Is Your Financial Advisor Ripping You Off?

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One of the best pieces of advice that I received growing up was that whenever you receive advice from someone, first ask yourself “Does that person have something to gain from giving me that advice?”.

Asking myself this one question has helped me avoid dozens of mistakes over the years such as picking the wrong financial advisor, taking on too big of a mortgage, buying the wrong house, and many others.

One of the most financially catastrophic decisions you can make, is not asking yourself this question when it comes to choosing your financial advisor.

The reason for this is especially true in Canada, where we have some of the highest mutual fund fees in the world. Making the wrong decision here can literally cost you hundreds of thousands of dollars over your lifetime (and no, I am not exaggerating).

Yikes! So it’s definitely worth your time to be skeptical and not automatically trusting when deciding which advisor you pick, and whether you buy the investments they recommend.

In Canada, there are a lot of great financial advisors, but also many sharks. This is why you shouldn’t just walk into your local branch just because you already bank with them, and accept whatever financial advisor happens to be available at that time.

It also goes without saying that you also shouldn’t invest in whatever they tell you to invest in without first giving it some serious thought and analysis. Whether you live a comfortable retirement or one at the poverty level can easily be impacted by this one decision so choose carefully, and don’t base this decision on “convenience”.

Aside: I’m going to use the term “financial planner” and “financial advisor” interchangeably in this article since most people don’t actually know the difference and are more familiar with the term “financial advisor”. Many people also say “financial advisor” when they really mean “financial planner”, so for the purposes of this article, I’m referring to the person you go to when you want to invest such as in your RRSP, TFSA, or if you want some sort of financial advice about what to do with your money.

Financial Advisors in Canada

The sad reality in Canada is that many people who call themselves “Financial Advisors” are actually commissioned sales people.  “Financial Advisor” sounds like a type of consultant. Someone that is there to advise me and has my best interests at heart (just like if you were to hire a consultant to help you with something in your job).

However when someone is paid a commission or bonus when they get you to invest in something, then they now automatically have a financial incentive to recommend investments to you that will make them the most money.

This is like going to a car dealership and asking the salesperson whether you should get the deluxe model with the heated seats.  I’d be willing to bet that if they get a higher commission to sell you the more expensive car, then 99% of them will say “Yes, you should get the more expensive model”.

I have nothing against people who receive commission but just realize that it’s human nature for us to recommend things when we have a financial incentive to do so.

Also realize that such a financial incentive is VERY hard for a lot of people to resist, as ultimately who doesn’t want to earn more money?

There’s also the fear or getting fired, or missing out on a promotion since if their job is to get you to buy the investments that are the most profitable for the company, and they instead end up recommending something that is perfect for you but makes the company less money, then now they might be questioned by their boss as to why they didn’t push the more profitable product. In other words, why did they made the company less money than they could have?

Now granted, there are honest people who are compensated in this way and that will say “no” to more money because they genuinely do have your best interests at heart (some also realize that by giving you the correct advice you are more likely to become a satisfied repeat client).

The problem though is that it is hard, if not impossible to know whether the “expert” you just met is one of those people. You’re essentially rolling the dice hoping that you got a good one and personally, I’m not willing to take that bet.

There is simply too much at stake (i.e. You being able to actually retire vs having to work as a Walmart greeter when you’re in your 60s). This is why I would much rather speak to someone that doesn’t have any financial incentive to recommend me one investment over another.

If you get one thing out of this article, it’s to question advice that you get by asking yourself:

“Does the person giving me the advice have something to gain from giving me that advice?”

(i.e. a bonus, commission, promotion at work, etc.)

Apply this to everything in your life, and especially investing and saving for retirement as it can literally profoundly affect the wellbeing of you and your family throughout your life.

So when it comes to financial planning and advice who do I recommend?

Fee-for-Service Financial Planners

The answer is a fee-for-service financial planner (which people also often call fee-for-service financial advisors).

The reason that I recommend this group, is because they don’t actually sell investments to you. They therefore don’t have a financial incentive to recommend you a mutual fund because they get a bonus or commissions from selling it to you.

In other words, this is the best chance you have of receiving impartial advice where there is no conflict of interest.

So what’s the downside? Because they are not paid by commission, you end up paying them the same way that you would pay another professional like an accountant or lawyer. You basically pay them up front or after the service is done.

This isn’t really a downside but it can be easy to see it as one since there are many financial institutions out there where you can just walk in and get a “free” financial advisor to “help you”.

Free sounds a lot better than paying $100+ dollars for advice. The reality though is that the advice is really just disguised as “free”.

Think about it, is a person highly educated in personal finance and investing willing to work for free?

Are all financial institutions that offer this “free” service non-profit charities? Of course not. Just as is typical when it comes to marketing, the word “free” is used to lure you in and money is made from you by the business in other ways (such as hidden fees).

Specifically in Canada, this often results in Canadians paying some of the highest fees in the world at around 2.50%. Contrast this to the fees that I personally pay by buying ETFs which averages at 0.138%.

In other words, if you are paying 2.5% in fees with your mutual funds, then you are paying over 18 times more in fees than what I pay. Think about that for a moment. You’re not paying twice as much as what I’m paying. Not even three times as much as I’m paying. You’re paying over 18 times more!

Aside: The most common question that I get from Build Wealth Canada listeners is how to actually buy these ETFs, what brokerage should you use, and how to actually do all of this step-by-step. To answer that I’m actually creating an in-depth step-by-step video guide where you can actually see my screen, and see everything that I do when I invest every month. This way you can follow along, see exactly how to do it, and do it at your own pace so that you feel comfortable with the process. You can also ask any questions that you may have about the process. If you want to learn more about, go to www.buildwealthcanada.ca/etf.

If you have money invested in mutual funds right now then hopefully you are getting some incredible returns that consistently outperform the market to offset those incredibly high fees that you’re paying. Unfortunately, study after study have shown that the overwhelming majority of mutual funds do not beat the market.

The last study I looked at showed that 86% of mutual funds actually didn’t beat the market. Yikes! So the odds that you picked one of the “winners” is really low. Plus you are paying ridiculous fees whether your mutual fund ended up beating the market or not.

Why would you pay such high fees when you have no guarantee that they will actually perform well?

Do you think it’s fair that you pay thousands of dollars in fees regardless of whether the mutual fund did well or not?

Are the Fees Really That Bad?

Another trick of the industry is that the fees you’re paying look very small as a percentage compared to others fees you might have seen for other products. For instance, a 2.50% fee on a mutual fund seems tiny when you’re comparing it to a credit card that charges you 18% interest.

However think of it this way: If you have a portfolio of $100,000, that means that you are paying about $2,500 per year in fees! Once again, Yikes!  Regardless of how much money you make in your job, $2,500 is nothing to scoff at. That’s the cost of an entire vacation for some people.

How does this compare to the low cost ETFs that I buy every month? On that same $100,000, I am paying around $138 in fees. In other words, I am saving $2,362 a year by holding low cost ETFs instead of a typical mutual fund in Canada.

What makes all this even worse, is that fees get taken off your investments automatically whether your investments do well or not. Also, they get charged every year which also means that all that money spent on fees is no longer being invested to help grow your portfolio even faster.

This is why studies have shown that over your lifetime you can literally have paid hundreds of thousands of dollars in such fees without even knowing about it (since they are being taken off automatically.

What if You Already Have a Decent Size Portfolio?

Let’s say we’re a bit older and have a portfolio of $500,000. With an average mutual fund in Canada charging the 2.5%, you would be paying around $12,500 in fees per year. Ouch!

How does that compare to ETFs I invest in? My cost would be $690. That’s a savings of $11,810 in just one year.

You can do a lot with that kind of money, and imagine if instead of paying that fee you are investing that $11,810. That’s what you would be doing by purchasing the ETFs instead, and just imagine how much earlier you would be able to retire if every year you’re literally investing that much more because you’re not paying that amount in fees.

We’ll talk about ETFs in more detail in following episodes, but for now I just wanted to bring these fees to your attention so that you can see that there is a better way that can ultimately result in you being able to retire much earlier than you thought.

Where to Find the Right Financial Advisor:

How can you find a good fee-for-service financial advisor that’s not going to try to sell you these high fee mutual funds just because that is what is most profitable for them?

To start, I’ll be keeping a directory of Canadian fee-for-service financial planners that have been recommended to me, and that I have personally screened.

Each advisor in the directory will be interviewed by me too so you can watch or listen to the interview to get a better sense as to whether you would like to potentially work with them or not, and you can book a free consultation with them right from the Build Wealth Canada site.

You can find the directory over at BuildWealthCanada.ca/advisors

What Are Good ETFs and Stocks to Buy?

Now the caveat with fee-for-service financial planners is that due to Canadian regulations and personal preference, most of them won’t actually be able to sell or recommend you specific ETFs or stocks.

While this is great from the perspective that you won’t have to worry about there being a conflict of interest (i.e. Being recommended something only because it will earn them a bigger commission), the challenge with that is that you still have to ultimately decide which investments you would like to purchase.

For example, which ETFs, stocks and/or bonds are good choices based on what is available out there right now?

To help you with this, I’ve partnered up with Peter Hodson, Ryan Modesto, and their team over at 5i Research (who are also conflict-free).

You might remember Peter from episode 20 who during his 31 years of experience investing on Bay Street was responsible for managing over 1 billion dollars worth of assets and was actually chairman of the largest hedge fund in Canada.

Peter, Ryan and their team actually research and analyze individual stocks as well as ETFs every day, and they don’t actually sell any of them.

Instead they offer a paid subscription service where they are paid for their analysis. That way, they aren’t compensated through hidden fees and commissions like many of the others in the industry, and therefore there is no conflict of interest when it comes to the investments that they recommend.

They are the only investing team that I know of that offers conflict free advice like this, and so I thought they would be a great partner for Build Wealth Canada since they are highly qualified to actually make specific recommendation based on their analysis of different ETFs and stocks (whether you are an index investor like me, or whether you are picking individual stocks for growth, or investing for dividends).

Through our partnership, they’ve agreed to offer a free 30 day trial of their membership to Build Wealth Canada listeners (which they don’t normally offer through their site). You don’t need to give any credit card information to do the trial, and once you’re in you can see the answers to over 28 thousand investing questions asked by other members in the community.

You can also ask Peter and the team their opinion on what stocks and/or ETFs they would buy, based on all their analysis.

Last but definitely not least, you’ll also get access to their model portfolios and research reports on Canadian companies. These are perfect if you’re a dividend investor, a growth stock investor, or an index investor that likes to do a little stock picking on the side (often referred to as the “core and explore” strategy).

Now they’re not financial planners so they can’t tell you based on your risk tolerance and specific situation what you should be investing in, but they can tell you their opinion on what ETFs and stocks they would invest in, based on their up-to-date research and analysis of those investments.

As part of the free trial they’ve also agreed to answer 1 question that you submit as a Build Wealth Canada listener (whereas paid members get 24 questions per year).

So you can ask them whatever you want about investments, and you’ll still have access to over 28 thousand investing questions that others have submitted and gotten answers to. Regardless of whether you just do the free trial or become a paid member, you’ll learn a lot from 5i and the others in the community.

You can get the free one-month trial by going to buildwealthcanada.ca/trial.

Alright, have wonderful week, and talk to you soon!

Kornel

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