Transferring your investments away from a mutual fund salesperson and into a do-it-yourself solution can be a frustrating exercise. Of course, the advisor – who counts on your commission – doesn’t want to give up your assets without a fight. And when you say that you’re leaving to start a portfolio of low cost index funds or ETFs, well, you can bet your advisor is not going to be happy with your decision.

Here’s a typical response that blog readers and clients have shared from their advisors after attempting to break up, transfer their funds, and go it alone (or with the help of a fee-only financial planner):

“People think they can trade mutual funds or ETFs on their own but it’s not as easy as you think. Rebalancing a portfolio is easy if you have the background but doing it like you’re thinking about is very tough without the training and knowledge. Plus you don’t have anyone like me to call up and ask if you’re doing the right thing.


Our fees are at 2 percent (ed. actually 2.76 percent for a global balanced fund) because this isn’t just about buying and selling. We’ve created a complete portfolio with you for your tolerance in the market and we deal in actively traded mutual funds that outperform the market most of the time. Additionally, your returns for the last 5 years are 10 percent, and that’s after we take the 2 percent MER (ed. actually 2.76 percent).


Besides ETF’s aren’t all that great. When you buy an ETF, you buy the whole index. Remember in the late 90’s when Nortel made up 30 percent of the TSX? It crashed! If you bought that ETF you’d be down 30 percent too! You are much more protected with mutual funds.”

My typical and long-winded rant reply

It’s not surprising to hear these rebuttal statements from your advisor. The Nortel example is one of my favourites. If you look closely at VCN – a Vanguard Canadian index ETF – you’ll see 231 stocks, the biggest of which, RBC, makes up just 7 percent of the fund’s holdings.

The funny thing about the “2 percent buys you so much more” comment is that it’s the exact opposite of what academic research shows. Low costs have proven to be the best predictor of future investment returns. So that tells me why not go with a cheap, broadly diversified portfolio and just accept what the market returns, minus its very small fee?

This chart shows a periodic table of investment returns from 1996 – 2015:

Try to guess which asset class will outperform next year. Your advisor would have you believe that their “professional” money managers and research can identify where to invest your money, but that has proven to be bogus.

Look at that chart and note the returns for emerging markets. It looks great at the top of the pile for seven years out of 20. But it’s also at the bottom of the heap for seven years out of 20, and second from the bottom two years out of 20.

Index investing is basically taking that entire chart and, instead of betting on which sector will outperform, saying:

”I’ll just buy every sector and accept that on average it will achieve around 7-8 percent a year. Sure, I won’t hit a homerun. But I’m not likely to strikeout either.

Let’s turn percentages into dollars and take a closer look at that 2.76 percent fee, using a $50,000 portfolio as an example.

$50,000 x 2.76 percent is $1,380 per year. Compare this to the Tangerine balanced growth portfolio. It has a similar structure of Canadian, U.S., and International stock exposure, plus Canadian fixed income exposure.

The Tangerine balanced growth portfolio comes with a MER of 1.07%. That’s still higher than a portfolio of TD e-Series funds or ETFs, but comparable to the balanced fund in which you’re currently invested. The Tangerine portfolio would cost you just $535 per year, almost one-third the cost of what you currently pay.

But let’s delve even deeper. A portfolio of four TD e-Series mutual funds will cost just 0.42 percent – or just $210 per year – for a $50,000 portfolio.

Finally, the model portfolio that consists of three Vanguard ETFs costs a minuscule 0.20 percent. In dollar terms, that’s just $100 per year.

Your advisor brings up a valid point: Unless you’re willing to go it alone you need to consider all the costs involved. You could use a robo-advisor to implement your low cost investment portfolio, or you could hire a fee-only advisor to help build you a financial plan and keep you on track with your goals.

As your investments grow, so does the gap between a high fee structure like you’re currently in and the small fees that you’d pay from a DIY index portfolio, or the modest fees that come with a robo-advisor managed portfolio.

A $250,000 portfolio built with mutual funds averaging 2.76 percent MER will cost you $6,900 per year. That same portfolio of e-Series funds costs just $1,050 per year. Add in a fee-only advisor charge of $1,000 and you’re still at only $2,050 per year.

Ask yourself what kind of value you’re getting from your advisor for an extra $4,850 per year? And remember that we’ve already determined it’s not for investment outperformance or rebalancing. A reasonable fee should include all aspects of financial planning. Investments are just a small portion of a bigger overall picture. In fact, a low-cost and broadly diversified investment portfolio that is rebalanced once a year is about as simple and worry free as you can get.

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