Our financial adviser's argument for active fund management

[elaine amj]

We have recently transferred some of our money out of some investments with a couple of different companies. One financial adviser emailed to ask why and we said it was to save on fees. This was the response:

I do believe there is a place for index products for sure.
However, if a fund manager beats the index by 2%  net of fees consistently, I would argue you stand to lose more in a lower fee index product. The comparison is off because the index product does not have the ability to think, thus the low fee.

But I guess my question is if a management team is beating the index is the only way it is worth buying is if they do it for free? I know of no other profession that would work for free.

So again if I am ahead of the market, and have had lower volatility I will be ahead of the index even though those who bought it paid less in fees for a lower. Like I said there is a place for both, but the real consideration should be what did the index or the manager net me over the period, and that is why looking at fees only does not correctly reflect the whole picture.

If you did the same calculation only used the index and a manager who beat the index then the index fund could cost you just as much or more in unrealized gain.


Help - it was hard to convince my husband to move our investments to start with and he's not entirely convinced about a passive ETF strategy. I think he's feeling swayed....

[Louisville]

We have recently transferred some of our money out of some investments with a couple of different companies. One financial adviser emailed to ask why and we said it was to save on fees. This was the response:

I do believe there is a place for index products for sure.
However, if a fund manager beats the index by 2%  net of fees consistently, I would argue you stand to lose more in a lower fee index product. The comparison is off because the index product does not have the ability to think, thus the low fee.

But I guess my question is if a management team is beating the index is the only way it is worth buying is if they do it for free? I know of no other profession that would work for free.

So again if I am ahead of the market, and have had lower volatility I will be ahead of the index even though those who bought it paid less in fees for a lower. Like I said there is a place for both, but the real consideration should be what did the index or the manager net me over the period, and that is why looking at fees only does not correctly reflect the whole picture.

If you did the same calculation only used the index and a manager who beat the index then the index fund could cost you just as much or more in unrealized gain.


Help - it was hard to convince my husband to move our investments to start with and he's not entirely convinced about a passive ETF strategy. I think he's feeling swayed....

[see bolded]
They don't. The data, which I'm going to be lazy and leave to someone else to cite, shows that actively managed funds underperform a broader market something like 80% of the time. And the longer the period you measure, the worse it gets.

[infogoon]

Exactly. There are occasionally fund managers who beat the market for a few years at a time. None have ever done it long-term.

[FrugalFan]

The problem is that 80-90% of managers WILL NOT beat the market. And the average percentage that managers beat the market by, for those few that do beat it, is lower than the average amount the managers underperform the market by, for the majority that underperform. I would prefer to know that I will for sure get what the market gives, versus having a small chance (less than 20%) of beating the market and a much larger chance (80%) of underperforming the market.

Did you look at your actual earnings? Does this manager beat the market or no? (even if he did I would not change my position on this because eventually the odds are against him).

[nereo]

the obvious and immediate answer is that the overwhelming majority of managed funds do not beat index funds after fees over 5+ year periods.  The last time I looked, it was fewer than 20%.  Over 10 year periods the % of funds who have successfully beat the SP500 is vanishingly small (less than 5% I believe).

If your financial advisor is putting up this argument, counter by asking him/her to provide the returns after fees for the previous 5 year period.  Almost no financial firm will do this because almost none beat their averages.   For bonus points, have him/her provide their volatility score during that period and compare it with your index of choice.

From there the typical arguments go towards throwing out vague but unsettling terms like "down-side risk management" and "tax-loss harvesting".  The former is largely gibberish (it just sounds good) and hte latter is useful only for people with large balances, and can be done with products already offered by Betterment, Vanguard, etc.

[elaine amj]

I like this.

I sent my husband a couple of news articles citing a couple of studies and basically saying that the guy is nuts if he is claiming he can beat the market consistently (especially when taking the extra fees into account). Plus there's the fees to buy whatever funds the adviser is suggesting.

http://www.nytimes.com/2015/03/15/your-money/how-many-mutual-funds-routinely-rout-the-market-zero.html?_r=2

http://www.marketwatch.com/story/almost-no-one-can-beat-the-market-2013-10-25

The study documents that in painful detail. Barras, Scaillet and Wermers tracked 2,076 actively managed U.S. domestic equity mutual funds between 1976 and 2006. They found that after fees, three-quarters of the funds exhibited zero “alpha,” a fund’s excess return over a benchmark index. And 24% of the funds were run by unskilled managers (who had negative alpha, or value subtraction).
And — are you sitting down? Only 0.6% — you read that right, 0.6% — showed any true skill at beating the market consistently, “statistically indistinguishable from zero,” the three researchers concluded.

[Interest Compound]

We have recently transferred some of our money out of some investments with a couple of different companies. One financial adviser emailed to ask why and we said it was to save on fees. This was the response:

I do believe there is a place for index products for sure.
However, if a fund manager beats the index by 2%  net of fees consistently, I would argue you stand to lose more in a lower fee index product. The comparison is off because the index product does not have the ability to think, thus the low fee.

But I guess my question is if a management team is beating the index is the only way it is worth buying is if they do it for free? I know of no other profession that would work for free.

So again if I am ahead of the market, and have had lower volatility I will be ahead of the index even though those who bought it paid less in fees for a lower. Like I said there is a place for both, but the real consideration should be what did the index or the manager net me over the period, and that is why looking at fees only does not correctly reflect the whole picture.

If you did the same calculation only used the index and a manager who beat the index then the index fund could cost you just as much or more in unrealized gain.


Help - it was hard to convince my husband to move our investments to start with and he's not entirely convinced about a passive ETF strategy. I think he's feeling swayed....

I'll make it easy for you. Tell me what funds the adviser put you in, including how long you were in them, and I'll show you how well you did vs the index. Hopefully your portfolio stayed relatively consistent for at least a few years so we can get good data. Some advisers like to churn your portfolio, moving in and out of funds frequently so you're always in the "top performing" funds, but only after they moved up! Effectively selling low and buying high...but hey, it makes for a good backtesting chart so they can justify their fees :-P

[fattest_foot]

You should have your husband read the jlcollins Stock Series at http://jlcollinsnh.com/stock-series/

And if you haven't, you probably should as well.

If afterwards he still thinks a financial advisor is worth the cost, there's probably no convincing him otherwise.

[2lazy2retire]

Interesting that Vanguard's active funds do not even eclipse their index funds by all that much, details below but none close to 2%, especially over longer periods - say 10 years. Of course your "active guy" could be better at it than Vanguard;)

https://assetbuilder.com/knowledge-center/articles/do-vanguards-indexes-beat-their-own-actively-managed-funds

[bootyman]

I'll make it easy for you. Tell me what funds the adviser put you in, including how long you were in them, and I'll show you how well you did vs the index. Hopefully your portfolio stayed relatively consistent for at least a few years so we can get good data. Some advisers like to churn your portfolio, moving in and out of funds frequently so you're always in the "top performing" funds, but only after they moved up! Effectively selling low and buying high...but hey, it makes for a good backtesting chart so they can justify their fees :-P

THIS

[Vertical Mode]

Don't know if forum user "Dodge" is still around, but he often shows up in threads like this with tons of helpful graphs that illustrate what thousands of words cannot.

Active fund managers who can consistently beat the market are so rare that everyone knows who they are. Buffett. Ackman. Icahn. Tepper. Check Forbes list for the full accounting, but even these guys aren't perfect. In fact, I would venture that they beat the market precisely because they are "market makers" with enough clout to influence markets and shape their own outcomes.

Probability-wise, index funds and ETF's with minimal fees are most likely going to be your best bet. Warren Buffett has even said that for most investors, a low-cost index fund is likely to outperform most, if not all, alternatives, and there is significant mathematical basis for this being true (see Burton Malkiel's "Random Walk Down Wall Street"). If this advisor doesn't agree with the mathematical basis of indexing, or the operating principle behind why index funds work so well, I'd leave his ass in the rearview because he is blowing smoke to justify taking his cut.

That diatribe aside, financial advisors can be very helpful in ways not directly related to asset management. Fee-based/Fee-only advisors can help get you on the right path by looking at the whole picture and helping you plan - all angles of insurance coverage, tax-efficient drawdown strategy, setting up trusts, wills, estate planning, etc. Personally (and I get the sense that this attitude is common around here) I think the money/investing component is the easiest of all of the aforementioned to DIY, despite many brokerage firms' spin suggesting otherwise.

[Shane]

I like this.

I sent my husband a couple of news articles citing a couple of studies and basically saying that the guy is nuts if he is claiming he can beat the market consistently (especially when taking the extra fees into account). Plus there's the fees to buy whatever funds the adviser is suggesting.

http://www.nytimes.com/2015/03/15/your-money/how-many-mutual-funds-routinely-rout-the-market-zero.html?_r=2

http://www.marketwatch.com/story/almost-no-one-can-beat-the-market-2013-10-25

The study documents that in painful detail. Barras, Scaillet and Wermers tracked 2,076 actively managed U.S. domestic equity mutual funds between 1976 and 2006. They found that after fees, three-quarters of the funds exhibited zero “alpha,” a fund’s excess return over a benchmark index. And 24% of the funds were run by unskilled managers (who had negative alpha, or value subtraction).
And — are you sitting down? Only 0.6% — you read that right, 0.6% — showed any true skill at beating the market consistently, “statistically indistinguishable from zero,” the three researchers concluded.

See bold above.

Under no circumstances should you ever have to pay fees to get into a mutual fund. Any fund that charges fees, aka a load, to get in or out of the fund is a rip off! The only reason for the fees is to compensate your "adviser" for putting you into the fund. It's like a kick back.

Try asking your adviser if he would buy a loaded mutual fund for his own investment portfolio? If he says yes, he's a liar!

Also, ask your "adviser," preferably in writing, if he has a "fiduciary responsibility" to always look out for your best interests. If so, ask him to put that in writing. Then sue him. Because there's no way recommending that a client buy a front-loaded mutual fund could be in her best interests!

You and your husband should run as fast as you can from this rip-off artist!

[trailrated]

Ask for a detailed breakdown of your funds since he invested them, then compare with index funds.

[Frugalman19]

The biggest question is, do you use the financial adviser for more than his money management? Does he help you with tax planning, estate planning, insurance reviews, all other financial planning etc?? If so, then the small fee you pay in management is probably worth his services. If all he does is re-balance your portfolio than just tell him to read "the quest for alpha" by Larry Swedroe. He cant beat the market consistently.

Being a financial advisor that does manage money for a fee, I do use a passive ETF strategy, and the advisory fee that we charge, is more for the financial planning aspect like mentioned above. It isnt to beat the market, coming from a professional who manages money, I can tell you, your financial adviser will not "beat" the market. What he might do, is save you money by giving you good financial advice.

My two cents from his side of the table. If he isnt a true financial planner, move on.

[Shane]

The biggest question is, do you use the financial adviser for more than his money management? Does he help you with tax planning, estate planning, insurance reviews, all other financial planning etc?? If so, then the small fee you pay in management is probably worth his services. If all he does is re-balance your portfolio than just tell him to read "the quest for alpha" by Larry Swedroe. He cant beat the market consistently.

Being a financial advisor that does manage money for a fee, I do use a passive ETF strategy, and the advisory fee that we charge, is more for the financial planning aspect like mentioned above. It isnt to beat the market, coming from a professional who manages money, I can tell you, your financial adviser will not "beat" the market. What he might do, is save you money by giving you good financial advice.

My two cents from his side of the table. If he isnt a true financial planner, move on.

It sounds like it's not just a "small fee" the OP and her husband are being charged by their adviser. She said that "there are fees to buy whatever funds the adviser is suggesting." This leads me to believe their adviser is putting them into loaded funds. If so, they're paying the front-end load to the mutual fund company (never a good idea), a yearly management fee to the mutual fund company, probably >1%, plus probably at least 1%/year to their adviser. This seems to be the norm in the financial planning industry.

It would be fine if a financial adviser charged clients an hourly fee, like an attorney, to give them advice. Even if the hourly rate were relatively high, it might be worth it if the adviser were good. But that doesn't seem to be the business model for the industry as a whole. Their model is to charge clients 1%+/year for the privilege of being directed into mutual funds with loads anywhere between 2-6%, just to get into the fund, and then the fund charges the clients another 1%+/year to under perform its index. It's insane, and I think it should be illegal for "advisers" to take advantage of their clients in this way.

[Vertical Mode]

The biggest question is, do you use the financial adviser for more than his money management? Does he help you with tax planning, estate planning, insurance reviews, all other financial planning etc?? If so, then the small fee you pay in management is probably worth his services. If all he does is re-balance your portfolio than just tell him to read "the quest for alpha" by Larry Swedroe. He cant beat the market consistently.

Being a financial advisor that does manage money for a fee, I do use a passive ETF strategy, and the advisory fee that we charge, is more for the financial planning aspect like mentioned above. It isnt to beat the market, coming from a professional who manages money, I can tell you, your financial adviser will not "beat" the market. What he might do, is save you money by giving you good financial advice.

My two cents from his side of the table. If he isnt a true financial planner, move on.

It sounds like it's not just a "small fee" the OP and her husband are being charged by their adviser. She said that "there are fees to buy whatever funds the adviser is suggesting." This leads me to believe their adviser is putting them into loaded funds. If so, they're paying the front-end load to the mutual fund company (never a good idea), a yearly management fee to the mutual fund company, probably >1%, plus probably at least 1%/year to their adviser. This seems to be the norm in the financial planning industry.

It would be fine if a financial adviser charged clients an hourly fee, like an attorney, to give them advice. Even if the hourly rate were relatively high, it might be worth it if the adviser were good. But that doesn't seem to be the business model for the industry as a whole. Their model is to charge clients 1%+/year for the privilege of being directed into mutual funds with loads anywhere between 2-6%, just to get into the fund, and then the fund charges the clients another 1%+/year to under perform its index. It's insane, and I think it should be illegal for "advisers" to take advantage of their clients in this way.

Holy shit! 6% loads exist?! I agree, that should be criminal. Seriously, FINRA should be put on notice about it.

I think I remember seeing in another thread awhile back (can't find it right this instant...) talk about fee-based/fee-only advisors being worth their salt in many instances. The key is whether the advisor does the ancillary things around your assets, as Awgolfer suggests. IMHO, this is where the real value of financial advisors comes into play, with their experience at putting together the whole picture. The value they add won't always be strictly numerical.

[elaine amj]

The biggest question is, do you use the financial adviser for more than his money management? Does he help you with tax planning, estate planning, insurance reviews, all other financial planning etc?? If so, then the small fee you pay in management is probably worth his services. If all he does is re-balance your portfolio than just tell him to read "the quest for alpha" by Larry Swedroe. He cant beat the market consistently.

Being a financial advisor that does manage money for a fee, I do use a passive ETF strategy, and the advisory fee that we charge, is more for the financial planning aspect like mentioned above. It isnt to beat the market, coming from a professional who manages money, I can tell you, your financial adviser will not "beat" the market. What he might do, is save you money by giving you good financial advice.

My two cents from his side of the table. If he isnt a true financial planner, move on.

I'd be fine paying for that type of advice too. But, no - we were just the usual basic investment stuff.

This particular adviser had us in about 8 different Fidelity B series funds.

It's a small independent firm in Canada - Sterling Mutuals.

[Frankies Girl]

http://www.pbs.org/wgbh/frontline/film/retirement-gamble/

This is pretty powerful and easy to follow about how fees eat away at your growth and why you shouldn't use high fee funds at all.

[mrpercentage]

Help - it was hard to convince my husband to move our investments to start with and he's not entirely convinced about a passive ETF strategy. I think he's feeling swayed....

After spending probably too much time in these forums I moved 50% of my 457 into Vanguard index funds. So far its underperforming T Rowe by 50% on returns (example if T Rowe is up 4% Vanguard is up 2%). So your husband might be right. Nobody is going to give away top grade service. That said, there are merits to index funds and despite the short term performance I see I will give them a long term shot. Given that I have access to premium closed funds this might actually cost me over the long term but wisdom is learned with blood and tears. If you are invested don't rush to move anything. Maybe just begin investing elsewhere. That is my thoughts on it for whatever it is worth.

[Heckler]

Ask for a detailed breakdown of your funds since he invested them, then compare with index funds.

Here are two examples of active fund management I was more than happy to cut my losses on after too many years of getting fleeced. 

Elaine, I strongly recommend you use data to make your decision.  Do you have a "growth of $10000" graph compared to the appropriate index?  That's the quickest and simplest way to see through a lie. If the index line is less than your funds line, your better off passive.

[Telecaster]

I'd be fine paying for that type of advice too. But, no - we were just the usual basic investment stuff.

This particular adviser had us in about 8 different Fidelity B series funds.

It's a small independent firm in Canada - Sterling Mutuals.

The kicker is the part about "consistently beating the market."    Can he show he's consistently beaten the market over any reasonably long period of time, like say 10 or 20 years?   

Swami says no. 

[Heckler]

And you can use morningstar to get the comparison to the relevant index. 


http://quote.morningstar.ca/quicktakes/fund/f_ca.aspx?t=F0CAN05TCY&region=can&culture=en-CA


Here's an example of the Fidelity fund seriously under performing the S&P 500.  You'd have $10k more after 10 years of owning a S&P 500 index fund.


http://quote.morningstar.ca/quicktakes/Fund/f_ca.aspx?t=F0CAN05TGI&region=CAN&culture=en-CA

[Seppia]

Tell him about Buffett's bet against the hedge funds and how it's going

http://www.ft.com/cms/s/0/946ade3c-f235-11e4-892a-00144feab7de.html#slide0



It's how I convinced my HR to dump the high fees 401k funds and switch to vanguard

[Interest Compound]

The biggest question is, do you use the financial adviser for more than his money management? Does he help you with tax planning, estate planning, insurance reviews, all other financial planning etc?? If so, then the small fee you pay in management is probably worth his services. If all he does is re-balance your portfolio than just tell him to read "the quest for alpha" by Larry Swedroe. He cant beat the market consistently.

Being a financial advisor that does manage money for a fee, I do use a passive ETF strategy, and the advisory fee that we charge, is more for the financial planning aspect like mentioned above. It isnt to beat the market, coming from a professional who manages money, I can tell you, your financial adviser will not "beat" the market. What he might do, is save you money by giving you good financial advice.

My two cents from his side of the table. If he isnt a true financial planner, move on.

I'd be fine paying for that type of advice too. But, no - we were just the usual basic investment stuff.

This particular adviser had us in about 8 different Fidelity B series funds.

It's a small independent firm in Canada - Sterling Mutuals.

Can you list the tickers for each of the 8 funds, along with how long you were in them (ball-park it)?

[NoraLenderbee]

if a fund manager beats the index by 2%  net of fees consistently,

If someone invented a car engine that ran on dog poop and converted it to rainbows . . . If there were a type of chocolate that had no calories . . . if there were a pill that made you as young and healthy as you were at age 20 . . .

You could tell him that you'll gladly pay for performance. Propose that if he can equal the return of the index, you'll pay the same fee you would for the equivalent index fund. If he beats the index, you'll pay him more. If he lags the index, you pay less or nothing. Think he'd agree?

[SandyBoxx]

Sorry - I do not want to thread hijack, but we are in the exact same situation, and I received a message from my advisor today wanting to discuss our decision to move our funds to TD.   I know he is going to try to talk us out of it and would love to know how I check the Growth of $10K for our funds.

Most of our holdings are in the same 5-6 funds, we began purchasing in Dec 2012, and have made some lump sum contributions near the end of each year.  Our MER's are high, and our DSC's are likely in the 4-5% range for most of the funds still...gah. (I just cut and pasted the funds from a spreadsheet I made that listed the funds, the MER, the DSC's, and the trailing fees - all before really understanding what it meant.)

SM Top Up
CIG3574
CIG6154
MFC4283
MMF8493

RESP
CIG3574
CIG6154

RRSP -
CIG3574
CIG6154
DYN714G
MFC842
MMF4455

RRSP - Spousal
CIG3574
CIG6154
DYN714G
MFC842
MMF4455

RRSP -
CIG3574
CIG6154
DYN714G
MFC842
MMF4455

ITF
CIG2573
CIG2322

I have typed the CIG3574 into Morningstar - does the Growth of $10K chart that pops up automatically use the closest index fund that matches this fund, or is this something I need to sort out myself? 

Edited to add: Basically - Forgive my ignorance, but I do not know exactly what those charts are trying to tell me!!

[Frugalman19]

The biggest question is, do you use the financial adviser for more than his money management? Does he help you with tax planning, estate planning, insurance reviews, all other financial planning etc?? If so, then the small fee you pay in management is probably worth his services. If all he does is re-balance your portfolio than just tell him to read "the quest for alpha" by Larry Swedroe. He cant beat the market consistently.

Being a financial advisor that does manage money for a fee, I do use a passive ETF strategy, and the advisory fee that we charge, is more for the financial planning aspect like mentioned above. It isnt to beat the market, coming from a professional who manages money, I can tell you, your financial adviser will not "beat" the market. What he might do, is save you money by giving you good financial advice.

My two cents from his side of the table. If he isnt a true financial planner, move on.

It sounds like it's not just a "small fee" the OP and her husband are being charged by their adviser. She said that "there are fees to buy whatever funds the adviser is suggesting." This leads me to believe their adviser is putting them into loaded funds. If so, they're paying the front-end load to the mutual fund company (never a good idea), a yearly management fee to the mutual fund company, probably >1%, plus probably at least 1%/year to their adviser. This seems to be the norm in the financial planning industry.

It would be fine if a financial adviser charged clients an hourly fee, like an attorney, to give them advice. Even if the hourly rate were relatively high, it might be worth it if the adviser were good. But that doesn't seem to be the business model for the industry as a whole. Their model is to charge clients 1%+/year for the privilege of being directed into mutual funds with loads anywhere between 2-6%, just to get into the fund, and then the fund charges the clients another 1%+/year to under perform its index. It's insane, and I think it should be illegal for "advisers" to take advantage of their clients in this way.

Sorry you have been misinformed. It is illegal in the US to make a commission on a product and charge a management fee. He most certainly is not putting her in loaded mutual funds and charging a fee. It's not possible.

[Frugalman19]

The biggest question is, do you use the financial adviser for more than his money management? Does he help you with tax planning, estate planning, insurance reviews, all other financial planning etc?? If so, then the small fee you pay in management is probably worth his services. If all he does is re-balance your portfolio than just tell him to read "the quest for alpha" by Larry Swedroe. He cant beat the market consistently.

Being a financial advisor that does manage money for a fee, I do use a passive ETF strategy, and the advisory fee that we charge, is more for the financial planning aspect like mentioned above. It isnt to beat the market, coming from a professional who manages money, I can tell you, your financial adviser will not "beat" the market. What he might do, is save you money by giving you good financial advice.

My two cents from his side of the table. If he isnt a true financial planner, move on.

It sounds like it's not just a "small fee" the OP and her husband are being charged by their adviser. She said that "there are fees to buy whatever funds the adviser is suggesting." This leads me to believe their adviser is putting them into loaded funds. If so, they're paying the front-end load to the mutual fund company (never a good idea), a yearly management fee to the mutual fund company, probably >1%, plus probably at least 1%/year to their adviser. This seems to be the norm in the financial planning industry.

It would be fine if a financial adviser charged clients an hourly fee, like an attorney, to give them advice. Even if the hourly rate were relatively high, it might be worth it if the adviser were good. But that doesn't seem to be the business model for the industry as a whole. Their model is to charge clients 1%+/year for the privilege of being directed into mutual funds with loads anywhere between 2-6%, just to get into the fund, and then the fund charges the clients another 1%+/year to under perform its index. It's insane, and I think it should be illegal for "advisers" to take advantage of their clients in this way.

Holy shit! 6% loads exist?! I agree, that should be criminal. Seriously, FINRA should be put on notice about it.

I think I remember seeing in another thread awhile back (can't find it right this instant...) talk about fee-based/fee-only advisors being worth their salt in many instances. The key is whether the advisor does the ancillary things around your assets, as Awgolfer suggests. IMHO, this is where the real value of financial advisors comes into play, with their experience at putting together the whole picture. The value they add won't always be strictly numerical.

Loaded mutual funds are still used, but very rarely and only by commission only advisors. Not by financial planner. The ones who sell the loaded mutual funds are the guys at your local bank.

[Frugalman19]

The biggest question is, do you use the financial adviser for more than his money management? Does he help you with tax planning, estate planning, insurance reviews, all other financial planning etc?? If so, then the small fee you pay in management is probably worth his services. If all he does is re-balance your portfolio than just tell him to read "the quest for alpha" by Larry Swedroe. He cant beat the market consistently.

Being a financial advisor that does manage money for a fee, I do use a passive ETF strategy, and the advisory fee that we charge, is more for the financial planning aspect like mentioned above. It isnt to beat the market, coming from a professional who manages money, I can tell you, your financial adviser will not "beat" the market. What he might do, is save you money by giving you good financial advice.

My two cents from his side of the table. If he isnt a true financial planner, move on.

I'd be fine paying for that type of advice too. But, no - we were just the usual basic investment stuff.

This particular adviser had us in about 8 different Fidelity B series funds.

It's a small independent firm in Canada - Sterling Mutuals.

If they just sold you mutual funds, the damage is done, you should not be paying them any fee. They have already made their commission. I would move over to vanguard, or find yourself a CFP.

[FrugalFan]

The biggest question is, do you use the financial adviser for more than his money management? Does he help you with tax planning, estate planning, insurance reviews, all other financial planning etc?? If so, then the small fee you pay in management is probably worth his services. If all he does is re-balance your portfolio than just tell him to read "the quest for alpha" by Larry Swedroe. He cant beat the market consistently.

Being a financial advisor that does manage money for a fee, I do use a passive ETF strategy, and the advisory fee that we charge, is more for the financial planning aspect like mentioned above. It isnt to beat the market, coming from a professional who manages money, I can tell you, your financial adviser will not "beat" the market. What he might do, is save you money by giving you good financial advice.

My two cents from his side of the table. If he isnt a true financial planner, move on.

It sounds like it's not just a "small fee" the OP and her husband are being charged by their adviser. She said that "there are fees to buy whatever funds the adviser is suggesting." This leads me to believe their adviser is putting them into loaded funds. If so, they're paying the front-end load to the mutual fund company (never a good idea), a yearly management fee to the mutual fund company, probably >1%, plus probably at least 1%/year to their adviser. This seems to be the norm in the financial planning industry.

It would be fine if a financial adviser charged clients an hourly fee, like an attorney, to give them advice. Even if the hourly rate were relatively high, it might be worth it if the adviser were good. But that doesn't seem to be the business model for the industry as a whole. Their model is to charge clients 1%+/year for the privilege of being directed into mutual funds with loads anywhere between 2-6%, just to get into the fund, and then the fund charges the clients another 1%+/year to under perform its index. It's insane, and I think it should be illegal for "advisers" to take advantage of their clients in this way.

Holy shit! 6% loads exist?! I agree, that should be criminal. Seriously, FINRA should be put on notice about it.

I think I remember seeing in another thread awhile back (can't find it right this instant...) talk about fee-based/fee-only advisors being worth their salt in many instances. The key is whether the advisor does the ancillary things around your assets, as Awgolfer suggests. IMHO, this is where the real value of financial advisors comes into play, with their experience at putting together the whole picture. The value they add won't always be strictly numerical.

Loaded mutual funds are still used, but very rarely and only by commission only advisors. Not by financial planner. The ones who sell the loaded mutual funds are the guys at your local bank.

Not in Canada, I'm afraid. I am just moving from Edward Jones to Questrade. Our advisor was a certified financial planner. He had 90% of our investments in mutual funds with MER's greater than 2.7%, deferred sales charges of 6%, and he/Edward Jones gets 1.5% of our portfolio value every year. We are leaving and it will cost us 3.4k in deferred sales charges plus capital gains in our taxable account.

[Frugalman19]

The biggest question is, do you use the financial adviser for more than his money management? Does he help you with tax planning, estate planning, insurance reviews, all other financial planning etc?? If so, then the small fee you pay in management is probably worth his services. If all he does is re-balance your portfolio than just tell him to read "the quest for alpha" by Larry Swedroe. He cant beat the market consistently.

Being a financial advisor that does manage money for a fee, I do use a passive ETF strategy, and the advisory fee that we charge, is more for the financial planning aspect like mentioned above. It isnt to beat the market, coming from a professional who manages money, I can tell you, your financial adviser will not "beat" the market. What he might do, is save you money by giving you good financial advice.

My two cents from his side of the table. If he isnt a true financial planner, move on.

It sounds like it's not just a "small fee" the OP and her husband are being charged by their adviser. She said that "there are fees to buy whatever funds the adviser is suggesting." This leads me to believe their adviser is putting them into loaded funds. If so, they're paying the front-end load to the mutual fund company (never a good idea), a yearly management fee to the mutual fund company, probably >1%, plus probably at least 1%/year to their adviser. This seems to be the norm in the financial planning industry.

It would be fine if a financial adviser charged clients an hourly fee, like an attorney, to give them advice. Even if the hourly rate were relatively high, it might be worth it if the adviser were good. But that doesn't seem to be the business model for the industry as a whole. Their model is to charge clients 1%+/year for the privilege of being directed into mutual funds with loads anywhere between 2-6%, just to get into the fund, and then the fund charges the clients another 1%+/year to under perform its index. It's insane, and I think it should be illegal for "advisers" to take advantage of their clients in this way.

Holy shit! 6% loads exist?! I agree, that should be criminal. Seriously, FINRA should be put on notice about it.

I think I remember seeing in another thread awhile back (can't find it right this instant...) talk about fee-based/fee-only advisors being worth their salt in many instances. The key is whether the advisor does the ancillary things around your assets, as Awgolfer suggests. IMHO, this is where the real value of financial advisors comes into play, with their experience at putting together the whole picture. The value they add won't always be strictly numerical.

Loaded mutual funds are still used, but very rarely and only by commission only advisors. Not by financial planner. The ones who sell the loaded mutual funds are the guys at your local bank.

Not in Canada, I'm afraid. I am just moving from Edward Jones to Questrade. Our advisor was a certified financial planner. He had 90% of our investments in mutual funds with MER's greater than 2.7%, deferred sales charges of 6%, and he/Edward Jones gets 1.5% of our portfolio value every year. We are leaving and it will cost us 3.4k in deferred sales charges plus capital gains in our taxable account.

I would seriously look into this. My firm for example, is able to use any mutual fund. But the sales charges and the commissions are waved. So on paper you would look up the mutual fund and see that there is a load, but if you are in an advisory account(an account that charges an annual fee for management) all of the loads and charges are waved. This is a very common misunderstanding in the finance world.
Trust me, he is not making a commission and charging a fee, that is highly highly illegal.

[Frugalman19]

Let me explain further in a real life example. Again, you are not paying a commission if you are paying a yearly advisory or management fees.
For example,
Let's say I want my client to have the American beacon international fund, but the only share class they have are A shares that have a 4.5% upfront charge. I'm charging my client a .85% management/advisory fee to manage the account. If I buy the A share in a managed account, American beacon will wave the 4.5% sales charge, because that would have gone to me anyways, and I am already getting paid. So the client is invested in the A share fund, without paying the upfront load. It's very common and misunderstood by a lot of people.

Funds have expense ratios that are not avoidable, that's why people choose index funds.

[FrugalFan]

The biggest question is, do you use the financial adviser for more than his money management? Does he help you with tax planning, estate planning, insurance reviews, all other financial planning etc?? If so, then the small fee you pay in management is probably worth his services. If all he does is re-balance your portfolio than just tell him to read "the quest for alpha" by Larry Swedroe. He cant beat the market consistently.

Being a financial advisor that does manage money for a fee, I do use a passive ETF strategy, and the advisory fee that we charge, is more for the financial planning aspect like mentioned above. It isnt to beat the market, coming from a professional who manages money, I can tell you, your financial adviser will not "beat" the market. What he might do, is save you money by giving you good financial advice.

My two cents from his side of the table. If he isnt a true financial planner, move on.

It sounds like it's not just a "small fee" the OP and her husband are being charged by their adviser. She said that "there are fees to buy whatever funds the adviser is suggesting." This leads me to believe their adviser is putting them into loaded funds. If so, they're paying the front-end load to the mutual fund company (never a good idea), a yearly management fee to the mutual fund company, probably >1%, plus probably at least 1%/year to their adviser. This seems to be the norm in the financial planning industry.

It would be fine if a financial adviser charged clients an hourly fee, like an attorney, to give them advice. Even if the hourly rate were relatively high, it might be worth it if the adviser were good. But that doesn't seem to be the business model for the industry as a whole. Their model is to charge clients 1%+/year for the privilege of being directed into mutual funds with loads anywhere between 2-6%, just to get into the fund, and then the fund charges the clients another 1%+/year to under perform its index. It's insane, and I think it should be illegal for "advisers" to take advantage of their clients in this way.

Holy shit! 6% loads exist?! I agree, that should be criminal. Seriously, FINRA should be put on notice about it.

I think I remember seeing in another thread awhile back (can't find it right this instant...) talk about fee-based/fee-only advisors being worth their salt in many instances. The key is whether the advisor does the ancillary things around your assets, as Awgolfer suggests. IMHO, this is where the real value of financial advisors comes into play, with their experience at putting together the whole picture. The value they add won't always be strictly numerical.

Loaded mutual funds are still used, but very rarely and only by commission only advisors. Not by financial planner. The ones who sell the loaded mutual funds are the guys at your local bank.

Not in Canada, I'm afraid. I am just moving from Edward Jones to Questrade. Our advisor was a certified financial planner. He had 90% of our investments in mutual funds with MER's greater than 2.7%, deferred sales charges of 6%, and he/Edward Jones gets 1.5% of our portfolio value every year. We are leaving and it will cost us 3.4k in deferred sales charges plus capital gains in our taxable account.

I would seriously look into this. My firm for example, is able to use any mutual fund. But the sales charges and the commissions are waved. So on paper you would look up the mutual fund and see that there is a load, but if you are in an advisory account(an account that charges an annual fee for management) all of the loads and charges are waved. This is a very common misunderstanding in the finance world.
Trust me, he is not making a commission and charging a fee, that is highly highly illegal.

This must be a difference with the US (Canada also has the highest expense ratios in the world). He most definitely charges us 1.5% of portfolio value, and kindly provided all the sales charges we will have to pay upon transferring our funds to Questrade. 3.4 k.

[Goldielocks]

If your advisor beats the index by 2% consistently, he is either a Warren Buffet or a Bernie Madoff.

[Vilgan]

The biggest question is, do you use the financial adviser for more than his money management? Does he help you with tax planning, estate planning, insurance reviews, all other financial planning etc?? If so, then the small fee you pay in management is probably worth his services. If all he does is re-balance your portfolio than just tell him to read "the quest for alpha" by Larry Swedroe. He cant beat the market consistently.

Being a financial advisor that does manage money for a fee, I do use a passive ETF strategy, and the advisory fee that we charge, is more for the financial planning aspect like mentioned above. It isnt to beat the market, coming from a professional who manages money, I can tell you, your financial adviser will not "beat" the market. What he might do, is save you money by giving you good financial advice.

My two cents from his side of the table. If he isnt a true financial planner, move on.

It sounds like it's not just a "small fee" the OP and her husband are being charged by their adviser. She said that "there are fees to buy whatever funds the adviser is suggesting." This leads me to believe their adviser is putting them into loaded funds. If so, they're paying the front-end load to the mutual fund company (never a good idea), a yearly management fee to the mutual fund company, probably >1%, plus probably at least 1%/year to their adviser. This seems to be the norm in the financial planning industry.

It would be fine if a financial adviser charged clients an hourly fee, like an attorney, to give them advice. Even if the hourly rate were relatively high, it might be worth it if the adviser were good. But that doesn't seem to be the business model for the industry as a whole. Their model is to charge clients 1%+/year for the privilege of being directed into mutual funds with loads anywhere between 2-6%, just to get into the fund, and then the fund charges the clients another 1%+/year to under perform its index. It's insane, and I think it should be illegal for "advisers" to take advantage of their clients in this way.

Holy shit! 6% loads exist?! I agree, that should be criminal. Seriously, FINRA should be put on notice about it.

I think I remember seeing in another thread awhile back (can't find it right this instant...) talk about fee-based/fee-only advisors being worth their salt in many instances. The key is whether the advisor does the ancillary things around your assets, as Awgolfer suggests. IMHO, this is where the real value of financial advisors comes into play, with their experience at putting together the whole picture. The value they add won't always be strictly numerical.

Loaded mutual funds are still used, but very rarely and only by commission only advisors. Not by financial planner. The ones who sell the loaded mutual funds are the guys at your local bank.

Not in Canada, I'm afraid. I am just moving from Edward Jones to Questrade. Our advisor was a certified financial planner. He had 90% of our investments in mutual funds with MER's greater than 2.7%, deferred sales charges of 6%, and he/Edward Jones gets 1.5% of our portfolio value every year. We are leaving and it will cost us 3.4k in deferred sales charges plus capital gains in our taxable account.

I would seriously look into this. My firm for example, is able to use any mutual fund. But the sales charges and the commissions are waved. So on paper you would look up the mutual fund and see that there is a load, but if you are in an advisory account(an account that charges an annual fee for management) all of the loads and charges are waved. This is a very common misunderstanding in the finance world.
Trust me, he is not making a commission and charging a fee, that is highly highly illegal.

I don't think this is accurate. I've seen plenty of people get charged a fee and the load does not get waived. I know my mother trusted an advisor from Waddell and Reed that was recommended by her school district. She paid 5% load which was a commission for the advisor and went primarily into her advisor's pocket. The funds all also had over a 2% expense ratio.

There is nothing illegal about that, although it is dishonest as hell and still makes me angry. The only time its illegal to steer someone into paying a load is if you have a fiduciary duty which financial planners will typically avoid signing.

Random internet reference which makes no mention of loads/fees that go to commissions being illegal: http://www.investopedia.com/terms/f/front-endload.asp

[mrpercentage]

If your advisor beats the index by 2% consistently, he is either a Warren Buffet or a Bernie Madoff.

Or he is this guy. I love this guy

[elaine amj]

Can you list the tickers for each of the 8 funds, along with how long you were in them (ball-park it)?

We bought the funds around Dec 2011. I'm just thankful it wasn't a massive chunk of our portfolio, only about $35k...DH just wanted to give him a trial.

FID US DIV-B U$ 'FRAC FID986 - MER 2.36%
         
FID US M/I-B U$ 'FRAC FID1350 - MER 2.22%
         
FID NRTH STAR U$-B 'FRAC FID789 - MER 2.36%
         
FID CDN L/C CL-B U$ 'FRAC FID486 - MER 2.36%
         
FID CDN BAL CL U$-B 'FRAC FID2227 - MER 2.08%
         
FID SPL SIT U$ SER-B'FRAC FID1299 - MER 2.29%
     
FID CHINA U$-B 'FRAC FID1207 - MER 2.40%
         
FID S/CAP AMER U$ 'FRAC FID762 - MER 2.34%

When I looked each fund up, they all said that their fees are front-loaded. I don't understand - I though B series funds meant they used deferred sales charges. I'm hoping for front load since DH will be resistant to paying fees to liquidate and he'll end up arguing for holding on.

[Heckler]

I have typed the CIG3574 into Morningstar - does the Growth of $10K chart that pops up automatically use the closest index fund that matches this fund, or is this something I need to sort out myself? 

Edited to add: Basically - Forgive my ignorance, but I do not know exactly what those charts are trying to tell me!!

here's CIG3574, a global equity fund with 2.46% MER
Cash   6.20 %
Canadian Equity   0.00 %
U.S. Equity           26.58 %
International Equity   67.22 %
Fixed Income           0.00 %
Other                   0.00 %

vs XWD, a similar global equity index fund with 0.46% MER
Cash                           0.21 %
Canadian Equity   3.07 %
U.S. Equity           58.47 %
International Equity   37.35 %
Fixed Income           0.00 %
Other                   0.90 %

In the past three years, XWD grew 73.4%, while your fund grew 69.6%.  They're close, and the difference is likely more explainable to the difference in US Equity allocation, instead of the difference in fees. 

VXC would be the comparable Vanguard Canada fund, but it's only been around for a year, so I didn't compare it.

The Morningstar performance tab has a compare function.  Always make sure you're comparing two funds from the same start date - you can't compare a 10 year period if the fund didn't exist for 10 years, but you can compare to a funds relative index, in this case the MSCI World Index.

[rmendpara]

Can you list the tickers for each of the 8 funds, along with how long you were in them (ball-park it)?

We bought the funds around Dec 2011. I'm just thankful it wasn't a massive chunk of our portfolio, only about $35k...DH just wanted to give him a trial.

FID US DIV-B U$ 'FRAC FID986 - MER 2.36%
         
FID US M/I-B U$ 'FRAC FID1350 - MER 2.22%
         
FID NRTH STAR U$-B 'FRAC FID789 - MER 2.36%
         
FID CDN L/C CL-B U$ 'FRAC FID486 - MER 2.36%
         
FID CDN BAL CL U$-B 'FRAC FID2227 - MER 2.08%
         
FID SPL SIT U$ SER-B'FRAC FID1299 - MER 2.29%
     
FID CHINA U$-B 'FRAC FID1207 - MER 2.40%
         
FID S/CAP AMER U$ 'FRAC FID762 - MER 2.34%

When I looked each fund up, they all said that their fees are front-loaded. I don't understand - I though B series funds meant they used deferred sales charges. I'm hoping for front load since DH will be resistant to paying fees to liquidate and he'll end up arguing for holding on.

The bold above is your/DH first mistake. If you give someone money as a "trial", it's in their incentive to take on more risk than you want in order to exceed the return of a "boring index fund". Even if they do earn 1, 2, or 5% more, remember that you are comparing apples and oranges.

Since you guys are having trouble understanding the adviser (not your fault at all, that's why financial advisory is a HUGE business), I'd recommend some reading. It's impossible to understand something if you... uh, don't understand it.

https://www.bogleheads.org/wiki/Expense_ratios <-- one place to start.

I haven't looked into those funds specifically, but they look to be a lot of small cap and China type funds (very high risk overall). You may find it's a good idea to invest SOME of your portfolio here, but check out your overall allocation (Canada equity, US equity, Intl equity, fixed income, etc.) and make sure that overall mix is something you think makes sense.

If you're at a loss what an asset mix is, or what it maybe should be for you/DH, I'd recommend further reading on bogleheads, to start...

[Heckler]

Can you list the tickers for each of the 8 funds, along with how long you were in them (ball-park it)?

We bought the funds around Dec 2011. I'm just thankful it wasn't a massive chunk of our portfolio, only about $35k...DH just wanted to give him a trial.

FID US DIV-B U$ 'FRAC FID986 - MER 2.36%
   

When I looked each fund up, they all said that their fees are front-loaded. I don't understand - I though B series funds meant they used deferred sales charges. I'm hoping for front load since DH will be resistant to paying fees to liquidate and he'll end up arguing for holding on.

Load: Multiple from Morningstar means your salesperson gets to choose what you buy.  If it's front load (FEL), you pay a fee when you bought.  DSC will pay a fee when you sell.  A good salesperson will sell you DSC to start and transfer a percentage x over to FEL each year, resulting in no load over x years of holding the fund.  That's an option, if your fund is matching or beating it's index.

FID986 is not, although it may appear its currency hedged, not seeing the recent fluctuations of the exchange rate.  -7.3% return compared to S&P500 index measured in $CAD.

[Heckler]

https://www.bogleheads.org/wiki/Expense_ratios <-- one place to start.

If you're at a loss what an asset mix is, or what it maybe should be for you/DH, I'd recommend further reading on bogleheads, to start...

here's the Maple Leaf version I recently found.

http://www.finiki.org/wiki/Main_Page

[Frugalman19]

The biggest question is, do you use the financial adviser for more than his money management? Does he help you with tax planning, estate planning, insurance reviews, all other financial planning etc?? If so, then the small fee you pay in management is probably worth his services. If all he does is re-balance your portfolio than just tell him to read "the quest for alpha" by Larry Swedroe. He cant beat the market consistently.

Being a financial advisor that does manage money for a fee, I do use a passive ETF strategy, and the advisory fee that we charge, is more for the financial planning aspect like mentioned above. It isnt to beat the market, coming from a professional who manages money, I can tell you, your financial adviser will not "beat" the market. What he might do, is save you money by giving you good financial advice.

My two cents from his side of the table. If he isnt a true financial planner, move on.

It sounds like it's not just a "small fee" the OP and her husband are being charged by their adviser. She said that "there are fees to buy whatever funds the adviser is suggesting." This leads me to believe their adviser is putting them into loaded funds. If so, they're paying the front-end load to the mutual fund company (never a good idea), a yearly management fee to the mutual fund company, probably >1%, plus probably at least 1%/year to their adviser. This seems to be the norm in the financial planning industry.

It would be fine if a financial adviser charged clients an hourly fee, like an attorney, to give them advice. Even if the hourly rate were relatively high, it might be worth it if the adviser were good. But that doesn't seem to be the business model for the industry as a whole. Their model is to charge clients 1%+/year for the privilege of being directed into mutual funds with loads anywhere between 2-6%, just to get into the fund, and then the fund charges the clients another 1%+/year to under perform its index. It's insane, and I think it should be illegal for "advisers" to take advantage of their clients in this way.

Holy shit! 6% loads exist?! I agree, that should be criminal. Seriously, FINRA should be put on notice about it.

I think I remember seeing in another thread awhile back (can't find it right this instant...) talk about fee-based/fee-only advisors being worth their salt in many instances. The key is whether the advisor does the ancillary things around your assets, as Awgolfer suggests. IMHO, this is where the real value of financial advisors comes into play, with their experience at putting together the whole picture. The value they add won't always be strictly numerical.

Loaded mutual funds are still used, but very rarely and only by commission only advisors. Not by financial planner. The ones who sell the loaded mutual funds are the guys at your local bank.

Not in Canada, I'm afraid. I am just moving from Edward Jones to Questrade. Our advisor was a certified financial planner. He had 90% of our investments in mutual funds with MER's greater than 2.7%, deferred sales charges of 6%, and he/Edward Jones gets 1.5% of our portfolio value every year. We are leaving and it will cost us 3.4k in deferred sales charges plus capital gains in our taxable account.

I would seriously look into this. My firm for example, is able to use any mutual fund. But the sales charges and the commissions are waved. So on paper you would look up the mutual fund and see that there is a load, but if you are in an advisory account(an account that charges an annual fee for management) all of the loads and charges are waved. This is a very common misunderstanding in the finance world.
Trust me, he is not making a commission and charging a fee, that is highly highly illegal.

I don't think this is accurate. I've seen plenty of people get charged a fee and the load does not get waived. I know my mother trusted an advisor from Waddell and Reed that was recommended by her school district. She paid 5% load which was a commission for the advisor and went primarily into her advisor's pocket. The funds all also had over a 2% expense ratio.

There is nothing illegal about that, although it is dishonest as hell and still makes me angry. The only time its illegal to steer someone into paying a load is if you have a fiduciary duty which financial planners will typically avoid signing.

Random internet reference which makes no mention of loads/fees that go to commissions being illegal: http://www.investopedia.com/terms/f/front-endload.asp

Trust me, if you pay a load or sales charge, it is 100% illegal to charge an advisory or management fee in the US. Paying a load and then paying the 2% expense ratio is normal, but the load goes to the advisor and the expense ratio goes to the mutual fund company, the advisor has made his commission.

[Frugalman19]

The biggest question is, do you use the financial adviser for more than his money management? Does he help you with tax planning, estate planning, insurance reviews, all other financial planning etc?? If so, then the small fee you pay in management is probably worth his services. If all he does is re-balance your portfolio than just tell him to read "the quest for alpha" by Larry Swedroe. He cant beat the market consistently.

Being a financial advisor that does manage money for a fee, I do use a passive ETF strategy, and the advisory fee that we charge, is more for the financial planning aspect like mentioned above. It isnt to beat the market, coming from a professional who manages money, I can tell you, your financial adviser will not "beat" the market. What he might do, is save you money by giving you good financial advice.

My two cents from his side of the table. If he isnt a true financial planner, move on.

It sounds like it's not just a "small fee" the OP and her husband are being charged by their adviser. She said that "there are fees to buy whatever funds the adviser is suggesting." This leads me to believe their adviser is putting them into loaded funds. If so, they're paying the front-end load to the mutual fund company (never a good idea), a yearly management fee to the mutual fund company, probably >1%, plus probably at least 1%/year to their adviser. This seems to be the norm in the financial planning industry.

It would be fine if a financial adviser charged clients an hourly fee, like an attorney, to give them advice. Even if the hourly rate were relatively high, it might be worth it if the adviser were good. But that doesn't seem to be the business model for the industry as a whole. Their model is to charge clients 1%+/year for the privilege of being directed into mutual funds with loads anywhere between 2-6%, just to get into the fund, and then the fund charges the clients another 1%+/year to under perform its index. It's insane, and I think it should be illegal for "advisers" to take advantage of their clients in this way.

Holy shit! 6% loads exist?! I agree, that should be criminal. Seriously, FINRA should be put on notice about it.

I think I remember seeing in another thread awhile back (can't find it right this instant...) talk about fee-based/fee-only advisors being worth their salt in many instances. The key is whether the advisor does the ancillary things around your assets, as Awgolfer suggests. IMHO, this is where the real value of financial advisors comes into play, with their experience at putting together the whole picture. The value they add won't always be strictly numerical.

Loaded mutual funds are still used, but very rarely and only by commission only advisors. Not by financial planner. The ones who sell the loaded mutual funds are the guys at your local bank.

Not in Canada, I'm afraid. I am just moving from Edward Jones to Questrade. Our advisor was a certified financial planner. He had 90% of our investments in mutual funds with MER's greater than 2.7%, deferred sales charges of 6%, and he/Edward Jones gets 1.5% of our portfolio value every year. We are leaving and it will cost us 3.4k in deferred sales charges plus capital gains in our taxable account.

I would seriously look into this. My firm for example, is able to use any mutual fund. But the sales charges and the commissions are waved. So on paper you would look up the mutual fund and see that there is a load, but if you are in an advisory account(an account that charges an annual fee for management) all of the loads and charges are waved. This is a very common misunderstanding in the finance world.
Trust me, he is not making a commission and charging a fee, that is highly highly illegal.

This must be a difference with the US (Canada also has the highest expense ratios in the world). He most definitely charges us 1.5% of portfolio value, and kindly provided all the sales charges we will have to pay upon transferring our funds to Questrade. 3.4 k.

For a b share in an advisory account that has a management fee, he would be able to sell the shares with no load charged. I'll try and explain how it works without getting too wordy.
B shares have a deferred sales charge, which means 100% of your money goes to work right away. The mutual fund company then pays the advisor the commission up front, instead of the commission coming out of the investors money. The differed charge is to prevent to advisor from selling the fund within a few years. If you were in a managed account(an account that is registered to charge a fee), he would have never received the load, so he can sell the fund inside the managed account and not get charged the deferred charge. I know you said you paid a sales charge, I would seriously look into whether it was actually charged. If you were in some sort of variable annuity then I could see how there would be surrender charges, but not for a regular investment account.
Again, I deal with this stuff everyday, although I am in the US. But this exact case is highly highly illegal and extremely regulated. You cannot charge a commission and charge an annual percentage fee. It's blatant theft if that was true.

[MrMonkeyMustache]

 If the market returns 10% the maneger will have to beat the market by 20% to justify a 2% fee. Beating the market by 2% is worth a 0.2% fee.

Don`t mix percentages and percentage points.

Sent from my GT-I8190N using Tapatalk

[Shane]

Again, I deal with this stuff everyday, although I am in the US. But this exact case is highly highly illegal and extremely regulated. You cannot charge a commission and charge an annual percentage fee. It's blatant theft if that was true.

It seems that there's some confusion among posters about exactly which fees you're referring to. I accept your knowledge of the industry and the fact that it's illegal, at least in the U.S. to charge both a load on a fund AND charge a fee based on a percentage of the client's assets. It has to be either or, but not both.

It does appear, however, that clients can legally be charged twice in another way. Annually, clients pay a fee to their adviser, which is a % of assets invested, usually about 1%, and then, also every year, clients pay a fee to cover management expenses to the fund(s) their adviser put them in. In the case of the OP, all of the 8 funds her adviser put them into were charging >2% annual management fees. So, total, it looks like OP was paying >3%/year in fees between her adviser and the funds he recommended to them.

@Awgolfer, are there any attempts being made, that you know of, by people in your industry who are providing fee-based advice services to clients to put an end to obviously predatory practices which are apparently completely legal for "advisers" to do? You know as well as I do that if combined yearly fees for a mutual fund and "adviser" are >3%, clients are being robbed. It seems like you guys who are doing a legitimate business need to speak up and get the government to step in and put the crooks out of business. If not, legitimate advisers who charge an hourly fee for their services may end up getting put out of business as well...

[mrpercentage]

Can you list the tickers for each of the 8 funds, along with how long you were in them (ball-park it)?

We bought the funds around Dec 2011. I'm just thankful it wasn't a massive chunk of our portfolio, only about $35k...DH just wanted to give him a trial.

FID US DIV-B U$ 'FRAC FID986 - MER 2.36%
         
FID US M/I-B U$ 'FRAC FID1350 - MER 2.22%
         
FID NRTH STAR U$-B 'FRAC FID789 - MER 2.36%
         
FID CDN L/C CL-B U$ 'FRAC FID486 - MER 2.36%
         
FID CDN BAL CL U$-B 'FRAC FID2227 - MER 2.08%
         
FID SPL SIT U$ SER-B'FRAC FID1299 - MER 2.29%
     
FID CHINA U$-B 'FRAC FID1207 - MER 2.40%
         
FID S/CAP AMER U$ 'FRAC FID762 - MER 2.34%

When I looked each fund up, they all said that their fees are front-loaded. I don't understand - I though B series funds meant they used deferred sales charges. I'm hoping for front load since DH will be resistant to paying fees to liquidate and he'll end up arguing for holding on.

 Yep. Those are some ugly fees. Not always the case but they are too high. I don't like straying further than 1% with no sales load. I would move them in your case. I also don't see a need for 8 funds. Any more than 4 is defeating the point. At that point you might as well just buy a total stock market index. VT

[Frugalman19]

Again, I deal with this stuff everyday, although I am in the US. But this exact case is highly highly illegal and extremely regulated. You cannot charge a commission and charge an annual percentage fee. It's blatant theft if that was true.

It seems that there's some confusion among posters about exactly which fees you're referring to. I accept your knowledge of the industry and the fact that it's illegal, at least in the U.S. to charge both a load on a fund AND charge a fee based on a percentage of the client's assets. It has to be either or, but not both.

It does appear, however, that clients can legally be charged twice in another way. Annually, clients pay a fee to their adviser, which is a % of assets invested, usually about 1%, and then, also every year, clients pay a fee to cover management expenses to the fund(s) their adviser put them in. In the case of the OP, all of the 8 funds her adviser put them into were charging >2% annual management fees. So, total, it looks like OP was paying >3%/year in fees between her adviser and the funds he recommended to them.

@Awgolfer, are there any attempts being made, that you know of, by people in your industry who are providing fee-based advice services to clients to put an end to obviously predatory practices which are apparently completely legal for "advisers" to do? You know as well as I do that if combined yearly fees for a mutual fund and "adviser" are >3%, clients are being robbed. It seems like you guys who are doing a legitimate business need to speak up and get the government to step in and put the crooks out of business. If not, legitimate advisers who charge an hourly fee for their services may end up getting put out of business as well...

In America at least, expense rations are nowhere near 2% for most funds. Some people see an expense ratio(what it costs to run the fund, in her case over 2%) and thing it is outrageous. But, some fund do have to charge that amount, especially if it involves a lot of thinly traded international stocks. There are even ETF's out there with close to 2% expense rations. Meaning the fund company isn't making a lot, it just costs that much to run it. Look at BIZD, it is a bdc ETF that has an almost 9% expense ratio.

It is becoming alot more common in the US for advisors, like myself to build ETF and index mutual fund portfolios for clients and charge them 1%. The fee isn't to beat the market, we all know we can't, it's to build a sensible portfolio for their given risk tolerance and to make sure it meets what their individual goals are. So on average our ETF portfolios cost about .24%. Plus our management fee, which is never above 1% and after 500k goes below that.

There are a place for advisors, I've said this 1000 times, a good advisors worth to a client is 5% investment return, and 95% making sure they don't do the wrong thing(pull out of the market). Most people will not have the guts to take on investments on their own like you all will, it's scary. Especially if it is your life savings, that's why people will always use advisors.

[nereo]

In America at least, expense rations are nowhere near 2% for most funds. Some people see an expense ratio(what it costs to run the fund, in her case over 2%) and thing it is outrageous. But, some fund do have to charge that amount, especially if it involves a lot of thinly traded international stocks. There are even ETF's out there with close to 2% expense rations. Meaning the fund company isn't making a lot, it just costs that much to run it. Look at BIZD, it is a bdc ETF that has an almost 9% expense ratio.

It is becoming alot more common in the US for advisors, like myself to build ETF and index mutual fund portfolios for clients and charge them 1%. The fee isn't to beat the market, we all know we can't, it's to build a sensible portfolio for their given risk tolerance and to make sure it meets what their individual goals are. So on average our ETF portfolios cost about .24%. Plus our management fee, which is never above 1% and after 500k goes below that.

There are a place for advisors, I've said this 1000 times, a good advisors worth to a client is 5% investment return, and 95% making sure they don't do the wrong thing(pull out of the market). Most people will not have the guts to take on investments on their own like you all will, it's scary. Especially if it is your life savings, that's why people will always use advisors.

I have two responses to this:
1) for actively managed portfolios, charging a percentage of total assets seems parasitic to me.  It does not take appreciably 10x more work to manage a portfolio worth $1MM than one worth $100k.  the current model seems to be predicated on luring customers in when they are young and their portfolios are very small, and then keeping them for live, milking huge sums of cash during their later years. 

2) I've seen no evidence that financial advisers do a better job at preventing their clients from pulling out of the market during downturns.  In fact, I see the exact opposite effect.  Vanguard released a report showing that of their self-managed clients, more than 80% stayed the course during the 'great recession'.  In contrast, actively managed funds drastically increased their cash holdings and sold off tons of equities.  Professional advisers can be even more prone to pulling out their clients money than individual investors.  They are interested in what the next quarter shows and want to stop the bleeding.

3) I believe that most people 'don't have the guts' (as you say) to take on their own investments because there is an ongoing marketing campaign to make people think investing is harder than it really is.  Basic investing can be very simple, and simple strategies built wealth and typically beat out the majority of complicated strategies.  Otherwise, actively managed funds wouldn't trail indexes year after year, decade after decade.

Consulting a financial adviser can be very useful for some people.  But not for a percentage of the total portfolio. 

[Vertical Mode]

Again, I deal with this stuff everyday, although I am in the US. But this exact case is highly highly illegal and extremely regulated. You cannot charge a commission and charge an annual percentage fee. It's blatant theft if that was true.

It seems that there's some confusion among posters about exactly which fees you're referring to. I accept your knowledge of the industry and the fact that it's illegal, at least in the U.S. to charge both a load on a fund AND charge a fee based on a percentage of the client's assets. It has to be either or, but not both.

It does appear, however, that clients can legally be charged twice in another way. Annually, clients pay a fee to their adviser, which is a % of assets invested, usually about 1%, and then, also every year, clients pay a fee to cover management expenses to the fund(s) their adviser put them in. In the case of the OP, all of the 8 funds her adviser put them into were charging >2% annual management fees. So, total, it looks like OP was paying >3%/year in fees between her adviser and the funds he recommended to them.

@Awgolfer, are there any attempts being made, that you know of, by people in your industry who are providing fee-based advice services to clients to put an end to obviously predatory practices which are apparently completely legal for "advisers" to do? You know as well as I do that if combined yearly fees for a mutual fund and "adviser" are >3%, clients are being robbed. It seems like you guys who are doing a legitimate business need to speak up and get the government to step in and put the crooks out of business. If not, legitimate advisers who charge an hourly fee for their services may end up getting put out of business as well...

In America at least, expense rations are nowhere near 2% for most funds. Some people see an expense ratio(what it costs to run the fund, in her case over 2%) and thing it is outrageous. But, some fund do have to charge that amount, especially if it involves a lot of thinly traded international stocks. There are even ETF's out there with close to 2% expense rations. Meaning the fund company isn't making a lot, it just costs that much to run it. Look at BIZD, it is a bdc ETF that has an almost 9% expense ratio.

It is becoming alot more common in the US for advisors, like myself to build ETF and index mutual fund portfolios for clients and charge them 1%. The fee isn't to beat the market, we all know we can't, it's to build a sensible portfolio for their given risk tolerance and to make sure it meets what their individual goals are. So on average our ETF portfolios cost about .24%. Plus our management fee, which is never above 1% and after 500k goes below that.

There are a place for advisors, I've said this 1000 times, a good advisors worth to a client is 5% investment return, and 95% making sure they don't do the wrong thing(pull out of the market). Most people will not have the guts to take on investments on their own like you all will, it's scary. Especially if it is your life savings, that's why people will always use advisors.

+1.

Dr. Doom's Drawdown Series over at his LivingAFi blog talks about the psychological aspect of investing, and how it FEELS when the market tanks and you've got skin in the game. For those who don't take a keen interest in PF like we all do, that can lead to huge mistakes making emotional decisions when things go precipitously south.

[Shane]

Consulting a financial adviser can be very useful for some people.  But not for a percentage of the total portfolio.

This.

Okay, I can agree that some clients can benefit from hand holding by an adviser, but why does an adviser need to charge the client for his advice based on a percentage of the client's assets? Is it 10x more work for an adviser to come up with a portfolio of ETFs for a client who has $1MM than it is for him to create a portfolio for a client who has $100K? Of course not!

It's a rip off! And legitimate advisers who charge a fee for their services need to stand up and speak out about it.

Recently I sat down with my brother to look over his portfolio of mutual funds which had been chosen for him by his adviser who was charging him 1% on top of 1-2% management fees for 8 funds! His situation was almost identical to the OPs, just the management fees on the funds were a little lower, but still ridiculous.

Anyone who is paying 1% to an adviser and 1%+ to a mutual fund(s) is getting ripped off IMO. If there were no other, better alternatives, then it wouldn't be so bad, but it's super easy to create a portfolio of ETFs or mutual funds on your own with an expense ratio of .05%. It's called VTSAX or VTI.

It sounds like @Awgolfer is letting his clients off a little more cheaply by putting them into ETFs, but it's still costing them ~1.25%/year. That's 25x more expensive than just buying VTSAX and holding it. If you look at the two charts next to each other, one portfolio with everything in VTSAX @ .05% ER, and the other chart with the best portfolio of ETFs that @Awgolfer can come up with for his clients, there will be NO COMPARISON! VTSAX will win every time, because it has lower fees.

@Awgolfer, you say that 95% of an adviser's value to a client is in holding their hands and convincing them not to sell when the market tanks. Okay, why would you need to charge clients a percentage of assets invested to do that? Is it really more work to convince someone with a lot of money invested not to sell than it is to convince somebody with just a little bit of money? I would think it would be the opposite. As people get older, have more money invested, have met more times with their financial advisers year after year after year, they would eventually get it, and not need as much hand holding. It seems to me like the ones you'd really have to babysit would be the younger people who were just starting out with investing...