I love sending readers and clients on a mission to test their financial advisor. I get them to ask about lower cost portfolio options such as index mutual funds or ETFs. The responses are typically hilarious – so much that I wrote an entire post on the sh!t my advisor says.
A reader I’ll call Michelle emailed me about a recent conversation with her advisor about switching to ETFs.
Hello Robb, I love your articles. Thank you!
I spoke to my advisor about switching to a low cost ETF strategy for my RRSP. She told me there can be liquidity issues with ETFs and that she always sells them with limit orders and it can take time. Is this true? I own one with CI First Asset that she recommended.
Also, she was trying to scare me that I’d be responsible for ensuring I drew down my RRSP properly, implying this was a difficult task that I might not be able to manage. I will have to start drawing down in 10 years.
Your thoughts would be much appreciated.
Michelle’s advisor is right in that limit orders are useful when buying and selling ETFs. That’s because the liquidity of an ETF is best measured by its bid-ask spread. The smaller the spread, the more liquid the ETF. Bid-ask spreads on large, liquid markets like the S&P 500 will be very tight at all times. Spreads will be wider in less liquid, more “niche” exposure ETFs.
Stocks with higher trading volume tend to be more liquid. But an ETFs liquidity reflects the liquidity of the underlying stocks or bonds it holds.
When in doubt, avoid trading too close to the market’s open or close, and always use a limit orders. Stick to broad-market ETFs. Look for all-in-one solutions like Vanguard’s VBAL, VGRO, or VEQT. It’s never been easier to be a do-it-yourself investor.
The advisor’s other comment – about Michelle drawing down her ETF portfolio – is nonsense. First of all, retirement is 10 years away. Why stay in expensive, actively managed mutual funds for the next decade on the assumption that Michelle’s advisor will do a good job assisting in the portfolio drawdown at that time?
Yes, retirement withdrawals can be complicated, and many investors will need guidance. But Michelle can pay for that guidance when the time comes, rather than overpaying for advice through product fees today. Or, she can take control of her DIY portfolio and follow a total return strategy to generate retirement income. Or, she can switch to a robo-advisor who can assist in portfolio withdrawals for a fraction of the cost of a full-service advisor.
There are plenty of reasons why commission-based advisors want to prevent their clients from switching to low cost index funds and ETFs. The most obvious is that actively managed mutual funds simply pay more commission to the fund dealer and advisor.
If we believe that, then it’s easy to paint commission-based advisors as devious and evil. But a recent paper titled, ‘The Misguided Beliefs of Financial Advisors‘ suggested that most advisors actually mean well, they just simply don’t know any better.
“Advisors give poor advice precisely because they have misguided beliefs. They recommend frequent trading and expensive, actively managed products because they believe active management, even after commissions, dominates passive management. Indeed, they hold the same investments that they recommend.”
If you work with an advisor at a bank or investment firm, don’t be afraid to challenge or question their advice, especially when it comes to fees on the products they recommend. For every high-fee, actively managed product there is a low-fee, passively managed equivalent that is most likely better suited for your portfolio. Insist on the low fee option.
This Week’s Recap:
This week I wrote about our tendency to kick debt down the road.
From the archives: How to create your own financial plan with these eight steps.
Over on Rewards Cards Canada: What’s the difference between Air Miles Cash Miles vs. Dream Miles?
Friday was my last official day in the office – hopefully forever!
Quit my job to blog full time. Am I retired?
— Boomer and Echo (@BoomerandEcho) December 7, 2019
Finally, a quick update on life insurance as a few readers asked if I had the option to convert my group insurance to a private policy. It turns out I can, but only to a maximum of $200,000. I’m happy with my decision to go with a new $600,000 15-year term life policy.
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This Week’s Recap:
An economist tackles a big question – will the stock market crash in 2020?
A Wealth of Common Sense blogger Ben Carlson explains why bull markets last much longer than you think.
Rob Carrick shares some lessons from your fellow Canadians on how to be successful with TFSAs.
Mr. Carrick also shares an important piece on how investment firms are ducking responsibility for bad advice that costs clients:
“The investment industry talks endlessly about the value of the advice it provides. But no loophole goes unexplored in finding ways to avoid taking responsibility when that advice goes wrong.”
PWL Capital’s Ben Felix is back with his latest Common Sense Investing video about investing in IPOs:
Nick Magguilli (Of Dollars and Data) shares his psychological tricks for worry-free spending.
Michael James discovered an error in the rules-based spreadsheet he designed to manage his portfolio and now wrestles with a decision to fix his mistake.
The most dangerous of all people is the fool who thinks he is brilliant. Jason Zweig shares his own experience with overconfidence.
Million Dollar Journey compares bond ETFs, GICs, and high interest savings accounts in this fixed income investing summary.
Finally, travel expert Barry Choi shares eight hotel booking tips to ensure you get the best value when booking hotels online.
Have a great weekend, everyone!