Factcheck your Finances: Understanding the Cost of Investing

Factcheck your Finances: Understanding the Cost of Investing

Any service has a cost. If I were to call a plumber, I would be charged a fee for the service call as well as the repair cost. That’s over and above the cost of his or her labour. The benefit to me is that I get to enjoy a working tap or a drain that keeps water from getting all over my floor.

Weighing whether or not you need the service of a Financial Advisor is a similar decision. As a Financial Advisor, my ‘rule-of-thumb’ is to say that you should have an advisor, but that may not always be the case. The real question that needs to be answered on a personal level, is ‘does the cost of investing outweigh the value of investing?‘.

A Tale of Two Investors

Let’s paint two pictures. The first is of a person who has experience in financial industry, general knowledge of economics, AND has time to do their research. Side note: a ‘general knowledge of economics’ seems pretty vague, but I define it as knowing what factors go into making investment decisions and knowing what questions to ask. If you don’t know enough to understand what you DON’T know, you’re in for a lot of surprises.

The second person is someone who works away from the financial industry, may or may not enjoy trying to follow the markets, but doesn’t have the time/energy to keep up to date with what’s going on in the investment world. We’ll come back to them in a second.

What is the Cost of Investing?

First, I’d like to go over fees and what they actually represent.

Usually people talk about fees as if they are interest rates on a loan, the idea being: lower is better. The ‘standard’ fee you will see attached to different funds and ETFs is a MER (Management Expense Ratio). This is just one of the factors that goes into the ‘cost of investing‘. This fee is shared by the investment company and investment dealer, and is how your advisor gets paid.

For example, if a Fidelity Global Equity fund had an MER of 2.5%, you would see 0.208% (2.5%/12) deducted from your account each month. A portion of this fee goes to Fidelity Investments to pay their expenses (taxes, administration costs, registration costs for registered plans, and management/research). The other part goes to the dealer and pays similar expenses on their side. Your advisor may get paid a salary (more common in banks) or they’ll get a portion of the dealer’s fee.

ETFs have much lower expenses than mutual funds simply because they are typically not actively managed (buying and selling stocks on a daily basis to try and out perform the market). If I was building an ETF, I would look at an index (the S&P 500 for example) and copy/paste it into a fund. I would buy all the same companies and hold them in the same proportions. Once the initial stocks are purchased, very little work goes into the maintenance of the ETF.

ETFs have evolved and now have the availability of limited research options which help bridge the gap between a ‘no-research’ model and a mutual fund. A mutual fund would use the S&P 500 as a benchmark and build a portfolio with a similar mandate, but with the objective of beating the index. Their goal would be to outperform the S&P 500 by buying better companies, adjusting their asset proportions, or waiting until some of the ‘over-priced’ companies go ‘on sale’. This requires a team of analysts and managers, and therefore requires a higher fee.

The other factors that go into the cost of investing are time and flexibility, among others. When you put money into the market, whether through your advisor or through third-party services, you are essentially tying up that money. You, as the investor, sacrifice your financial flexibility. If you put money into a non-callable (locked-in) bond for example, part of your return is designed to compensate you for not having access to your money for a period of time. Some funds will also invoke a ‘short term trading fee’ if money is invested and devested within a short period of time (usually three months). Time, on the other hand, is a resource that is in finite supply. You can either use your own time to do research yourself or pay a professional to do that research for you (seen in MERs).

What are the options for DIYers?

If you have internet access and a set of eyes, you’ve probably seen many ads for companies such as Wealthsimple, Questrade, or some other DIY investment platforms. These services boast low or $0 fees as their lure away from the traditional banking relationship. So it begs the question, “will I be served better by advice or by a lower fee?”. On these platforms, you are often left to your own devices to chose individual stocks or ETFs, or you’re lumped together with other DIYers and placed in 1 of maybe 5 portfolios preselected by them based on a questionnaire you answered.

If we look at the question above and apply it to investor #1, the answer may be ‘lower fee’, and I don’t think that’s a bad assumption. The beauty of the low cost model is that if you’re already making all the decisions with your money at the bank, you can have a similar experience without paying for someone else to facilitate your plan. You have the ability to look at the investment market through an educated lens and make decisions that will generally lead in the right direction.

Investor #2 is a different story. I follow reddit threads every now and again because it gives me a unique look at how DIY investors view and create their own portfolios. Some do a great job and talk about diversification, asset allocation, and contribution disciplines. Others try to speculate and ‘guess’ at how companies will respond to the markets based on their own bias. For example, one individual invested in an outdoor motorsports company because they liked their ATVs. There was no due diligence done around the company,  it was simply a bias towards their product.

The most common ‘theme’ I noticed is that most of the ‘redditors’ had investment proposals already created. They went online in search of validation and confidence from other users that they were making the best decisions. More simply put, they were bouncing their ideas off of this internet forum and using the other users as their collective ‘advisor’. Sometimes that works and you get some great feedback. Other times you get the opinion of the ‘wrong’ people and you end up in a ‘blind leading the blind’ situation.

Are you #1 or #2?

Rarely do people connect themselves perfectly to investor #1 or #2. My experience is that investors fall on a spectrum. Some clients want to have their hand held and will take my advice and recommendations very willingly. Some have their own understandings and background knowledge and use me to facilitate and ‘fact-check’ their understanding. My role, and how I earn my ‘fee’ as an advisor is to provide enough value to my client that they don’t resent the fee they pay.

This looks different for each client. For my hand-held clients, it’s giving them access to recommendations that they wouldn’t have come up with themselves. That fee saves them time and energy when it comes to decision making, while also providing confidence that there isn’t an obvious ‘hole’ in their plan. For my independent clients, it’s a matter of expressing ‘approval’ or alternatives that they may not have thought of or known existed. Either way, if I (or any other advisor) is not providing enough value to justify the client’s expense, we should not be surprised when a client moves to a different platform.

Your choice.

I think that choosing a financial advisor is like anything else in life. If my car breaks down, I can choose to fix it myself or take it to a mechanic. He’s a professional who has spent years honing his abilities to recognize and diagnose problems. He also has the tools to fix them. For me to do it on my own means I have to spend time and money going out and researching my car’s problem, buying the tools to fix it, and hoping I get it right. Financial advising SHOULD be the same, and if you find yourself wondering where your advisor adds value, you should be re-evaluating their role in your financial planning.

Having an advisor adds to your cost of investing, but it can also produce better rewards. Those rewards may not always be financial, but they should be valuable. Some of the ways you should seek value is through advice on how to reduce your taxable income, how to best take income in retirement, how to best save for specific goals, and/or how to feel secure in your portfolio’s risk-to-reward relationship.

Don’t be afraid to be picky with choosing your advisor. Advisors should be knowledgeable and able to make un-biased and educated recommendations that have your best interests at heart. You work hard for your wealth, and you should put your trust in someone who understands the importance of protecting it.


By the Letter: The Benefits Behind Financial Education

By the Letter: The Benefits Behind Financial Education

I’ve worked in a few industries. When I first graduated high school, I moved to Sudbury where I would thrust myself into emergency medicine. I graduated from Cambrian College and started a career as an Advanced Care Paramedic with the City of Greater Sudbury. Through my time there, we had to maintain “CE (continuing education) Credits”. From Sudbury, I moved to Lethbridge, AB, where I worked as a paramedic in the oil fields north of Grand Prairie. On top of the CE credits I was obligated to maintain through the Alberta Health Services, I also had to maintain certification in oil and gas specific credentials. These took up time and money, but whenever I went to one of these courses, whether it was H2S (hydrogen sulfide) training, or wilderness training, it always seemed to be, what we referred to in high school, as “Bird Courses”.

A “Bird Course” is essentially a course that has no meaning or is “for the birds” as it were. They often took an evening or a weekend and consisted of someone standing at the front of a class and “teaching” us all about how we shouldn’t do things that most people wouldn’t do anyway. The snooze-fest of a day was capped by a short quiz to prove you showed up.

So why do I bring up CE credits?

Let’s just say that ‘the birds’ are flying in a different direction.

Though there will always be educational requirements to maintain licensing and there will always be courses that seem like they are around simply to slow down the process of starting or continuing a career, I wanted to go into the specifics of why CE credits, or continuing education as a whole, can be important.

Continuing Education in the Financial Industry

I recently passed my CFP (Certified Financial Planner) exams. It consisted of four long courses and three two-hour exams. When I tell clients that I passed my CFP, they start by congratulating me, but then ask, “What does that let you do?”. That’s a valid question.

Historically, there have been a lot of designations in the financial industry. For example, Rick Tomalty, my father and one of the partners at my firm, has a multitude of letters after his name (CFP, CLU, CH.F.C., CHS, MFA, CEA, CKA). To be honest, if you asked me what those “let him do”, I would have no real answer for you. What I do know, is that he has been able to use those designations to help people navigate their financial dilemmas. For example, one of those sets of letters represents a course that allows him to be the professional executor or trustee of a will. When clients had specific questions about how to deal with their parent’s passing, he was able to step in and give more than the generic, broad-based answer most financial advisors would give. He may not use that designation every day, but it made a huge difference in that moment.

When I was a paramedic, we were trained to be a “jack of all trades, but a master of none”. We were supposed to know enough about every body system to keep people alive until they got to the hospital. That’s very similar to how most financial advisors practice. They know investments and/or insurance, but only scratch the surface of what’s “need to know” about other aspects, whether it’s tax planning, estate planning, power of attorneys, trusts, incorporation and corporate structure, ect.

This is where designations like the CFP come into play.

The CFP designation does not give me any special superpowers, but it allows me to speak as an expert of matters outside of general investments or insurance. The course specifically connects investments and insurance to the other aspects of peoples lives. FP Canada, the regulatory body for Financial Planners, wants to breed advisors who will look at their clients through a holistic lens. Where 15 years ago, most of those letters behind Rick’s name had a very impactful meaning, the big one that has moved up is the CFP. Soon, within the next few years, having your CFP will be a “table-stakes” designation to be a financial advisor. In the same way accountants have different accreditations to distinguish themselves, the CFP designation (and QAFP, Qualified Associate Financial Planner) differentiate advisors from your traditional ‘investment/insurance salesmen’. When you go to see your accountant, you will have more confidence seeing the “CPA” designation compared to your average H&R Block representative.

Just like other industries, the financial industry has required CE credits for each year, but these are simply because we live in an ever-changing world. The last two years has provided more evidence of that than we need. My clients trust me to stay on top of the investment market and to provide them with confidence that they don’t have to maintain up-to-date knowledge themselves. The CFP brings about another layer of trust that my recommendations are more encompassing than what is happening in that moment.

An ending note:

My opinion of continuing education prior to entering the financial services was quite negative. In the medical field, there were rarely ever new findings that constituted radically changing our perception of how the body functioned. CE credits really turned into a yearly refresher of knowledge and tactics we already used daily.

This industry has changed my perspective because the credits serve a new purpose. It seems as though every time I look at the news, there is a new outlook or case study that gives us better insight into how to work with our clients.

So however you get your financial advice, know that the letters make a difference.

Some people have the benefit of years of experience, while others (like myself) have invested time and energy into learning what experience has yet to teach them. Unfortunately, I have seen many cases of people taking financial advice from friends, who got it from their friends or from their advisor. Suddenly, it becomes second or third hand advice, and as seen in the game “telephone”, that often leads to a twisted echo of the original message.

I would hesitate to get advice on how to build a home from a plumber. He would be an expert on that specific part of the building, but he wouldn’t know the intricate detail it takes to add electricity or windows. That’s where a contractor will come in and be able to look at the home for what it is. Building a home takes knowledge and understanding of a multitude of components. The contractor is able to use his body of knowledge to advise and piece all the parts together so you aren’t left with a poor foundation or inadequate power.

If you start to look at your financial “home” the same way, suddenly it becomes obvious why a contractor, or someone who knows how to connect all the intricate parts of your life, becomes valuable.