A client is moving her portfolio to the robo-advisor Wealthsimple, where she will save a minimum of $5,000 in annual fees. Her former advisor is not happy about this, as you’d expect, and sent an email filled with all the reasons why she’d be better off staying invested in his actively managed mutual funds.
Most advisors have a list of rebuttals, a playbook if you will, to send clients when they start asking about index funds and lower fees. These counter-arguments sound great but keep in mind they’re coming from someone whose advice is tied to a percentage of your assets, and the anecdotal stories don’t actually hold up to empirical evidence.
Here’s why your advisor doesn’t like index funds:
- Index funds are risky. “With an index fund you buy the entire market and have no protection in a downturn. When the index goes down, so do your returns.”
- Index funds own every company, even the bad ones. “The index is filled with a lot of bad companies. An active manager can select the good ones and filter out the bad.”
- Index funds don’t beat the market. “Why settle for average returns with index funds when an active manager can find an edge and outperform the market?”
- Index funds are complicated. “You don’t perform your own dental work. What makes you think you can manage your own investment portfolio?”
- Cheaper isn’t always better. “Good advice costs money, and you get what you pay for. You wouldn’t buy the cheapest pair of shoes or stay at the cheapest Mexican beach resort. Why would you want the cheapest investments?”
I’m sure you’ve heard some version of these arguments if you’ve ever left an advisor. They’re meant to discredit the notion that a low cost portfolio of globally diversified index funds is more likely to lead to successful outcomes than an active investment strategy (after costs).
The best defence against these rebuttals is to arm yourself with enough knowledge and information to fight back. Luckily, PWL Capital’s Ben Felix has you covered with this video that tackles common reasons to avoid index funds:
This Week’s Recap:
On Thursday I explained why I don’t prioritize paying off my mortgage.
Over on the Young & Thrifty blog I wrote 2,200 words on the best ETFs for young Canadian investors.
Is the American Express Platinum Card worth the $699 annual fee? The answer might surprise you.
Promo of the Week:
I’m still impressed with KOHO, the no-fee, pre-paid, and reloadable VISA card and full-service account on your phone. Join KOHO and use the referral code BOOMECHO to get up to $60 ($20 when you make your first purchase, and an additional $40 when you add a direct deposit (payroll, government cheque, etc.).
KOHO recently added Apple Pay, so you don’t even need to carry the card around. Just a handy app that’s perfect to manage your miscellaneous monthly spending. Check it out!
Nick Magguilli nailed it with this piece – the problem with most financial advice:
“Many financial commentators/bloggers provide personal finance advice based on their own experiences, which are typically outside the norm. The exceptions become the rule and then personal finance becomes a bit too…personal.”
Long time Wall Street Journal columnist Jason Zweig dispels the myth of “dumb money”.
The Oracle of Omaha Warren Buffett on why he’s having more fun than any 88-year-old in the world.
Before you read up on another millionaire’s morning routine, this study shows that rich guys are most likely to have no idea what they’re talking about.
Will you blow your tax refund on something fun? Blame it on mental accounting. <—Awesome read
Rob Carrick thinks people are spending too much money on vehicles these days and shares some financial rules he follows when buying a car.
Curious to try one of those meal kit coupons from HelloFresh and the like? Global News tried four of the meal kit services and did an incredibly in-depth review of them here.
Erica Alini explains why the gig economy is making cash flow management a nearly impossible task.
What to look for when booking a hotel? Travel blogger Barry Choi has you covered.
Oooh boy. The comments section should be fun on this one. A contrarian argues against building wealth and creating income through dividend stocks.
Mark Seed explains why he doesn’t invest in Canadian dividend ETFs. I agree, if it’s the dividends you’re after you can arguably build your own portfolio of dividend stocks.
Des Odjick gives you nine actionable ways to prepare for a recession without becoming a doomsday market timer.
Frugal Trader shares his plan to withdraw from his accounts to fund early retirement.
Finally, Helaine Olen asks why do we believe Americans spend too much money on coffee and avocado toast? Good question.
Have a great weekend, everyone!