Investors Getting Short Changed From Our Banks And Advisors
Last week I asked, can you trust advice from your bank? The bottom line is you should be wary of any advice you receive from someone who can profit from your actions.
That doesn’t just hold true for banks and financial advisors, but the same goes for real estate agents, mortgage brokers, insurance brokers and car salesmen.
I received an email from Bob Lindsay (name has been changed), who read my review of BMO’s adviceDirect on Moneyville last week.
I’m going to share that email here, because I think many investors can relate to Mr. Lindsay’s experience.
I’m a do-it-yourself investor with BMO InvestorLine. A few months ago, I attended an investment seminar put on by BMO at my bank branch. It was okay – pretty basic stuff for me but I learned a few new things and had some of my ideas reinforced so it was worth the few hours.
At the seminar, we were invited to sign-up to receive occasional emails regarding investment news and suggestions.
The other day I received their quarterly update for ETF portfolios that set off alarm bells and is the perfect example of your comment about the dangers of trusting a bank that has its own products to sell.
It was dedicated entirely to BMO ETFs. It’s hard to believe that with all the other ETFs out there, BMO ETFs are the best in every category. No matter how well some were doing tracking their indexes I’m sure others might do better, or might be cheaper.
I wonder what adviceDirect will be telling clients to buy?”
Mr. Lindsay is in the process of simplifying his holdings and switching to mostly index ETFs. Like many do-it-yourself investors, he’d like some advice but can’t accept the fee structure commonly used in the industry.
Related: Mutual Fund Fees – The High Cost Of Canadian Funds
At one time, Mr. Lindsay briefly went with BMO Harris (private wealth management) because he thought even with the very high fees they charge, it would eliminate a lot of time and effort and free him up to enjoy other things.
But after they made mistakes in a proposed portfolio they offered for discussion and were unable to successfully transfer his InvestorLine accounts, he quickly went back to InvestorLine.
“What’s the point of paying huge fees when I still have to watch everything they did?” says Lindsay.
So when BMO’s adviceDirect was announced, he was initially interested in the service. He could still manage his portfolio while getting personal advice on buying and selling.
Related: Do You Need Financial Advice?
“But then I started to have my doubts,” says Lindsay. “I read that their advisors would be relatively junior people. It might be a good way for them to get some experience, but not at my expense.”
But the real killer with adviceDirect is the 1% annual fee. Once the portfolio is set-up, he’d need almost no advice.
He hopes to set up something similar to a Couch Potato portfolio of index ETFs. After the initial trades to sell existing holdings and buy some ETFs, his only trading would be re-balancing once a year – which might involve a half dozen trades, if that.
“With ETFs tracking known and established indexes I’d be reasonably confident they’d behave as they have historically,” says Lindsay. “So for my 1% a year, I’d get very little in return.”
One problem with the percentage fee structure is that it has almost nothing to do with the amount of work involved.
“The percentage fee structure ensures that financial advisors get a predictable, steady stream of cash,” says Lindsay. “Yet, if they charge by the hour and do a good job they might seldom hear from their client.”
Related: Fee Only Financial Planner Vs. Commission Based Advisor
What Mr. Lindsay is really after is advice from an established investment advisor who charges by the hour. Once the portfolio is set up, ideally they’d meet once a year to review things and see if any tweaks were needed.
One of the challenges he faces, along with many retirees, is the lack of discussion about appropriate portfolios for retirees.
Related: Wealth Based Portfolio Vs. Income Based Portfolio
There are lots of model portfolios out there but they mainly talk about asset allocation based upon age and risk tolerance.
For retirees, age is an important factor because they may not have the time to wait for markets to recover or to benefit from future growth. Retirees need income now, not capital gains five or 10 years from now.
Risk tolerance is such a personal thing, and it’s the “tolerance” part that bothers Mr. Lindsay the most.
“It’s less about tolerating the risk in your portfolio than it is about understanding that some volatility is to be expected. Your portfolio should be structured so that volatility is minimized – and to differentiate between volatility and something going down the tubes,” says Lindsay.
Final thoughts
Mr. Lindsay’s email highlights a major problem in the financial services industry today. First time investors get sold expensive equity mutual funds. Retirees get lured into expensive income funds. Neither group is offered advice on creating a financial plan that’s appropriate for their age and stage in life.
Related: Why A Fiduciary Standard For Investment Advisors Is Needed In Canada
Investors are getting a raw deal from our banks and advisors because we pay some of the highest fees in the world, yet have little to show for it when it comes to investment returns and financial advice.
Aren’t there fee only financial planners around that you could use for a couple of hours to set up a portfolio within something like Vanguard or even Ameritrade?
@Mrs. Pop – that’s definitely a solution. The problem is finding one and then getting over our fear of paying for advice upfront.
I have a number of accounts through Investorline and like “Mr. Lindsay” also receive the BMO ETF Quarterly newsletter.(The one from Alfed Lee, I am assuming). Of course it is going to highlight BMO ETFs. That’s the whole premise of the thing – they are not going to do all that market research and then suggest you fill up with iShares! You can take their general suggestions though, and do some some research on your own and find comparable ETFs from alternate providers. Investorline has an excellent ETF screening tool which allows you to do just that. The one thing I wish BMO would do however, is offer a set of very low MER Index ETFs similar to the eSeries offered by TD to their online investors. You can find these listed on the Couch Potato investing blog.
@J Palmer – Yes, it’s naive to think they won’t be highlighting their own products.
Good point about BMO’s Index EFTs – they’re Canadian Index ETF costs three times as much as the same e-Series fund.
The sad truth is whenever there is money to be made it is hard for people to be impartial in their advice and the products they recommend.
I’ve gone the DIY ETF investment route myself on the advice of many personal finance blogs, but I honestly wonder sometimes if I would have done better if I had just stuck with a real advisor. The fact is I make a pretty crappy investor even if I do try and stick with ETFs.
I’m still fairly young so hopefully I’ll get more disciplined and be able to stick with a solid plan over time and it will pay off in the end.
@SavingMentor – the nice thing is that when you’re young, increasing your contributions will do more for you than cutting costs by one or two percent. But eventually you’ll need to find a low cost strategy or those fees will erode your portfolio over time.
As much as I hate on the banks/Realtors/advisors/car salespeople, at some point, we need to stop blaming others and look at our own collective stupidity as a contributing factor.
@Joe – I hope that as it becomes easier to invest and do research online, people will start making smarter choices with their investments.
Funny I came to the same conclusion that banks are not to be trusted for financial advice 3 years ago based on a friend’s experience.
There is an inherent conflict of interest: banks are structured to maximize profits for shareholders. They ARE supposed to make money of the customers. Don’t be surprised when they do.
@Michael – At my old job, I had an employer matching RRSP, but we had to invest with HSBC mutual funds to get the match. I went in and filled out my KYC form and was recommended their global growth fund.
When I left that job I sold my mutual funds and transferred the money over to TD Waterhouse. I dug up an old HSBC statement the other day – the MER on that global growth fund was 2.88%!
I have no problem with banks making money, but I’d rather tell everyone I can to beware of commission-based bank employed advisors so they don’t make the same mistakes that many of us did.
I remember there was a teller at TD that always screwed up my transactions. When I was standing in line I’d think to myself, “Please don’t let me get her, please don’t let me get her.”
Then one day I made an appointment to see one of their financial planners to set up a GIC. When she came out to greet me I panicked. She began showing me what she would put the money in and I finally decided to just put the money down on my mortgage instead. That was around the same time I said, “enough is enough” and I started to invest myself. Best financial decision ever!
@The Loonie Bin – I’m sure I’ve had the same experience with a bank teller or advisor. When I’m explaining the investment choices to the employee, something’s wrong 🙂
Great post.
Totally agree, “Investors are getting a raw deal from our banks and advisors because we pay some of the highest fees in the world…”
Until we refuse to stop paying them, or most of us know better, little will change.
@Mark – I agree, nothing will change. We’ll just continue beating the drum and hopefully help some people along the way.
I would have to agree with mark as well. Until people wake up and hold people accountable then there will be no change.
“Education is what remains after one has forgotten everything he learned in school.” — Albert Einstein
In school, we learned to think. Whether we do is up to us. If we’re lax, we’re easier to fool.
At the recent CPFC12.com event, Tom Hamza (President of the Investor Education Fund) pointed out that the financial sector has some of the sharpest marketing minds in the country. That doesn’t mean that we’re powerless. We need to be diligent, as this post reminds us.
I agree with most of everyone’s statements, and I am one of those commission based and fee based advisors.
However there is a point missed here…
No matter what industry you work in or recieve services from, duds are everywhere. How many of your co-workers do you view as lazy… perhaps just in it for the paycheque? Then there are those that go above and beyond… to make a difference! You are an employer the minute you seek guidance or service, so be selective like one. Like all “employers” be selective. If the person you hire reveals himself as a dud, can him/her.
My industry is a relationship based industry – or at least it should be. I choose those I want to work with, they don’t choose me… but then I service the heck out of them. Some organizations (i.e. banks) tell their employees what to sell. My organization gives us the freedom to choose… and it is through the coaching and advice that the client is able to make a clear and sound decision. Can some underhandedness still occur, sure – but like I said, there are bad employees everywhere.
And on commissions, at my firm, the commission is consistent across all products… Trailer fees? These are what keep us encouraged to keep your portfolio growing, because our incomes will go up and down depending on your performance, and your gratitude as clients.
Moral of the story – be selective! Shop around! Insist on relationship sales!
And in the end, if you want to do it yourself – do it without emotion… because that is why most DIYs recieve less than a quarter of true market performance.
I love my job!
I read your article regarding adviceDirect. And I must say that you definitely read the brochure – but didn’t really do any “research” beyond that.
Firstly, you are right about the 1% fee. That is THE MOST someone would pay, and even that is tax deductible and includes trades. I actually pay closer to .50%, similar to what an ETF would charge EXCEPT MY PORTFOLIO IS ACTIVELY MANAGED.
I suggest you research the past returns to determine whether or not a fee is “worth it”
I would also suggest you research where the advice comes from. You will see that in fact, it is impartial, as BMO does not supply it.
@Jay – Thanks for your comments. The fee schedule is:
$100,000 to $500,000 = 1.00%
On the next $500,000.01 to $1,000,000 = 0.75%
On the next $1,000,000.01 and up = 0.50%
So you need a million bucks to get 0.50%. The fee MAY be tax-deductible for non-registered accounts provided you meet certain criteria.
Past returns don’t have anything to do with whether or not this fee is worth paying.
The research is provided by 3rd parties (Lipper and MarketGrader) however the advisors are most certainly BMO employees.