and government spending.

      I do my own job 40 hours a week, then 15 hours of coaching, before committing another 15-20 hours a week to my side company. Oh and don’t forget the Master’s Degree thing that can be a real PITA. If you need someone to hold your hand through the investing process find a fee-based adviser that is upfront about what they are charging you. I’m sure when I get more assets under my belt I’ll need some hand-holding through specific parts as well.

  15. Case for Advisors says:

    You would think it speaks volumes. Too bad for your friend he met with what sounds like potentially a poor recruiter. It doesn’t mean the whole company is like that. Why don’t you go and ask an advisor who has built their business for 4 or 5 years what they think of the company?? OR would you not consider that because it does not support the etf brainwash drabble you spew on your oh so famous blog.
    Or why dont you actually take into consideration the value that numerous clients of IG including myself have communicated to you and factor that in rather than minimizing any positive anyone has to say in an effort to make your point seem stronger??
    As well, your friend never would have made it in the business. Thinking of himself as a mutual fund salesperson is his first mistake. His second is being too ignorant to understand why he would need to dress in a professional manner when meeing with clients..which is probably the reason he didn’t hack it as a mortgage broker either and why he is back holding a sign for a living.
    The handholding during a turbulent market is one of the things an advisor does. You being ignorant enough not to put value on the tax planning, risk planning, and estate planning that advisors do reassures me that this blog is not an open forum for discussion but rather a place where you best agree with “TeacherMan” or not bother stating your opinion at all.

    I completely agree that some people are better off on their own investing with etf’s…and
    chances are those people are not clients of IG. That doesn’t mean that what investors group is doing is wrong or bad. I am glad your investment strategy is working out for you, and I hope it continues too.

    Since you speak of investors dividend fund are you aware that if you have been invested in that fund since inception as of Dec 31 2011 you would have realized an annual rate of return of 7.2% ??? after the dreaded MER you speak of has been paid?? (you can keep your 6.7% etf)
    Were you also aware that between jan 1 1990 and dec 31 2011 the average canadian equity mutual fund had a return of 6.7%, and if you had of missed the 50 best trading days during that time period you would have had an average rate of return of -4.7%? So to me the 1.2% extra I may pay in fees is worth it to receive the professional advice I need at the time I need it.

    Your case for fee based advisors has holes as well. How is someone to be sure their advisor is giving them correct advice if their compensation is not tied to the success of that advice? At least with IG the advisors have a vested interest in seeing their clients succeed.

    FYI, I am not locked into any funds…mine are 100% no load. For you to take a small piece of what the company does and choose to attack it and share only the negative aspects without considering the positive or why it may be set up that way makes me worried for the children you teach. I can only hope you teach in a way differently than what you display on this blog, because here you come across as a very closed minded individual.

    • Teacher Man says:

      Once again, so many holes in your argument. As always with this crowd that tries to defend the mutual industry in general. I’ll try and answer this in point form for my audience for educational purposes:

      1) My friend’s experience was very typical given Jonathon Chevreau’s comments in the National Post, Rob Chilton’s columns in the Globe and Mail, and pretty much every major personal finance columnist in Canada back him up in one for or another. They have all published anti-mutual fund, anti-Investor’s Group material at some point. You must know better than those experts too though I surmise.

      2) I think if one were to look at who makes the most money in that line of work, those who are great at selling mutual funds would occupy many of the top compensation spots. It’s the nature of the compensation package.

      3) I’ve clearly stated at multiple points in this conversation that there is value in various parts of financial planning, but it doesn’t come close to the MER fees that get charged on your investments over time. I’ve quoted specific numbers and debated these points ad nauseam. Please actually read prior comments and replies before making blanket statements if you want your comment to be taken seriously and not be replied to sarcastically.

      4) You cherry pick one specific fund and call that proof? Come on sir, that proves the lack of credibility your post has. I have quoted comprehensive studies that show over an extended time frame less than 1% of mutual funds can match their index after fees and the number is shrinking as more and more talented managers go into the hedge fund market. These are broad facts, not anecdotal almost-arguments.

      5) If you can’t see why someone who charges a flat rate is less biased than someone whose “vested interest” is dependent in part on selling you that latest mutual fund offering then I’m pretty sure we should quite commenting to each other because we will NEVER understand each other.

  16. ETF Advocate, but... says:

    Disclosure – I am an ETF advocate and a financial advisor (Not with IG).

    The facts are clear: 99% of the time ETFs outperform Mutual Funds over the long-term. There are, as has been shown, a small number of Funds that can beat ETFs, but it has also been shown that it is impossible to predict ahead of time which Funds will do it. ETFs also offer some tax advantages for non-registered money because they have low turnover in the portfolio. Many ETFs are available that are broadly diversified and span multiple asset classes and regions (ie. DEX Bond Index, Russel 3000 Index, MSCI EAFE, etc.).

    Those are the irrefutable facts and benefits of investing in ETFs. As stated I was/am a firm believer in ETF investing. In fact, prior to becomming an advisor, my entire portfolio was invested in ETFs (I wont get into why I changed after becomming an FA, it’s outside of the scope of what we’re talking about here).

    The problem, my friends, is that we are giving equal weighting to the facts AND to our own assumptions going into this argument (and we know what they say about assumptions). I’ll break it down into the two camps:

    Pro-ETF:
    - ETFs are cheaper/perform better (FACT)
    - People should educate themselves, open a discount brokerage account, and invest their own money in ETFs (ASS)
    - If you must use an advisor, use a fee-based one (ASS)

    Pro-Funds:
    -Some funds outperform the markets (FACT — barely)
    -A good advisor with a financial plan can add value (FACT — Morning Star recently released a study demonstrating this, they call it Gamma)
    -People need guidance from a professional (ASS)

    Here is my position (remember, former ETF’er & current supporter): the vast majority of people do not have the time, inclination, or confidence to manage their own investments. Prior to becomming an advisor I would spend hours, litteraly hours, with friends showing them how to manage thier own money in ETFs. It was amazing to see that EVERY one of them ended up asking me if I would just do it for them. Ironically, it was because of these ETF discussions that I became a financial advisor. However, entering my career as a financial advisor I realized that mutual funds have a role in the investing world. And because of the vast majority of people who would rather have someone else manage their finances, it’s a very large role. Here’s the catch: If you are going to use an advisor (fee-based or commission, I’ll explain in a second) you are going to acheive a lower return than your self-managing-ETF-using friends. That’s because you’re paying an intermediary to provide you with a service.

    Here’s where it gets really interesting: I’ve read a lot of the books advocating ETFs (Random Walk, Four Pillars of Investing, Common Sense on Mutual Funds, ect.) and they all present rock-solid data for the performance of ETFs over Funds. HOWEVER, the results are not fair because they are comparing ETFs without the additional costs of an advisor against regular series Mutual Funds with MERs that are high because they include compensation to an advisor. In fact, I dont know of any ETF comparrison study that has strictly used a comparison to F-class funds (where the advisor’s compensation is removed). If there has been one, please let me know where to find it.

    An analogy may help here: If I went to the store, bought some motor oil, went home and changed the oil in my car I could get it done at much lower cost than going to a garage. However, I haven’t learned how to do it, I’m not comfortable doing it, and most importantly I don’t want to do it. So I pay someone to do it for me. In the end my car ends up costing me more than it needs to because I’m paying more for service, but it’s a trade-off I’m willing to make.

    Bottom line: If you’re going to invest on your own, use ETFs. If you’re going to use an advisor, mutual funds are more expensive but they may be the best choice anyway.

    Final note in regards to a fee-based advisor vs. a commissioned/trailer advisor (assuming we’re using ETFs here): fee-based is actually more expensive and therefore the poorer choice (by the way, in my practice I have the ability to offer both). Fee-based advice in Canada usually costs 1%-1.5% per year. Since we all agree that everyone should have at least some exposure to fixed income investments, an advisor fee of >1% for fixed income investments is far too high. The fee-based vs. commission argument really comes down to trust. If you trust that your adviser is NOT going to churn your account then you will ultimately pay less is commissions/fees by using a commission-based advisor. If you dont trust your advisor’s recommendations and are comforted knowing that they are paid by a percentage of assets and not on each trade then you may want a fee-based advisor, just know that you will likely being paying more over the long term (not to mention that you should probably find a new advisor that you trust anyway).

    • Teacher Man says:

      I’m with you until the fee-based vs commission numbers. You have blurred the comparison here and don’t show any proof for your numbers. You have also neglected to show that mutual funds on average do not beat ETFs (in fact it’s not close according to John Bogle and Vanguard) even BEFORE their MERs are calculated, so the commission/mutual fund system is costing more than you propose here. Finally, even if I trust my adviser, I’d still rather they give them incentive to provide me with unbiased advice vs recommending something that could drastically affect their compensation one way or the other. Study after study shows that people can justify many things in their head if given the right incentives. Finally, fee-based works much better if you only want specific help in one or two areas which I think is where most Canadians could take real advantage of the difference.

      • ETF Advocate, but... says:

        Excellent! I was hoping you’d bring up the fee-based vs. commission-based issue (my last post was getting a tad long).

        Let’s deal with the other issues first.

        In regards to Mutual Funds under-performing ETFs even prior to the MERs being added on: Admittedly, it has been a few years since I reviewed the data. However, I seem to recall it being a difference of approximately 1%. However, since I cannot reference actual data at this time, I cannot assert that it is accurate. Give me a few days to dig up the numbers and I’ll post my findings (for better or worse). Nevertheless, the point I was trying to get across is that even if you end up with a “mutual fund only” firm (which I would advise against), if you have a good advisor working for you – and that’s a big “if” – then you will still be okay (refer to my previous mention of “Gamma”).

        The second point. In regards to your comment:

        “I’d still rather they give them incentive to provide me with unbiased advice vs recommending something that could drastically affect their compensation one way or the other. Study after study shows that people can justify many things in their head if given the right incentives.”

        Again, clearly, this comes down to trust. I understand where you’re coming from; having my compensation tied to the volume of trades/changes I recommend obviously puts me in a position of a conflict of interest. However, if you TRUST your advisor will stick to a plan and not deviate from it simply to increase his/her commission, then you will be better-off.

        Which brings us to the last point. Lets see the numbers. However, before I do, let me be clear in one thing: I cant stand Investors Group. It is the one firm I have absolutely ZERO respect for. The reason is simple: they use proprietary products which carry higher MERs than any of their competitors for absolutely no reason. What’s that? Total Planning including insurance you say? Sure, I also provide that. Sorry? You have industry leading specialist working for you? Yup, so do I (I work for an international firm that is literally 10x bigger than IG). Oh, you focus on achieving personal financial goals, not absolute returns? Uh-huh, me too. The difference is that I (and many other financial firms) provide those same critical services and (and this part is crazy) literally the EXACT SAME INVESTMENT at a LOWER COST. For example, lets look at the already expensive fund Mackenzie Maxxum Dividend with an MER of 2.51%. Now, lets look at the EXACT SAME fund but this time it’s offered through Investors Group with the “IG” name attached. The MER? A ridiculous 2.93%. FOR THE EXACT SAME FUND!!! That is why I can’t stand IG.

        Anyway, back to my position on fee-based vs. commission. Admittedly, my commission to buy & sell equities through an exchange (which is how ETFs are purchased) is on the high end at 2.5%. That will actually work in favor of my position because if you can get a commission lower than that, then you’re even further ahead. Let’s take the example of a $100K portfolio invested 100% in ETFs. With a fee-based advisor charging 1% per year (which is on the low-end, again supporting my position), you’re paying $1,000 every year for that service. Let’s assume NO GROWTH of investments over 10 years. Your total cost with a fee-based advisor is $10,000. Now, let’s contrast that with a commission-based advisor. The key here is turn-over. I advise my clients, and this is only supported by my personal experience, that we will turn-over, on average, approximately 10% ($10K) of the portfolio every year (rebalancing fixed income, equities, and geographies). Here is the cost break-down:

        First year: $2,500
        Years 2-9: $500 ($10K to sell = $250 @ 2.5%, $10K to buy = $250 @ 2.5%)
        Year 10: $2,500 (assumes we sell the entire portfolio)
        Total cost: $5,400

        As you can see, the commission-based advisor costs less which means you keep more of your money. In fact, I could turn-over >15% of the portfolio every year and still be cheaper than a 1% fee-based service. Again, it all comes down to trust. And for those clients who simply wont trust me, I make this offer: If my recommendations ever result in a cost that is more than 1% of the value of your portfolio I will discount my commission so that it stays below. In this industry the math doesn’t lie. Unfortunately, people do.

        • Teacher Man says:

          Thanks a lot for replying in such great detail ETF. I think this information is extremely valuable to my readers, and I really love how honest you are about everything. I’ll try to reply to everything in point form here to keep succinct.

          1) Mutual Funds – Bogle does some pretty thorough research here, and it depends what numbers you use when looking at funds. I’m sure you’re familiar with the “survivorship bias” or whatever you want to call it where most mutual funds studies fail to take into account how simply cease to exist and then get rolled into other, very bad funds. On average, BEFORE fees, most professional managers do not beat their benchmarks. That alone makes me hate the whole structure of mutual funds enough to never use them on principle. Once MERs are thrown in you’re definitely trailing the market by a lot more than 1% if you’re dealing with broad equity benchmarks.

          2) Trust – I guess I just subscribe to the theory of, “No one cares about your money as much as you do.”

          3) IG – Very interesting to hear another adviser talk this way about IG. I hope you don’t mind if I quote your comment in future comments and articles? You’re reasoning makes complete sense from what I can tell.

          4) I can’t resist pointing out that the funds you compare are also very similar to any TSX 60 index, and I would be interested in seeing how strongly they correlate (seeing as how I can get that exposure for almost no MER, and now – no trading fees!). But I think we agree on how useful ETFs can be, so that’s no really the issue at all.

          5) Your numbers paint an interesting picture. Before I get to them, I really like your commission-based promise. I think it’s very valuable.

          6) The numbers game. Your numbers are confusing to me in that I’m not sure how they factor in the fact that mutual funds are underperforming their benchmarks. I’m also not sure we’re going to the same fee-based advisor. I should have been a little clearer earlier, although I think fee-based is a better set up than commission, fee-only is really where I plan on going personally if I ever need assistance with something. In that scenario, paying someone $1,000 bucks a year to say “we’re just executing that exact plan we laid out for you in year one… stick with it,” seems a little high to me. My guess is that it would look something like $2,000 or so in year one, and then substantially less every year after (after you set someone’s plan up the first time, it shouldn’t take too long to review goals and rebalance, maybe take a quick look through insurance coverage and stuff every year).

          7) I will concede that in cases where an investor has a very small amount of assets, needs lots of help, refuses to educate themselves, and they manage to find a great adviser whom they can trust even though that adviser won’t be making much money off of them (due to relatively small portfolios), then a commission-based model might make sense as long as that situation stays the way it is.

          8) Are you ever tempted to leave the big companies altogether and just put out your shingle for your own small fee-based/fee-only business? I seeing this darkside being so tempting to advisers.

        • Scott says:

          In reply to ETF Advocate, but…:

          What company do you work for? I only ask because you brought what your company does compared to IG, so it’s only fair that we know who you are talking about.

          IG doesn’t offer the Mackenzie Maxxum Dividend fund, they have the IG Mackenzie Maxxum Dividend GROWTH fund. GlobeFund reports the MER for the IG Mackenzie Maxxum Dividend Growth series A fund as 2.64%. Still not as low as the 2.50% (which is the MER for the simple Mackenzie fund) but are they 100% comparable in the additional comprehensive planning services that come with IG funds. I assume you were looking at the C series MER which is 2.93% BEFORE service fee rebate. Some of my clients have a full service fee rebate of 0.50% which means the MER would be 2.43% (which is lower than the simple Mackenzie fund).

          Also, according to the Mackenzie web site, “You will also pay a sales commission to your financial advisor either when you buy your funds (a front-end load or sales charge) or when you sell them (a back-end load or sales charge).” With Investors Group series A funds, clients pay NO front-end charge AND if they leave the funds for 7 years they pay NO back-end charge. So, if you want to truly compare those fees you need to account for any front-end or back-end charges from Mackenzie.

          Also, shouldn’t your numbers look like this?

          First year: $2,500
          Years 2-9: $4,000 (shouldn’t it be 8 years of $500 per year fee)
          Year 10: $2,500
          Total: $9,000

          In reply to: Teacher Man
          Absolutely you can subscribe to the theory of “no one cares about your money as much as you do” but that’s not necessarily the same as “no one can help me with my money”.

          You’re a teacher, do you think you care more about your students than their parents? Should I home school my kids because no one cares about their education as much as I do? Is it because teachers know more than me, not likely, most of the teachers I know aren’t exactly Mensa material.

          People who frequent this and similar sites enjoy reading financial books and learning as much as we can about the topic but the VAST majority of the population wouldn’t take the time to pick up those same books.

          • ETF Advocate, but... says:

            Hi Scott,

            Glad you asked, you bring up an important point. I work for one of the big bank brokerages, or maybe I work for a large independent. The great thing is that it doesn’t matter. They all provide the services I described, so my points still stand. I won’t mention my employer because I have a feeling this thread would shift to an argument about “your firm is worse than my firm because of blah, blah, blah.” Not to mention the fact that I’m not using this forum to promote myself or my firm, only to discuss very real issues in the investing world. The reality is that you can most certainly find and site examples of where my firm has wronged someone, or where another advisor at my firm has done something dishonest. We all know that big firms come under fire for various reasons, and mine is no different. What is different, and it’s the point of this thread, is that IG is the only investment firm that uses and promotes proprietary products with inflated MERs for no reason other than they can (at least the insurance companies try to justify their high MERs by slapping on “seg fund guarantees”… and the usefulness of those is a whole other debate).

            Thanks for clarifying the difference of the funds. Just so we’re all clear: at what point do you offer a “service fee rebate”? Is that when the client has over $250K invested? Because if so, the simple Mackenzie fund is also available for rebate. Rebates aside, lets keep the base MERs the same and compare the series A of both funds (2.50% for Simple Mackenzie and 2.64% for IG). That comprehensive planning you were mentioning that comes with the A series? How is that any different from the planning services I, and any other advisor, would offer our clients when using the simple Mackenzie fund? Not that I would actually use that fund, but you seem to be implying that IG offers some kind of “super planning” that justifies a higher base MER. Also, since we’re on the subject, Mackenzie and Investors Group are owned by the same company, IGM Financial (which is itself a subsidiary of Power Financial). So really, IGM Financial is simply changing it’s pricing from one distribution channel to another. And a final point that I’m sure the readers would be interested in: The “comprehensive planning” that you refer to obviously includes a review and recommendation on insurance planning (life, disability, critical illness, and long-term care). Well, according to the IG website, two of the four insurance companies you use are also owned by Power Financial (Canada Life and Great West Life). I wonder which two companies get the bulk of you insurance apps?

          • Scott says:

            ETF Advocate, but…

            shift to an argument about “your firm is worse than my firm because of blah, blah, blah.”

            That statement rings a little hollow considering the number of shots you’ve taken at Investors Group. What you really mean is that you want to be able to bash a competitor and make statements about why you think you’re better, but you don’t want to have to prove it. I believe I have been pretty open about Investors Group since I started commenting here a few months ago. The fact you don’t want to reveal who you work for (and remember, you are the one that first mentioned why your company is better than IG) makes me wonder what you have to hide.

            I noticed that you didn’t address my point about the statement on Mackenzie’s web site about how clients “will also pay a sales commission to your financial advisor either when you buy your funds (a front-end load or sales charge) or when you sell them (a back-end load or sales charge).” Does your company charge a front-end commission? It’s easy to point out that 2.5% is lower than 2.63% but if a client gets dinged a front-end charge how long does it take to make up that annual difference?

            Secondly, MERs are a trailing number and at the end of June, Investors Group cut 0.15% off the MERs so when June 2013 rolls around the IG MER will be 0.15% lower than the June 2012 (assuming everything is equal). So, assuming there wasn’t a similar reduction on the plain Mackenzie fund, that gap will be further narrowed.

            The series C funds were discontinued long before I joined IG as a consultant (almost 3 years ago). Only 1 of my clients is in series C funds so I’m not that familiar with the product, all I know is they receive the full 0.50% rebate. I do know that the weighted average MER for the entire C series of that fund is 2.53%. IG has J series funds for clients over $250K which are generally about 0.25% lower than series A, so a J series MER for that fund would be 2.39% (based on the current MER, it will be even lower when the full fee reduction is reflected in June 2013). There are even further reductions available as client assets get larger, my biggest client ($1M+) gets a further 0.35% off the J series, bringing the total MER down to 2.03% (again, based on the current MER, it should be even lower in June 2013).

            I never said that IG provides some kind of “`super planning” I merely stated that without knowing which company you work for I can’t say clients receive a comparable level of service. I want to make an apples to apples comparison, I’m not going to make an apples to mystery fruit comparison because there is a wide range in the depth of planning services out there. Yes, Power Financial owns two of the largest insurance companies in Canada. I would think that when it comes to investing and buying insurance having a big, stable company that you know will be around long into the future is re-assuring to clients.

            Proprietary products in and of themselves are not a bad thing. Do you go to a Toyota dealership and bemoan the fact they only have Toyotas on the lot? One of the benefits of having proprietary products is the control a company has over what’s in the product. Another is product knowledge, Investors Group knows their product through and through, how much research do you put into the funds that you recommend to a client? I can’t imagine how long it would take to understand the thousands of funds out there so I assume you must have some favourites that you go to regularly. Which brings up another point, for funds within the same type (say, 100% equities) I get paid the same no matter which fund the client invests in. Can you state that no fund company pays you more or less than another?

          • ETF Advocate, but... says:

            Hi Scott,

            Well would you look at that? The first reply and it’s already about “My firm vs. your firm”. This thread is about IG, no one else. Of course I’m taking shots at your firm, I’ve clearly outlined every reason for doing so. If you want to debunk my statements, then please feel free to site examples of how other big firms are worse. Who I work for makes no difference in the debate, the facts are the facts. How about this, I’ll meet you half-way: go ahead and pick any big bank brokerage or large independent that you think is outdone by IG, and I’ll go to bat for them demonstrating why IG is an inferior choice for investors (even if it’s not my firm!). Please, though, keep the reasons high-level and don’t pick out an example of one advisor’s misconduct. I have never taken a shot at an individual IG advisor, only the firm as a whole.

            Now, on to your point about the Mackenzie Website. Jeez, I thought I was doing you a favor by not addressing it in my last post, but since you asked… Mutual funds are sold under 3 different cost/commission structures: Initial Sales Charge (ISC), Deferred Sales Charge (DSC), and Low Load (LL). Paying upfront is ISC, your example of the 7 year schedule is DSC, and a shortened version of your example (usually 3 years) is LL. The Mackenzie website (again, you do realize it’s the same company as IG, right?) is stating that a client will pay a commission depending on what sales charge type they purchase. There isn’t a mutual fund in existence that has a “perpetual DSC” where the client will always pay to sell.

            In regards to what I sell: I leave it up to the client and what they are comfortable with. I do provide general guidelines depending on their situation, such as if someone isn’t going to use the money for a long time then DSC may be appropriate. However, if they will need the money soon I make it a practice of using the front-end version and not charging a commission. How much of a jerk would I (or anyone else for that matter) look like if someone were saving for a home purchase next year and I said they had to either pay a commission now or when they withdrew the money? Actually, now that I think of that example, if all your clients are in DSC funds then what do you do when someone has an investment time horizon of less than 7 years?

            I noticed you side-stepped having to explain why IG can justify a higher MER for the same funds by claiming that you need to know who I work for. Again, it doesn’t matter. You admit that you don’t offer “super planning”, ok I accept that. I’ll even give you the benefit of the doubt and assume that you are an absolutely amazing advisor who truly works hard to understand his clients and provide meaningful guidance. Great! Now, assume I do the same but I work for a brokerage with equally talented support staff and planning resources (this is true of all large independents and bank brokerages). The difference is I have am able to use the non-IG version of funds that have lower MERs. Now, can you explain why IG funds warrant that higher MER?

            In regards to the insurance companies: I love the “bigger is better” comment. You’re right, it is important to have “a big, stable company that you know will be around long into the future”. Good thing IG has Manulife and Sunlife on their platform since they are number 1 and number 3. The point I was making, in case you missed it, is that having the other two (Canada Life and GWL) is yet another demonstration of how IG is systematically established to create conflicts of interest between what is most profitable for the company/advisor and what is best for the client. Again, and this is starting to sound old, I (and many other advisors at various firms) have the ability to use these same insurance companies. Only we do it without the conflict of interest that comes from being owners/employees of those companies.

            Which brings me to your question: “Investors Group knows their product through and through, how much research do you put into the funds that you recommend to a client?” As mentioned before, I work for an international firm that is much larger than IG. We have teams of analysts who meet with fund managers and companies, review fund histories, mandates, and underlying assets, and recommend suitability for clients. They, then, sum it all up for me so I can make an informed recommendation to my clients. But guess what? My firm isn’t the only one to do this. All the bank brokerages and big independents do it as well. Also, and this part is important, those analysts conduct on-going due diligence to make sure nothing with those funds has changed for the worse. If something does change, they let me know so I can get out of the fund and stop recommending it to clients. Since IG only sells their own funds, I doubt they’d tell you to stop selling them if something happened that wasn’t good for the outlook of the fund.

            Lastly, you’re right. Proprietary products are not inherently bad, as long as they provide some value to the client. The problem with IG is that they are not providing any meaningful value that isn’t also available from a cheaper alternative. You, or anyone else for that matter, have yet to provide any kind of evidence explaining IG’s UNIQUE additional value which would justify the higher cost.

          • Teacher Man says:

            Wow, this is really putting it out there: “I’ll meet you half-way: go ahead and pick any big bank brokerage or large independent that you think is outdone by IG, and I’ll go to bat for them demonstrating why IG is an inferior choice for investors (even if it’s not my firm!).”

            Kudos to you sir.

          • Scott says:

            I pick World Financial Group

          • ETF Advocate, but... says:

            Hi Scott,

            LOL! Well played sir, well played.

            I hadn’t considered that you might choose WFG (or Primerica, now that I think of it).

            Ok, here goes: this pains me very much to say, but in a world where I would have to choose between IG and WFG, I would choose IG (ugh, I suddenly feel so dirty).

            Seriously though Scott, c’mon! You’re defending IG as being among the best choices for investors, please give me a firm to defend that is highly regarded. Not one that has been fined or investigated 7 times in the last 7 years! Showing that IG is better than a border-line fraud organization still doesn’t say much for IG.

            How about I amend my offer slightly. Pick any one of the following firms for me to deffend (and yes, my firm is among them):

            Bank Brokerages
            -RBC Dominion Securities
            -BMO Nesbitt Burns
            -Scotia McLeod
            -CIBC Wood Gundy
            -TD Waterhouse

            Independents
            -Raymond James
            -Edward Jones
            -Canaccord
            -Assante

            8 of those 9 firms are competitors of mine, and I firmly believe I offer a better service than any of them. However, I also firmly believe that all of them are a better choice than IG.

          • Scott says:

            How about this, I will profile my median client and you tell me how you could serve them better than I do.

            They are a mid 30s family with 2 kids. They have invested a total of $30,000 with me over the past couple years (some of which was transferred at the beginning). I got in touch with them through a booth that I was doing at a trade show and, since they they both work and have kids, both the initial meeting and subsequent meetings are at their house during the evening.

            Answer these questions:
            1) Would your firm even accept a client of this size? Many firms have account minimums and won’t even deal with small accounts. Remember, this is my MEDIAN client size, so I have just as many under this level as above.

            2) If they were to transfer assets to you, would they be subject to a front end charge? You still haven’t answered my question related to this, if you want to compare a 2.50% MER to 2.63% MER (which will being lower in the future) then you need to acknowledge that some firms will charge a front end which changes the equation.

            3) Do you provide the same level of service with regards to meeting them at their home and during the evening? If you don’t provide that service, perhaps for the extra $39, the annual difference in MER, the client may feel they are better off.

            4) Would you have found this client in the first place? I, not IG, pay for marketing of this nature, does every company on your list actively market to as wide a client range as IG?

            Am I saying that IG has no weaknesses compared to other institutions for some clients? Absolutely not, I don’t think any company can claim that they are the best fit for every possible client out there. Higher net worth clients may be able to get better value by going with a fee only planner. This article talks about the lowering of IG’s MER which has made IG more competitive in the HNW market.

        • Scott says:

          I just want to be clear for the sake of other readers. The 4 points that I raised are to distinguish possible differences between what I and ETF Advocate offer. In no way am I saying that is the the only value added.

  17. ETF Advocate, but... says:

    First thing: I messed up the addition on the commission cost example (yikes, pretty embarassing for an financial advisor!). The total cost, assuming we sold the entire portfolio in year 10, would be $9,000 not $5,400. And only $7,000 if we didn’t sell… remind me not to blog late at night. Anyway, still cheaper than the fee-based @ 1%.

    Here are my replies, also in point form to keep the ideas separate and clear:

    1) Found a reference to fund performance vs. indexing before fees. “Common Sense on Mutual Funds”, chapter 5, figures 5.5 & 5.6. His findings indicate that, as a group, Mutual Funds underperform the index by exactly their cost (ie. MER). This makes sense because fund managers as a group must perform as the index over long periods of time (law of large numbers & reversion to the mean). He also references the advantage of survivorship bias (approx. 0.6%) but admits that it is likely off-set by the inherent lag caused by the cash positions that funds must hold. There is also a factor that I have been toying with that I call “Loser Inclusion” (my own term, not scientifically validated by any research, just my own experiences and suspicions). “Loser Inclusion” refers to the fact that all of the funds vs. indexes studies includ ALL funds in existence, including the ones that any self-respecting advisor would never recommend (think IG funds). I have seen many funds fall out of existence or get folded into other funds, but they are all funds I would never recommend to begin with. I’ll explain my fund vetting process in point 4.

    2) Agreed. But just remember, an advisor’s business and livelihood is built on word-of-mouth recommendations. Advisors who run a practice of milking their clients for extra commissions wont be around very long. Thankfully, I’m seeing a lot more of my clients and prospects asking the tough questions about costs, performance, etc. these days. It tells me that people are, in fact, waking up to the realities of the investing world (thanks, in part, to blogs like yours I’m sure).

    3) Reference away, my friend. I think it’s very important that word get out about IG. I’m a firm believer that we (advisors) need to be paid for our work, but the cost must be made clear and weighed against other options as well. IG’s (mis)pricing system is boarder-line fraud as far as I’m concerned.

    4) Indeed. But, in my opinion (and practice), funds are an acceptable alternative for some people. I’ll get into why I’m ok with some funds and how it relates to an advisory business in point 6, but let me clarify how I select the mutual funds I use. Interestingly, I vet my funds using the same factors that are explicitly identified as being the reasons funds lag. For instance, in every ETF/Indexing vs. fund book out there, they always refer to a few main reasons for fund underperformance: asset bloat, high MER, too narrow/restrcitve (ie. not a broad-based market mandate), and taxes. So, naturally, my vetting process is as follows: Manager/fund must have a history or mandate to cap the fund once it’s size reaches a critical mass (in Canada it’s $2B, the US is about $20B, and bond markets are essentially unlimited). Equity MER must be <2.2% & Fixed Income MER must be $1M each year. Those advisors typically have $50M-$180M in client assets under management (AUM). Some quick math with show you that an advisor’s income is approximately 0.5-1% of AUM. When I talk to people about my job and the cost to do business with me, I tell them that I will be compensated at an average rate of between 0.5%-1%. This is in line with most advisors across Canada so we can infer that this is the rate that the “market will bare”.

    When the ETF vs Fund issue comes up, cost is always at the centre of the debate. The reality is that once you hire an advisor and start factoring in their cost, the clear-cut advantage of ETFs goes away.

    One last point about fee-only advisors. Their costs are a lot more than what you may think. On average they charge $150-$200/hr, or $1,000-$5,000 for a financial plan, or $800-$1,000 for an annual review, and some even have a retainer of about $1,000 each year. In fact, it’s only the very wealthy (>$1M of investable assets) that may see some savings by using one. Here is a link so you can see for yourself:

    http://www.moneysense.ca/2012/10/01/where-to-find-a-fee-only-financial-planner/

    7) I think number 6 answered most of this. However, I will say it again: if you’re going to invest on your own, use ETFs. If you’re going to hire an advisor, make sure you know what all the costs will be, but a fund or a combination of fund/ETF might still make sense.

    8) Never. My firm provides me with so much support and information that I would not be nearly as effective of an advisor on my own. Most of my day is spent meeting with clients and creating/reviewing their financial plans. I (and any advisor for that matter) simply dont have time to keep up-to-date on all the changes in the industry, the markets, companies, compliance, governments, tax laws, new strategies, etc. However, having a massive firm to support me means I have the resources to handle cases that are complex and/or out of my comfort zone and ensure they are handled correctly. It also means that when things change (like compliance requirements, or laws) I get an immediate alert from my home office specialist explaining what has happened, how it will affect my clients, and what I should do about it.

    My recommendation to anyone wanting to work with an advisor is this:

    - make sure they can offer all investment types (ETFs, stocks, bonds, insurance, etc.) not just mutual funds.

    - make sure they are a part of at least a national (if not international) firm. They need proper support to do their job.

    - make sure they provide a WRITTEN financial plan that addresses your goals (retirement date, income, new home, school, etc.), not just how much money they say they’ll make for you.

    - Finally, make sure they are clear about ALL costs (current and ongoing) BEFORE you sign anything.

    • Teacher Man says:

      Hey ETF Advocate,

      I sort of wondered about that math before, but I figured even if it was correct it didn’t really detract from the overall argument. The fact that it now becomes $9,000 I guess makes the upfront dollars match up a little better, but I still believe the reasons to go fee-only or fee-based run much deeper than that.

      1) I like the idea of a “loser bias”. Interesting. There are just so many reasons why I don’t believe in mutual funds, but I think this thread and the other IG-related one do a pretty good job of outlining why without going over everything again.

      3) Thanks!

      4) Interesting Vetting process. Have you tracked the performance of your recommendations?

      8) Fair enough, this makes sense. Is there no larger organizations out there that would provide similar resources for fee-only planners? I’m not aware of any now that I think of it.

      I really appreciate your emphasis on transparency. I guess I question if most people have the financial literacy to properly understand the cost comparisons available.

      Thanks again for the honest and informed debate.

    • ETF Advocate, but... says:

      Not sure what happened to points 4, 5, and 6. The second half of point 6 seems to have been pasted over the second half of point 4. Oh well, I’ll clarify in a couple days when I have a little more time.

  18. Chris says:

    Your logic is simplistic your explanation amateur and your 1% is not factual. I know plenty of lifelong money managers that I own and track that beat their index and etfs in both an upmarkets and downmarket. Not all but there are more than a few You are definitely young , thrifty not so sure.

    • Kyle says:

      Love the blanket assertions Chris. The DALBAR study I’m quoting was pretty comprehensive and took into account survivorship bias that most studies leave out. You know “plenty” huh? Well then you sir should be rich! If you were able to predict these managers ahead of time and have a track record of doing this, I’m assuming you work for a major hedge fund? Please give some statistics of your own please as you make ridiculous generalizations with no proof. I have yet to see a single study that says anyone can consistently pick the very winning managers ahead of time.

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