Author Topic: Trying to decide if my financial advisor is worth it  (Read 1730 times)

RST

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Trying to decide if my financial advisor is worth it
« on: January 30, 2022, 11:28:54 AM »
I'm not sure how well this post will go over with the DIY crowd, but here goes :-)

First, some background. I graduated from grad school without any debt and started working at a big tech company. I've been there for a little over a decade, diligently saved a substantial portion of my money, and suddenly realized that I have a hefty nest egg at age 35: just shy of $2M.

I first started investing using the Couch Potato approach, eventually sough fee-for-advice from an independent financial advisor (happy to share if allowed), and eventually transitioned to full management with a 1% management fee. I think this drops to 0.5% at $2M AUM, but I need to check.

That management fee is a lot of money. In fact it would be largest annual expense, if I paid the minimum on my mortgage. I'm curious as to what others think about having a financial advisor.

There are a few key benefits in my mind, but I want to hear what others think:
  • Favourable exchange rates. A significant amount of my pay is in USD so this helps quite a bit.
  • Tax efficiency. Between RRSPs, TFSAs, RESPs, unregistered accounts, dividends, and capital gains, there is a lot to learn. Worse, it changes often and getting it wrong can cost a lot, decades down the line. Also it's super boring (not a great reason, but I personally don't want to spend my spare time learning about it and keeping up)
  • Correctness. Early in my DIY financial management, I made a fairly costly error trying to run Norbert's Gambit. With larger assets these types of mistakes are even costlier.
  • Advice on other financial tools. For example HELOCs, estates, trust funds, insurance, wills, etc.
  • Access to different funds. While they take a "couch potato" approach, they still have access to different funds that I, a layman, does not. In theory the return from those funds partially offsets the fees.
  • Fees are tax deductible, so I get some of it back.

I keep flip flopping on this, so I'd like to hear the counter argument. Obviously earning an extra 0.5-1.0% would be nice, but I don't know if I would actually get that since there are so many other considerations.

Psychstache

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Re: Trying to decide if my financial advisor is worth it
« Reply #1 on: January 30, 2022, 12:21:30 PM »
but I want to hear what others think:

Not Canadian, but I have some general thoughts.


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Favourable exchange rates. A significant amount of my pay is in USD so this helps quite a bit.

Does it help to the tune of 10s of thousands of dollars per year? Because that is what you are paying. I don't know the answer to this, but I highly doubt the delta between the 'normal' exchange rate and your person's 'preferential' rate are enough to consider this savings to be worthwhile.

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Tax efficiency. Between RRSPs, TFSAs, RESPs, unregistered accounts, dividends, and capital gains, there is a lot to learn. Worse, it changes often and getting it wrong can cost a lot, decades down the line. Also it's super boring (not a great reason, but I personally don't want to spend my spare time learning about it and keeping up)

This just seems like straight up laziness, which you do kind of admit. The US also has goofy, complex, and sometimes shifting rules on how different accounts and regulations work, but it is not a significant barrier for someone of your ability and intellect (I am using the proxy of making millions of dollars at your age as a proxy for those).

If someone told you that they had to eat drive through and restaurant food all the time because learning all the rules and tricks of cooking took a lot of time, how would you feel about that explanation?

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Correctness. Early in my DIY financial management, I made a fairly costly error trying to run Norbert's Gambit. With larger assets these types of mistakes are even costlier.

You have $2M at age 35 and are presumably the massive firehose of cash is still turned on (you are presumably still working for said large tech company) you should probably not worrying about the attempts to engage in currency conversion shenigans. In this example from the Canadian Finance Wiki site (https://www.finiki.org/wiki/Norbert%27s_gambit), a successful gambit on $120k Canadian will net you $700. So are you going to continue to pay $10-20k+ in AUM fees to have someone execute a maneuver that will make you a fraction of that every year?

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Advice on other financial tools. For example HELOCs, estates, trust funds, insurance, wills, etc.

Again, your paying $10-20k for this advice that you may or may not need. I think you keep trying to find these value add pieces, but you don't need them. When you need advice, find a lawyer or advisor and pay them an hour of  their time for the advice and move forward.

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Access to different funds. While they take a "couch potato" approach, they still have access to different funds that I, a layman, does not. In theory the return from those funds partially offsets the fees.

The key words here are "in theory". Most research ahs shown time and again that this is simply untrue and they are more likely to lose you money (often even before considering fees) compared to straightforward indexing.

  • Fees are tax deductible, so I get some of it back.

Paying $100 for something so you can deduct $20 on your taxes is not a recipe for success.

You seem to perceive some tangible and intangible benefits from this. Obviously I disagree, but I think you might find it worthwhile to calculate those tangible benefits (currency exchange delta, tax break) and then figure out if the intangibles are worth the remaining costs to you.

clifp

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Re: Trying to decide if my financial advisor is worth it
« Reply #2 on: January 30, 2022, 12:43:59 PM »
As I've discovered, in some case painfully, while on the surface the alphabet soup Canadian and American saving plans sound similar, there are actually numerous important differences.
Since, forums like Mr. Mustache is very much US centric, I suspect it is harder to learn/get good DIY advice if you are Canadian.  I had to Google Norbet's gambit for instance.

Anyway, I bit more sympathetic for a Canadian paying a 1% for financial advice than an American.

That said given your background, and your nest egg, it is clear you can and probably do understand this stuff.

Step one is to benchmark, their performance vs couch potatoes.  Ignore what they say about different risk profiles, diversification,blah blah.
If their life-time performance  trails couch potatoes by more than 1%, drop them. They aren't doing what they promised
If it exceeds couch potatoes and you want to keep them by all means do so
If it is between 0 and 1% below coach potatoes, post the results and people can weigh in.

Now personally, I think 50% bonds for someone your age, and earning potential, is way too high. So I wouldn't be surprised if they have you in much higher equity position.
So if you are at 70% equities and 30% bonds the correct benchmark is 70% of Vanguard total stock market and 30% vanguard total bond market.

As for it being boring, fair enough.  Still for $20K a year, I think you be better off, going to one of the fine Canadian strip clubs, and getting a lap dance while learning about RRSP etc.

Mighty Eyebrows

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Re: Trying to decide if my financial advisor is worth it
« Reply #3 on: February 01, 2022, 01:56:21 AM »
There are a few key benefits in my mind, but I want to hear what others think:
  • Favourable exchange rates. A significant amount of my pay is in USD so this helps quite a bit.
  • Tax efficiency. Between RRSPs, TFSAs, RESPs, unregistered accounts, dividends, and capital gains, there is a lot to learn. Worse, it changes often and getting it wrong can cost a lot, decades down the line. Also it's super boring (not a great reason, but I personally don't want to spend my spare time learning about it and keeping up)
  • Correctness. Early in my DIY financial management, I made a fairly costly error trying to run Norbert's Gambit. With larger assets these types of mistakes are even costlier.
  • Advice on other financial tools. For example HELOCs, estates, trust funds, insurance, wills, etc.
  • Access to different funds. While they take a "couch potato" approach, they still have access to different funds that I, a layman, does not. In theory the return from those funds partially offsets the fees.
  • Fees are tax deductible, so I get some of it back.

Advice and planning can be useful, but you have to figure out if you are really getting value for money. The fee at 0.5% of 2M is $10k/yr. Yes, every year. And the year after that, too! That is more than many small companies pay their accountant and lawyer combined.

You should be comparing it to something like a basic XGRO "everywhere" portfolio at 0.20% MER. An advisor might be able to shave 0.10% MER off by breaking XGRO into multiple ETFs, and perhaps get a smidge more back in foreign tax withholdings by using US ETFs in your RRSP. However, that only gets you a small portion of your fees back. Even fancy "factor" mutual funds from people like DFA are somewhat of a crapshoot as to whether you will make back more than their higher MERs over your personal time horizon (yes, I think factors work over long horizons, but what works for large pension funds may not be relevant to individual investors).

If your advisor is doing a lot of complicated estate planning and retirement drawdown tax planning, it may be worth it. However, for justification, even good advisors like PWL capital speak a big game about "psychological" management of clients; i.e. convincing them not to sell in a down market. If you need an advisor to keep you from selling at dumb times then, yes, they may have earned all their fees. If you are not that kind of person, and you aren't doing complicated tax planning, then I would challenge them to justify their value.


cool7hand

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Re: Trying to decide if my financial advisor is worth it
« Reply #4 on: February 01, 2022, 08:23:31 AM »
Is there any chance that this is a thinly-veiled solicitation?

FLBiker

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Re: Trying to decide if my financial advisor is worth it
« Reply #5 on: February 01, 2022, 08:24:52 AM »
We're in a (sort of) similar boat.  I'm older, with a similar amount of investments, and I live in Canada (although I'm a US citizen).  I think you're right that you're unlikely to get support for paying an AUM fee on this forum.  And one note on your fee -- my guess would be that your fee would only drop to .5% for the amount of your investments beyond $2M, and you'd still be paying 1% for the first $2M.  That's how it is typically structured.

As a DIY investor, a US citizen, and a Canadian permanent resident, I have had to learn about the US system, the Canadian system, and crossborder implications.  At the same time, I recognize that I find this stuff really interesting, and I do a lot of my learning while I'm getting paid to work my "real" job. :)  I don't think Canada is particularly complicated, and there are lots of good resources out there (PM me if you're looking for some).  For me, the crossborder angle adds a whole other wrinkle, but other than having to do currency exchanges that doesn't seem like an issue for you. 

I'm a big believer in the fact that no one is as motivated to take as good care of my assets as I am.  At the same time, the same could be said for DIY house projects, and I certainly outsource more of that than some of the folks on here, so you've got to find what works for you.

  • Favourable exchange rates. A significant amount of my pay is in USD so this helps quite a bit.
  • Tax efficiency. Between RRSPs, TFSAs, RESPs, unregistered accounts, dividends, and capital gains, there is a lot to learn. Worse, it changes often and getting it wrong can cost a lot, decades down the line. Also it's super boring (not a great reason, but I personally don't want to spend my spare time learning about it and keeping up)
  • Correctness. Early in my DIY financial management, I made a fairly costly error trying to run Norbert's Gambit. With larger assets these types of mistakes are even costlier.
  • Advice on other financial tools. For example HELOCs, estates, trust funds, insurance, wills, etc.
  • Access to different funds. While they take a "couch potato" approach, they still have access to different funds that I, a layman, does not. In theory the return from those funds partially offsets the fees.
  • Fees are tax deductible, so I get some of it back.

1. Exchange rate - I've done well enough with Wise (formerly Transferwise) and there are better ways (Norbert's Gambit being one of them) if you really want to minimize the fees.  Personally, I like the convenience of Wise (and I was paid in USD until last August).
2. Tax efficiency - With your earnings, it should be easy enough to max out both TFSA and RRSP.  Personally, I put the things that I expect to gain the most (i.e. stocks) in my TFSA.  And because Canada taxes Canadian dividends favourably, I might hold some of these in my non-registered account.  At the same time, this stuff is VERY secondary to simply investing.  If you don't really want to think about it and just hold the same asset allocation in all your accounts, the differences over time will be pretty negligible.
3. Correctness - It's true, you have to learn some stuff.  Norbert's Gambit is (IMO) kind of a pain, though, and totally not necessary.  And the rest of it is pretty straightforward.  There may be times (an inheritance, moving to another country, nearing retirement) where talking to an advisor with a particular set of questions might make sense, but in my experience, the vast majority of my investing life has been more or less on autopilot and it would hurt my soul to pay $20,000 per year for that.
4. HELOCs are easy, and estate planning will ultimately have to involve a lawyer, and they should be able to tell you about all that stuff.  We just engaged a lawyer to put together a crossborder estate plan for us, and it cost $1600.
5. Theoretically advisors could have funds that will do better, but they could also do worse.  I don't worry about this at all.  There are plenty of great funds available to us laypeople, and you only need a couple anyways.
6. Fees being tax deductible make the advice cheaper, but only you can decide if it's a price you're willing to pay.

Personally, with a wife, a kid and a similar nest egg, I'm getting close to pulling the trigger on retirement.  If I had to spend an additional $20,000 per year on a financial advisor, I'd have to delay my retirement significantly.

Studies have shown that the real value add of advisors is behavioral -- they can stop you from panicking when the markets tank, or jumping on something trendy (at least, the good ones would theoretically do this).  It doesn't seem like you have any problem with this, though, so for you my guess is that they don't really add any value.  Regardless, you're in great shape so I wouldn't worry overly much about it.

Raj

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Re: Trying to decide if my financial advisor is worth it
« Reply #6 on: February 02, 2022, 08:46:54 AM »
Personally I have a far smaller amount of money saved right now, but in general I agree with the others.

Even assuming you don't want to have to deal with the complicated taxes and rules that may or may not apply, it'd be far cheaper to just approach an Accountant and hire them to deal with part of it, rather than having to pay 20K  to your investor. 

There aren't as good Betterment alternatives in Canada, and it seems like Vanguard is likely the best option here, but even with that being the case, if you really wanted a lot of the various benefits you mentioned that your investor gives you, there are places like WealthSimple, which can help you capture a lot of those benefits at a smaller cost.

As you said it's by far the largest expense that you have, and will defer your retirement by quite a bit, even assuming you love your job and want to continue working, I'd still personally say that you should free the 20K yearly to go into other things.

Even assuming you don't need the extra money to invest, you could always look at starting your own charitable donations at that point.

Still in the end it is your life, if you'd really rather leave the 1% to your investment team, than we won't be able to convince you.

RST

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Re: Trying to decide if my financial advisor is worth it
« Reply #7 on: February 03, 2022, 09:37:58 AM »
Thanks everyone for the feedback! This is not a solicitation in the slightest. You're all right that I missed the forest for the trees and need bail on them ASAP. I'm super frustrated with myself, but am thankful I wasn't with them too long so it wasn't too much of a loss.

 I've spent the last few days getting everything in order so I can move to DIY. Given the magnitude of the taxable assets, I'm going to find a fee-only advisor who who knows the nuances of tax law.

erp

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Re: Trying to decide if my financial advisor is worth it
« Reply #8 on: February 03, 2022, 09:42:20 AM »
I'm not opposed to the idea of paying for service at all, even if there are cheaper options (because ultimately, you're buying peace of mind, or risk mitigation, or even just offloading something annoying). That said, 1% makes me cringe, it's a pretty high fee for what sounds like a relatively sparse offering of services.

My personal experiences in the relatively low wealth Canadian tax environment (say, under 2 million) seem to suggest that there's not really *that* much you can do for tax optimization unless you're also running a company or consultancy. People make a lot of hay about the low tax on eligible dividends, but it seems at least somewhat overblown on a portfolio-wide basis. The US seems to have a very different tax environment, and things like tax loss harvesting might still be a good idea at larger wealth numbers in Canada.

Although there are pretty mixed reactions to the following link on the forums, I'd recommend this summary from Joshua Kennon's blog (full disclaimer, I don't know him at all, but he is an asset manager of some kind - that said I find his writing insightful): https://www.joshuakennon.com/thoughts-starting-global-asset-management-firm/

He carves out a few different categories of wealth management, some of which sound like overt scams, and some of which are offering real value. There are *more* scams, and they're more common among retail investors - so the regular advice to dump your financial advisor makes a lot of sense to plebs like me. However, there seems to exist some sort of wealth threshold where the services you're looking for (ie. estate and tax planning) suddenly matter way more than an extra percent or two of gains.

tl;dr - right now, you can probably do it on your own and come out ahead. That might not always be true, because you're accumulating wealth at a truly stupendous rate. Your biggest drivers now should be to grow prudently, enjoy life/do good, and avoid wipe out risks - I don't know that your advisor supports those goals, but if they do, then it's a reasonable expense. I see a fee-only advisor for a 'check up' every few years to make sure I'm aware of new regulatory changes and to get a second opinion - it costs about $400/visit. If you'd like I'll provide the info.

Dee18

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Re: Trying to decide if my financial advisor is worth it
« Reply #9 on: February 03, 2022, 03:37:04 PM »
You don't mention why you switched from a fee only advisor paid by the hour to a management fee.  I know I have a great financial advisor, partly because he told me that while he would of course like the management fee, I seemed fully capable of doing the admin work myself and I would save a lot of money.  There were just 2 funds that he uses that I could not access, as they were limited to professionals, but he identified good substitutes.

afulldeck

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Re: Trying to decide if my financial advisor is worth it
« Reply #10 on: February 21, 2022, 02:52:21 PM »
The only reason I see for having a financial advisor is if they handle behavior issues. But at 35 with 2M you seem to have yourself under control already. Buy XEQT, XGRO, XBAL depending on your taste for risk and forget about it.