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! 

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.

Promo of the Week:

One of the top no annual fee cash back cards on the market is Tangerine’s Money-Back Credit Card. Cardholders can earn 4 percent money-back on purchases in up to three categories for their first three months (2 percent thereafter), and 0.5 percent back on all other purchases.

Our partners at Credit Card Genius have a great promo offer for this card right now where you’ll get a $75 Amazon e-gift card on approval.

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!

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7 Comments

  1. Scott on December 7, 2019 at 4:16 pm

    Excellent piece. This is exactly what happened to me when seeking guidance for my widowed mother in laws portfolio from her banks CFP. They steered us toward high MER Bank mutual funds. I honestly don’t think they new any better and thought that was the right thing to do. I inquired about Vanguard purchases through the RBC branch in order to keep expenses at a minimum. They made it sound like it wasn’t possible for the RRIF and TFSA even though I’ve done it for the non registered account. We left confused. I look forward to your guidance through your Financial Planning Services.

  2. Dominique on December 7, 2019 at 5:52 pm

    How we remember the days with a financial advisor, when we mentioned ETF’s, he was sure scrambling to deter us from that possibility. Well we’re happy to report that for the last 7 years we have successfully managed all our portfolios ( 6 registered accounts) using mostly ETF’s with some help from money sense( magazine). Sure we’ve made some errors, but with very little fees. I would say the most difficult part was opening an account. Anyone can do this, we just wished we had done it sooner. We have all our accounts with I-Trade and for the most part it has been very positive.

  3. It's Common Sense Really on December 7, 2019 at 7:50 pm

    This article is hilarious. There are plenty of actively managed mutual funds out there that provide plenty of value for their fees. Mark Schmels funds at fidelity are an easy example (look up the returns yourself so you can actually learn from looking up real data). Other great companies are Edgepoint and Capital group.

    There is plenty of hard data and evidence which shows that while do it yourself investors save themselves fees (those questrade ads are meant to target idiots), they realize much lower returns than the markets, mainly due to doing stupid things, selling at the wrong time, buying at the wrong time, following fads and generally having no f’n clue what they are doing.

    Are you disciplined? Do you exercise? Eat healthy? The simple shit? The average person can’t do very many technical things, oftentimes acting from hearsay or the stupid lessons that have been passed on from previous generations, simply for some odd form of tradition (“I don’t believe in RRSPs”).

    The truth is wealthy people don’t do their own investing. They pay for professional advice, and they laugh at everyone else because they know you get what you pay for in life. But hey, Jimbo, keep playing Lotto Max and taking care of your own investments (what did you do in 2009?)… After all everyone has a cousin whose friend won the lotto right? Why can’t you?

  4. John Wilson on December 7, 2019 at 11:26 pm

    Having worked in the industry I would only say that there were many advisors who lined their own pockets and generally did not always give their clients the best advice.
    In today’s world there is no need to pay 2-3% mutual fund mer’s when etfs can do the job for 1/10 the cost. For inexperienced investors they can either choose broad based global etfs or have their portfolios set up and monitored by robo advisors at modest costs .
    Finally, to be fair , there are some principled advisors out there who do take their responsibilities to their clients seriously, while still recommending mutual funds. It’s just a pity that more members of the public are not sufficiently financially literate

    • jeff on December 8, 2019 at 8:57 am

      When I started investing with a large banks wealth management team around 10 years ago they charged me 2% on portfolio. Now many years later and a much larger portfolio they are still charging the same . I have been approached by many investors over the years but just a couple of months ago I decided to go for a meeting . As it turns out this large independent company will do more for me at only 1% of balance. Within 5 years I will start my withdrawals and I have RRSP , Lira and retained earnings plus non registered investments so I think I will need some professional help but at half the cost I must move my investments .

  5. Maria @ Handful of Thoughts on December 8, 2019 at 7:10 am

    Our current advisor does earn a commission on products that we invest with him but he is the first to tell us when and how we can do things on our own. We know for a fact that he is working for the pleasure of it and not because he needs to to put food on the table. So then why do we work with him? He offers great advice and has access to private equity funds we could not access on our own. That being said he manages only a fraction of our investment portfolio. We do also have our own accounts with Questrade and invest in real estate. Overall we feel confident in our investments.

  6. Gerald on December 8, 2019 at 12:55 pm

    I’m thrilled with my returns at Mawer. I can sleep well at night knowing that the fees are low and the returns are significant. I appreciate the early learning I experienced from the advisors. But where are the Industrial Growth type funds now.

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