Many investors these days have become disenchanted with their investment advisors who don’t keep in contact, sell a pre-determined model of products, and give abysmal service, not to mention their poor returns. They are deciding they can do a better job themselves. But how do you know you have the right skills to manage your own money?
Related: Why I Became A DIY Investor
A “Couch Potato” strategy is a non-complicated plan appropriate for many investors, especially those just starting out. Do you have the discipline to stay the course over a long term?
To build a portfolio of individual stocks you need to take the time to do your research. There is also the risk of lack of diversification and buying “hot” investment products or the latest fad. It’s hard to find the right mix and overeager investors may take on too much risk in their search for yields.
Of course, managing your money isn’t just about building an investment portfolio. You need to take some time to identify specific goals you want to attain – paying your mortgage quickly, saving for a large purchase, staying home to raise your children, having X amount of income to enjoy in retirement, and so on. Then comes the plan for reaching these goals.
Some people can develop a financial plan on their own, especially if their goals are simple. There are many good books and other resources dedicated to this subject. But what if you can’t relate the ideas to your specific situation? What if you don’t know how to begin? Do you have the discipline to follow it through?
Related: 5 Challenges DIY Investors Face
For complicated situations and more financial expertise, working with a financial advisor can help you take this first important step.
A Fee-Only Financial Planner or Money Coach
Making financial decisions, especially with your own money, is a very emotional process. It can be comforting to work with someone who is able to see the big picture, point you in the right direction, and clarify how to proceed. Their objective, unbiased advice helps develop a workable budget, reduce taxes, and give financial strategies that you may not have thought of, to better reach your goals.
These types of advisors charge you a flat-fee, either by the hour or by project. They offer support to help you implement various action steps and track your progress, reassessing as required. Usually, they are not licensed to sell investments, or make specific recommendations for different products. Their services involve offering advice, planning and coaching.
Related: A New Fee-Only Financial Planning Service
This service is appropriate for people who will purchase and manage their own portfolio.
Portfolio (Wealth) Managers and Investment Advisers
Investment advisors are paid primarily by an agreed upon fixed percentage of the assets they manage. They can also include various planning services, if desired. They are paid directly by you rather than receiving commissions from the products they sell or other transactions.
This service can be costly, and often requires a stated minimum investment portfolio, but it could be just the ticket for those who want good results without being directly involved in the trading and management of their investments.
Related: When To Fire Your Investment Manager
Make sure you’re not paying for services you don’t need, or are not actually receiving.
Bottom line: Should You Pay For Advice?
If I want to develop my basement, I could buy a manual to find out how to do the electrical work myself. Or, I could hire an electrician to do the work for me. For a higher initial cost, I could avoid potential future problems that might be disastrous.
Canadian investors hate to pay fees. It’s easy to reduce fund costs and trading fees, but all fees are not equal. Those occupied with only reducing fees often make other costly mistakes. They don’t manage their income effectively, are not diversified, and are tax inefficient. They procrastinate and try to time the market and let their emotions dictate their behavior. Then they wonder why they are not as financially successful as they would like to be.
It could be worth your while to pay someone a one-time fee for planning advice.
In a recent Carrick Talks Money video series on the Globe and Mail, Rob Carrick discussed the “I’m finally ready to invest” portfolio for young adults. He asked Canadian Couch Potato blogger Dan Bortolotti, and PWL Capital wealth manager Justin Bender to come up with a portfolio of exchange traded funds (ETFs) for the young investor who’s just starting out. They came up with a better and simpler approach using TD e-Series funds:
Related: How index funds compare with equity mutual funds
TD e-Series Funds
You can build a low cost, broadly diversified portfolio with just four index funds from the TD e-Series family. Just use this simple asset allocation:
| Fund type | Fund name | Allocation | Expense Ratio |
| Canadian Equity | TD Canadian Index – e | 25% | 0.33% |
| US Equity | TD US Index – e | 25% | 0.35% |
| International Equity | TD International Index – e | 25% | 0.50% |
| Canadian Bonds | TD Canadian Bond Index – e | 25% | 0.51% |
The strategy is touted as a good option for beginners because it gives investors a simple way to set-up a low-cost, broadly diversified portfolio.
Unfortunately, the “lack of sophistication” with this simple portfolio turns off a lot of investors who may feel the need to spice things up to get better returns, better diversification, or lower costs.
My argument is that TD e-Series funds are not only good for beginners but they can be useful all throughout your investing life.
Related: How not to start investing
“A portfolio of e-Series funds is almost certainly better than what 90 percent of Canadian investors have now,” said Bortolotti.
The main problem, as he sees it, is behavioural. People are surprisingly resistant to simple solutions.
Simple doesn’t mean stupid
The other obstacle is that some people still can’t get past the idea that mutual funds are for chumps and ETFs are for sophisticated investors. It seems like many investors think once you reach $50,000 or so that you must then “graduate” to a more sophisticated portfolio. Clearly that’s not the case.
“I have heard from dozens of investors who have successfully used the e-Series funds for years, but they’re itching to “move up” to ETFs, as though it’s some kind of promotion,” said Bortolotti.
He says mutual funds are actually superior to ETFs in many ways: more user-friendly, no commissions to buy or sell, no bid-ask spreads, ability to set up automatic contributions, and automatic reinvestment of dividends. These advantages tend to be overlooked by investors who zero in on management expense ratios (MERs) as if they are the only factor to consider.
Related: Are mutual funds really that bad?
“We’ve used the e-Series funds for several of our DIY clients, even for portfolios as large as $300,000 or so,” he said.
A couple recently profiled in MoneySense magazine had about $140,000 to invest and wanted to consolidate their current portfolios of individual stocks, actively managed mutual funds, and index funds into one simple and low cost solution.
Dan Hallett was the advisor quoted in the article and he recommended using TD e-Series funds:
“They’re ideal because they’re almost as cheap as ETFs but you don’t need to pay brokerage fees, you can invest to the penny, every cent of distributions can compound through a full reinvestment and they’re ideal for those making regular deposits.”
The Global Couch Potato – which can easily be built with e-Series funds – did almost as well as the more complex portfolios over 10- and 20-year periods.
Why are they so hard to buy?
The biggest knock against TD e-Series funds is how much of a pain it is to get them set up. The funds are called e-Series because you can only buy them online, but you can’t actually open the account online because the bank requires your signature. That means visiting a branch; where there’s a good chance the bank representatives won’t know how to help you set them up. See this recent thread posted in the Canadian Money Forum.
Speaking from personal experience, I didn’t have any trouble buying TD e-Series funds – but that may just be because I’m already a TD customer. You can read more about e-Series funds here, including how to set them up and what type of funds TD offers.
Final thoughts
I use e-Series funds for my kids’ RESP account and contribute $200 to one of the four funds each month. To rebalance the portfolio back into its original asset allocation, I’d simply buy more of the lower valued fund until it got back up to 25 percent.
The bottom line: TD e-Series funds are not just for beginners. If you want a simple, low-cost, broadly diversified portfolio, e-Series funds are definitely worth a look.
Last week I reviewed two personal finance books: Stop Over-Thinking Your Money! by Preet Banerjee, and The Moolala Guide To Rockin’ Your RRSP by Bruce Sellery. The authors were kind enough to each provide a copy of their book to give away to a lucky Boomer & Echo reader.
We had over 80 entries to the contest and we used a random number generator to choose the winners.
- Congratulations to Jennifer, whose comment left at 7:43 am last Friday won her a copy of Stop Over-Thinking Your Money!
- Congratulations to AnnieA, whose comment left at 9:51 am last Friday won her a copy of The Moolala Guide To Rockin’ Your RRSP
I’ll get in touch with both winners today by email and arrange to send over the books.
Monthly Review
It has been a great start to the year so far. We launched our fee-only financial planning service and have already taken on a few clients. We’ve recently been added to MoneySense magazine’s directory of fee-only planners.
My advice for folks to switch out of expensive, actively managed mutual funds and into low-cost index funds and ETFs got a response from the head of the mutual fund trade association. A special thanks to Rob Carrick, who highlighted my response in his daily personal finance round-up, and to FAIR Canada, who agreed with the simple math that cutting fees will increase returns.
Because Money
This week on the Because Money podcast we talked about the simplest way to build a low-cost, broadly diversified portfolio using TD e-series funds. We also touched on why ETFs haven’t been able to make up much ground on mutual funds when it comes to total assets invested.
Next week we’ll be discussing the merits of the Home Buyers’ Plan and the pros and cons of using your RRSP as a down payment for your first home.
Weekend Reading:
Here are my top 10 personal finance reads from around the web this week:
Dan Bortolotti revealed an interesting way to look at diversification. He built a periodic table that showed the returns of the seven individual asset classes in the Complete Couch Potato, as well as the returns for the whole portfolio. The results were surprising.
The Financial Post’s Melissa Leong used a fun video to explain why RRSPs are like social media and as deserving of your attention.
MoneySense shared the five things your mortgage broker isn’t telling you, including the fact that most brokers only negotiate with a handful of lenders – the ones who, you guessed it, pay them the most commission.
Go to Disneyland, or pay bank fees? That’s the easy choice that Jackson Middleton made as his family embarks on a 52-week money saving challenge. By consolidating their banking into one no-fee account, the Middleton’s will save over $500 this year.
Many parents are helping their kids buy a home these days and while it’s natural to want to give financial support, Rob Carrick warns of three potential pitfalls to consider before opening your wallet.
Dan is an accountant from Calgary who recently started a new blog called, Our Big Fat Wallet. He explains the basics of the first-time donor’s super credit, a beefed-up tax credit to encourage Canadians to give more to charity.
Mark Seed from My Own Advisor asks the million-dollar question: how much money do you need to retire well? He says the magic number is at least a million, maybe more.
A reader asked Mike Piper, of the Oblivious Investor blog, how often he calculates his portfolio’s rate of return. His answer: never.
A frugal lawyer explains how he reached $1M net-worth by the age of 34 in this post on the Million Dollar Journey blog.
Kyle from Young and Thrifty takes a look at ING Direct – soon to be Tangerine – to see what, if anything, has changed since the online bank was swallowed up by Scotia last year.
Have a great weekend, everyone!