Weekend Reading: Pitfalls of Leaving Your Advisor Edition

A commonly held view in the do-it-yourself investing community is that to maximize returns one simply needs to cut ties with their expensive advisor and manage their own portfolio.

On the surface, this makes sense. Costs matter, so if you can slash your investment fees from 2% down to 0.5% or lower your returns will improve by the same measure.

Let’s say you’re one of the millions of Canadians invested in a typical bank branch balanced fund (ex. RBC Select Balanced fund, or TD Comfort Balanced fund). The management expense ratio (MER) on that fund is about 2%, and the fund itself is invested in 60% global stocks and 40% global bonds.

This fund isn’t trying to do anything special, so while it’s considered “actively managed” in reality it closely tracks its benchmark index (a global balanced fund). The returns will then equal the benchmark, minus the 2% fee.

Now let’s say you have a lightbulb moment and realize these fees are costing you up to 33% of your returns (assuming a gross return of 6% before fees).

You decide to open up your own self-directed brokerage account, transfer your account, and invest in a balanced asset allocation ETF (ex. Vanguard’s VBAL or iShares’ XBAL). Your fees are now about 0.20% and you are still invested in largely the exact same portfolio of global stocks and bonds.

The result, in theory, should be an increase in returns of about 1.8% (the difference in fees that are staying in your portfolio rather than enriching your advisor, their bank employer, and the mutual fund manager).

Whether you get those returns is another matter.

One, you need to become an emotionless robot when it comes to your portfolio. When markets drop, like they’re prone to do from time-to-time, you need to resist the urge to do something.

If you’re tempted to hit the sell button every time the market reacts to some bad news, you’re not going to capture those returns.

Similarly, you might fall victim to investing FOMO. That’s when you see higher returns in another investment and get the urge to abandon your sensible balanced portfolio to chase those returns. 

This could manifest in global equity investors wanting to switch to only US stocks, or US stock investors to switch to tech stocks, or tech stock investors to switch to bitcoin. The temptation is real, and when you’re in control of your own investments it’s easy to get distracted and start dabbling in individual stocks and funds.

Let me be clear. It’s extremely unlikely that you’re going to outperform your old bank managed mutual fund if you can’t stay in your seat with a similar lower cost portfolio. Panic selling, or return chasing, will almost certainly lead to worse outcomes.

Be an emotionless robot.

Another option is to take your brother-in-law’s advice and move to a boutique investment manager who will invest your portfolio in a mix of stocks and funds that the manager thinks will outperform the market. Surely you’ll beat the bank managed fund’s returns with this approach, right?

Not so fast.

Now you have an advisor charging similarly high fees AND making discretionary trades in your portfolio. That’s a poor combination to begin with. Add an element of untrustworthiness – just take a look at this 59 page list of unpaid fines from advisors who misappropriated funds or failed to act with due diligence – and this could be a recipe for disaster.

Say what you want about the banks and the high fees they charge for what amounts to a closet index fund, you’re less likely to incur these types of shenanigans with a bank managed fund.

Finally, even if you make the successful transition to DIY investor and manage your portfolio like an emotionless robot, you still have lost access to professional advice (whether that advice was any good in the first place is another story).

Almost everyone can use financial advice at some point in their lives. That’s why pairing low cost DIY investing in index funds with on-demand financial advice from an advice-only planner at key life stages can lead to better financial outcomes.

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Weekend Reading:

This former financial services executive is boating, re-qualifying as a lifeguard and learning to operate VHF radio in retirement.

Michael James on Money reviews the latest edition of Fred Vettese’s Retirement Income for Life.

Humble Dollar founder Jonathan Clements was given a year to live, and he’s determined to make the most of his remaining time.

A Wealth of Common Sense blogger Ben Carlson explains why introducing politics into your investment process is toxic to your portfolio:

“Every president in modern economic history has overseen drawdowns in the stock market.”

Ben Felix writes that despite some incredible success stories, trading options has generally been a disaster for retail investors.

How big of a return should you expect from your investments? Here’s why it may be less than you think.

Here’s a MoneySense primer on withdrawing from RESPs. Worth a read.

What if your child is nearly done University but still has a balance in their RESP? Mark Walhout has you covered:

Ben Felix again on why investors seek a narrative when stock markets crash (the Yen carry trade, anyone?). <–G&M subs

The ‘tax-free trap’: How a simple phrase skews Canadians’ savings choices:

“The sweet allure of “tax-free” in a title suggests governments should avoid choosing names for tax-sheltered savings plans that contain a heuristic cue, whether it be favourable or unfavourable.”

Finally, here’s Of Dollars and Data blogger Nick Maggiulli on how long stocks can underperform.

Have a great weekend, everyone!