Fee only Financial Advisors

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor. Seeking advice on your portfolio?
DanH
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Re: Fee only Financial Advisors

Post by DanH » 13 Feb 2012 17:32

ghariton wrote:
DanH wrote:I am not a disinterested party in such discussions but I don't participate here to find clients.
I know, Dan, and I appreciate your posts very much. I believe that what you post here is not swlf-interested, but rather in an intention to be helpful. In no way am I impugning you or your motives, and I apologize if my post comes across that way.
Thanks George. That was really a general disclaimer directed at Cathy F and others who may not know my identity/background. I didn't take any of your posts as being directed specifically at me in any way.

I pretty much agree with everything else you wrote in your reply. As for contingency fees for lawyers, I think we have one of the more successful such lawyers right here in little old Windsor.
Shakespeare wrote:Most of the professional-practice people would be better to put the effort into their practice rather than learning DIY, particularly the younger ones.
Good point re: time learning about investing takes away from more productive professional time. I spoke with a bright young pharmacist here last year. She was already investing in TD e-funds via DCA and was actually keeping it all pretty simple (i.e. using four funds) - though dabbled in a few stocks but with just a bit of play money. She'd originally called me looking for advice and I could have convinced her that she needed my help. But she seemed to have a good head on her shoulders and had spent some time educating herself. And was doing most of the right things so I told her to just keep doing what she's doing; don't go nuts with the individual stocks; and at some point it might be worth paying for broader financial planning advice.

We'll see what happens once her portfolio hits six figures. Even though, in theory, nothing should change; the dynamic changes because the larger dollars makes for bigger stakes - and more serious consequences should any errors be made.

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Re: Fee only Financial Advisors

Post by CROCKD » 13 Feb 2012 17:43

keith wrote:We have a number of widowed and divorced female friends. They are as likely to learn the ropes of investing as to change their own oil. They do not want to touch it no matter the costs. I also have some well-off male friends who love chatting with their advisors. I don't have one friend who does it themselves. (One guy comes close but still relies on his broker.)
I do not have this discussion with others, male, female or a couple very often but when I do they always seem quite surprised that I am a DIY investor.

My impression is that

1. They do not feel they can educate themselves
2.They are intimidated and do not have the confidence to start
3.They are busy with other pursuits such as earning a living or activities they are more interested in.
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Bylo Selhi
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Re: Fee only Financial Advisors

Post by Bylo Selhi » 13 Feb 2012 18:28

Seems to me that there are two distinct issues here:
1. Whether, in general, only a small percentage of people have the time, inclination and discipline to successfully DIY. I think we have broad agreement on that, i.e. that most people need to engage an advisor.
2. Whether in general those who engage an advisor are better served by fee-only than by commission or fee-based advisors. On this issue I fully agree with George on all points. Very well reasoned and said :thumbsup:
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Re: Fee only Financial Advisors

Post by NormR » 13 Feb 2012 18:36

Perhaps I've not noticed, but just how many fee-only investment advisors are there in Canada? Do I hear one hand clapping? :wink:

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Re: Fee only Financial Advisors

Post by deaddog » 13 Feb 2012 20:17

CROCKD wrote:
I do not have this discussion with others, male, female or a couple very often but when I do they always seem quite surprised that I am a DIY investor.

My impression is that

1. They do not feel they can educate themselves
2.They are intimidated and do not have the confidence to start
3.They are busy with other pursuits such as earning a living or activities they are more interested in.
4. They are able to place the responsibility for their financial future on someone else’s shoulders. If the advisor does well, they can take credit for hiring someone so smart but if the advisor does poorly they have someone to blame.
Most of our so-called reasoning consists of finding arguments for going on believing as we already do.( J.H. Robinson)

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Re: Fee only Financial Advisors

Post by Bylo Selhi » 13 Feb 2012 22:35

NormR wrote:Perhaps I've not noticed, but just how many fee-only investment advisors are there in Canada? Do I hear one hand clapping? :wink:
That's a testament to the marketing clout that 3% MERs can buy. If it's any indication of the superiority of commission/fee-based over fee-only, then that's from the perspective of the practitioner rather than their clients.
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Re: Fee only Financial Advisors

Post by DanH » 13 Feb 2012 23:24

Bylo Selhi wrote:
NormR wrote:Perhaps I've not noticed, but just how many fee-only investment advisors are there in Canada? Do I hear one hand clapping? :wink:
That's a testament to the marketing clout that 3% MERs can buy. If it's any indication of the superiority of commission/fee-based over fee-only, then that's from the perspective of the practitioner rather than their clients.
Perhaps a bit but quite significant is also the set of business realities that are just not friendly to a flat or hourly $ fee model. The regulatory regime doesn't support it. There aren't enough clients willing to pay to support it (at least not the fees that would be required to cover direct and indirect regulatory costs).

You might want to paint the fund industry as the culprit. Quite the contrary, it's the regulatory regime that has created a strong fund industry. It's very clear to me that regulators have no interest in allowing consumer friendly options to emerge.

Before the new registration rule was introduced they solicited comments from the industry and the general public. I read through hundreds of pages and made a formal submission quite plainly pointing out inconsistencies between their stated objectives and the clear consequences of their proposed rules. I was effectively dismissed as irrelevant in follow up documents on this proposed rule, which was largely implemented as proposed at that point.

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Re: Fee only Financial Advisors

Post by NormR » 13 Feb 2012 23:31

DanH wrote:Perhaps a bit but quite significant is also the set of business realities that are just not friendly to a flat or hourly $ fee model. The regulatory regime doesn't support it. There aren't enough clients willing to pay to support it (at least not the fees that would be required to cover direct and indirect regulatory costs).

You might want to paint the fund industry as the culprit. Quite the contrary, it's the regulatory regime that has created a strong fund industry. It's very clear to me that regulators have no interest in allowing consumer friendly options to emerge.

Before the new registration rule was introduced they solicited comments from the industry and the general public. I read through hundreds of pages and made a formal submission quite plainly pointing out inconsistencies between their stated objectives and the clear consequences of their proposed rules. I was effectively dismissed as irrelevant in follow up documents on this proposed rule, which was largely implemented as proposed at that point.
Gosh, are you saying that the regulators don't have the consumers' best interest at heart? Might they be following their own best interest? :twisted:

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Re: Fee only Financial Advisors

Post by Shakespeare » 13 Feb 2012 23:31

ISTM that the regulators are looking after the industry, not the public. That's not a surprise and not unusual.
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Re: Fee only Financial Advisors

Post by Bylo Selhi » 13 Feb 2012 23:35

DanH wrote:You might want to paint the fund industry as the culprit. Quite the contrary, it's the regulatory regime that has created a strong fund industry. It's very clear to me that regulators have no interest in allowing consumer friendly options to emerge.
Also a sad testament to the marketing clout that 3% MERs can buy. Neither fee-onlys nor DIYers nor consumer advocates can compete on that sort of unlevel playing field.
There aren't enough clients willing to pay to support it
We don't know that because too few people (a) appreciate the pernicious effects that 3% MERs have on their returns and/or (b) are aware of the fee-only alternative. Again thank the marketing clout and disingenuousness (e.g. "You don't pay me; the fundco pays me", "All your money is invested right away", "Fees don't matter; [obfuscated] returns matter", etc.) that 3% MERs can buy.
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Re: Fee only Financial Advisors

Post by ockham » 14 Feb 2012 00:36

Bylo Selhi wrote:"All your money is invested right away"
The exact words my advisor used years ago when recommending a DSC version of a Trimark fund over its FEL counterpart, neglecting to mention the mer differential between the two (75 bps or so), the return implications to me of that differential, and the trailer fee differential between the two versions for him. A clear case of advice based on the compensation model, not on what was in my interest. Took quite a bit of reading before I came to understand that.

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Re: Fee only Financial Advisors

Post by Bylo Selhi » 14 Feb 2012 08:00

ockham wrote:The exact words my advisor used years ago when recommending a DSC version of a Trimark fund over its FEL counterpart, neglecting to mention the mer differential between the two (75 bps or so)
Do the math. The industry now has at least $600B assets under management so even a trifling 50bp generates $3B in trailers. No wonder "It is difficult to get a man to understand something when his salary depends on his not understanding it." (Upton Sinclair.)

Also keep in mind, especially now that we're being bombarded by RRSP ads, that even a mere 10bp dedicated to "marketing" generates $600M a year—every year—in perpetuity. That's a lot of clout.

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Re: Fee only Financial Advisors

Post by CathyF » 14 Feb 2012 08:12

DanH wrote:
Cathy F wrote:If you have a lot of money to invest, you're far better off learning the basics yourself, and doing it through a discount broker. That will save you thousands of dollars per year, and cost you a couple of hours of time at most. Stick it in some ETFs and bonds, and reallocate once a year. Simple.
Simple? Yes. Easy? Not for most people. I'm reminded of Warren Buffett's reply to a Columbia business student who asked, and I'm paraphrasing, "...did it really take you 5 minutes to know you wanted to buy Burlington Northern Railroad?" Buffett replied first with laughter but then said, "...yes, 50 years and 5 minutes".
I don't stock-pick. That's why I said buy ETFs. Buying an ETF is simple and easy, and you'll get (almost) market performance. Stock-picking is much harder, and I'm not convinced that trying to out-guess the market is a winning game, certainly not for the average individual investor. I'm also not convinced that talking heads and investment advisors can out-guess the market, either. (Nortel, circa 2000, anyone?)

My investment thesis is "don't get greedy". I'm happy with something near market-performance. I also don't believe in being foolish, and that includes wasting thousands of dollars every year on an advisor when I can do it myself in a couple of hours.

If I could fix my own car, I probably would. But that would require far more time and knowledge than what I spend on investing, and only net me a few hundred dollars, not thousands. I think a little investment DIY knowledge is the best bang-for-the-buck that most people could make (unless they don't save anything, in which case investing is moot).

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Re: Fee only Financial Advisors

Post by Bylo Selhi » 14 Feb 2012 08:44

CathyF wrote:I think a little investment DIY knowledge is the best bang-for-the-buck that most people could make
To expand on that, everyone should have basic investing knowledge even if they engage an financial advisor. The same applies to medicine, law, taxes, car repair, etc. Not because people should DIY those things. Generally they shouldn't. It's so they can have meaningful discussions with professionals and better understand their recommendations.

In addition, an educated consumer is a good, perhaps the best, defence against unethical or criminal "professionals." Would someone who has a basic understanding of investing be as likely to believe the claims of a Bernie Madoff, etc?
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Re: Fee only Financial Advisors

Post by Thorn » 14 Feb 2012 09:39

I'd like to back up a step to actual 'financial planning' as opposed to 'investment planning', since most of us need to save some money from our monthly cash flow, in order to consider investing.

I have noticed that investors fall into three categories (cf Benjamin Graham). Note the grouping is more dependent on the time a person wishes to spend, as opposed to the usual simple-minded 'risk tolerance' approach.
(1) Passive - have some notion that they need to invest, but want to spend at most 30 inutes a year. At best they add another GIC or mutual fund offering to their portfolio, at worst they follow a 'Bernie Madoff' tip a friend whispers into their ear at a party.
(2) Defensive - willing to learn about investing and to spend enough time to develop a plan, with or without professional assistance. Often disgruntled passive investors.
(3) Enterprising - willing to spend a great deal of time researching a wide variety of opportunities, and to place money in some, even though risk may be high in some cases.

Given the dismal state of a general understanding of personal/family money management in this country, much of which amounts to willful ignorance, I don't find it surprising that most folks are Passive, or even more frightening, non-investors. I think we as a nation have a long way to go.

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Re: Fee only Financial Advisors

Post by DanH » 14 Feb 2012 09:52

Bylo Selhi wrote:
DanH wrote:There aren't enough clients willing to pay to support it
We don't know that because too few people (a) appreciate the pernicious effects that 3% MERs have on their returns and/or (b) are aware of the fee-only alternative. Again thank the marketing clout and disingenuousness (e.g. "You don't pay me; the fundco pays me", "All your money is invested right away", "Fees don't matter; [obfuscated] returns matter", etc.) that 3% MERs can buy.
I disagree. I actually offered fee-for-service investment and financial planning advice for 6 years. Under the old regulatory regime, this was a feasible model that, if a practice was built with this model in mind could work really well. And yet, I never came across another person across Canada who was a) licensed to give individual investment advice (i.e. not just asset mix advice but individual buy/sell advice); and b) charged for this advice on a fee-for-service basis (i.e. flat $ fees or hourly fees).

The new regulatory regime started at the end of September 2009. Not only did that raise the financial requirements to become licensed - i.e. reapply for past exemptions since this was a "new law"; increased capital requirements; increased insurance requirements (which in turn further raises capital requirements) - but it also raised the indirect costs (i.e. increaed audits and resulting required actions to plug deficiencies, most of which wouldn't apply to an advice-only model).

Had I continued on my own with that model, I'd have raised my hourly fee to the point where it probably would have scared people off. Remember, unlike lawyers and accountants, there is nothing in society that really forces people to use investment counsellors. And a $400-$500 hourly fee is a non-starter for most people.

And then there is the issue of frequency of engagements. Most people don't return every year for updates even when prompted by reminders. A few do but most don't. I have to decide how many clients I can handle and frequency of updates is critical to assessing capacity. If people return every year, that probably means I can handle no more than 50 clients full time on my own. But then there is a bad year and people might skip a year. Suddenly my income is cut in half if everybody does that.

So the solution would be to charge an annual fee, making myself available whenever people need to see/speak to me and incenting them to come in annually because they're already paying for it. It could work for me but I have a wider reach than most advisors. How many advisors outside of Toronto do you really think can make a go of this? Very very few.

And yet the absence of such a model (with a license) speaks volumes. I keep asking people to prove me wrong. Do you know of anybody that charges by the hour for individual investment advice (and has proper licensing and is fully compliant with rules and regulations)?

I think even Norm's "one-hand clapping" has disappeared.

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Re: Fee only Financial Advisors

Post by Bylo Selhi » 14 Feb 2012 10:44

DanH wrote:
Bylo Selhi wrote:
DanH wrote:There aren't enough clients willing to pay to support it
We don't know that because...
I disagree.
Actually I think you're making my point ;)

Before changes in regulations there were few people who availed themselves of fee-only for the reasons I gave. So we don't know how well that model would have worked had the fee-onlys been better able to market themselves.

Now that the regulatory bar has been raised we'll never know because it's no longer viable for the advisor. So now we'll never know (unless the regulators start looking after the interests of investors.)

OTOH the fee-only model seems to be viable in the US—even at lower ends of the spectrum, e.g. Garrett Planning Network. Are Canadians really that different that this model could never work, even if the regulatory environment was more accommodating?
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Re: Fee only Financial Advisors

Post by DanH » 14 Feb 2012 10:49

Bylo Selhi wrote:OTOH the fee-only model seems to be viable in the US—even at lower ends of the spectrum, e.g. Garrett Planning Network. Are Canadians really that different that this model could never work, even if the regulatory environment was more accommodating?
Isn't that the same link to the same firm you've been posting for ten years to illustrate how well fee-for-service works in the U.S.? ;)

Canadians are that different. Americans - I can see Michigan from my home...yikes I sound like Sarah Palin - are more aggressive and more willing to take charge of their own investments. Like Canadians, they're no better as Barber and Odean have taught us and as indicated by mutual fund holding periods that are about half of Canadians'.

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Re: Fee only Financial Advisors

Post by Bylo Selhi » 14 Feb 2012 10:55

DanH wrote:Isn't that the same link to the same firm you've been posting for ten years to illustrate how well fee-for-service works in the U.S.? ;)
So?
Canadians are that different. Americans - I can see Michigan from my home...yikes I sound like Sarah Palin
Actually you're starting to sound more like NormR :rofl:
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Re: Fee only Financial Advisors

Post by DanH » 14 Feb 2012 11:24

Bylo Selhi wrote:
DanH wrote:Isn't that the same link to the same firm you've been posting for ten years to illustrate how well fee-for-service works in the U.S.? ;)
So?
Well, if there are so many and it works so well I'd have thought you'd find a few more over the years.
Bylo Selhi wrote:Actually you're starting to sound more like NormR :rofl:
Thank you. That's the nicest thing anybody's said to me all week ;)

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Re: Fee only Financial Advisors

Post by Descartes » 17 Feb 2012 17:32

Five big blunders of 'do-it-yourself' investors
There is a close relationship between do-it-yourself and blew-it-yourself investing.
I smell something ...is it desperation?
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Re: Fee only Financial Advisors

Post by Bylo Selhi » 17 Feb 2012 23:14

The flaws in Canada's financial adviser system - The Globe and Mail
In the investing industry, the line between what’s best for the client and what’s good for the adviser is easily blurred. Advisers want their clients to enjoy high returns, but they need to make money, and the potential for large rewards is tempting. That creates an inherent conflict of interest in many client-adviser relationships, critics say, and too many investors are left in the dark about the fees they’re paying to advisers and the effect those fees have on returns...

“I can’t think of another field where you don’t get a clear bill and you don’t know exactly what you’re paying for,” said Mr. Tak, an executive at a health products manufacturer. “I don’t think they’re dishonest or trying to trick me. It’s the nature of the industry... They’re making money, whether we’re losing money or making money.”...

There’s also interest in Ottawa. Ursula Menke, commissioner of the Financial Consumer Agency of Canada, agrees that imposing a fiduciary duty for advisers would clearly be good for investors. “The compensation model, by its very nature, creates a conflict of interest,” she said in an interview.

Dumping the current duty-of-care model in favour of something more stringent is likely to face stiff resistance from the industry...
A dozen ways financial advisers can stretch the truth - The Globe and Mail
When people make a living selling products, they sometimes stretch the truth to make a sale. It certainly happens in the financial industry, where people spout all kinds of nonsense to get investors to buy what they’re selling. Here are 12 examples of untruths told by investment advisers who put making the sale above what’s best for clients...
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Re: Fee only Financial Advisors

Post by DanH » 23 Aug 2012 21:49

DanH wrote:Perhaps a bit but quite significant is also the set of business realities that are just not friendly to a flat or hourly $ fee model. The regulatory regime doesn't support it. There aren't enough clients willing to pay to support it (at least not the fees that would be required to cover direct and indirect regulatory costs).

You might want to paint the fund industry as the culprit. Quite the contrary, it's the regulatory regime that has created a strong fund industry. It's very clear to me that regulators have no interest in allowing consumer friendly options to emerge.

Before the new registration rule was introduced they solicited comments from the industry and the general public. I read through hundreds of pages and made a formal submission quite plainly pointing out inconsistencies between their stated objectives and the clear consequences of their proposed rules. I was effectively dismissed as irrelevant in follow up documents on this proposed rule, which was largely implemented as proposed at that point.
I suppose this is as good a place as any to pop the virtual champagne bottles and share the joyous news that the OSC proposes major increase in fees. Hip hip hooray! Hip hip...wait...how does this help investors? :?

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Re: Fee only Financial Advisors

Post by NormR » 23 Aug 2012 22:05

DanH wrote:I suppose this is as good a place as any to pop the virtual champagne bottles and share the joyous news that the OSC proposes major increase in fees. Hip hip hooray! Hip hip...wait...how does this help investors? :?
Forget investors, how do I sign up for this new growth industry? Can you still become a crony? (For added fun, note the sponsor of the vid.) :wink:

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Re: Fee only Financial Advisors

Post by DanH » 23 Aug 2012 23:14

NormR wrote:Can you still become a crony? (For added fun, note the sponsor of the vid.) :wink:
:lol:

One of the best lines is at the end..."why be a taxpayer when I can be a tax spender?" :wink:

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