At the outset, I should confess that I don’t have much experience investing with financial advisors. The only time I invested through one was eight years back, when I picked a labour-sponsored mutual fund from the two that were recommended – the other was a communication fund. To be honest, I picked the labour-sponsored fund because I was getting an extra $1,500 break on my taxes for the previous year but in hindsight, it wasn’t such a bad move because while the labour fund lost 30%, holding the communication fund would have been an utter disaster.
A friend of mine invests through an advisor, though a more appropriate term would be mutual fund salesperson. She is frugal, saves regularly, contributes to her RRSP every year and has accumulated a decent-sized nest egg. But her portfolio is a disaster. It has a motley collection of mutual funds, every single one sold with a deferred-sales charge with no attention paid to the basics such as asset allocation, tax-efficiency etc.
Let’s do the math and assume that my friend has a $200K portfolio and adds $10K to her investments every year. If the advisor is earning 1% in trailer fees and 5% in sales commissions, she is paying at least $2,500 every year for receiving advice. And what does she get in return for this tiny sum of money? Worse than nothing because many of the funds she was holding were “hot” sector funds that have a history of turning stone cold when the retail investor jumps in.
There is a happy ending to this story. After attending an investment seminar at work, my friend moved her investments to someone who at least knows what they are doing and is upfront about the fees. While I’m firmly in the camp that everyone can learn to invest on their own, the reality is that many, if not most, Canadians are not inclined to do so (for whatever reason) and are investing through an advisor. If you are such an investor, you owe it to yourself to ensure that your advisor is providing honest services for the fees that come out of your pocket.