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Apr 11 2013

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How To Respond When Your Advisor Tries to Dissuade You From Index Funds





In my book, Millionaire Teacher, the seventh chapter was titled, Peek Inside A Pilferer’s Playbook.

I explained the tactics used by financial advisors who try to dissuade their clients from buying index funds–keeping them in actively managed mutual funds instead.

Today, I summarized some of their smoke and mirror rhetoric in the following Globe and Mail article.  

Advisors who buy their clients actively managed funds are self-serving.  If your advisor insists on buying actively managed funds, you need to fire them.  Full stop.

Read my article at the Globe and Mail








About the author

andrew hallam

I'm a freelance finance writer, lucky enough to have been nominated as a finalist for two Canadian National Publishing Awards. I'm also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School, a book explaining how I became a millionaire on a teacher's salary, while still in my 30s. Working to empower people financially, I'm available to motivate and inspire people on basic retirement planning and index investing. I'm happy to comment on your questions, first, please read the Terms of Use.

Permanent link to this article: http://andrewhallam.com/2013/04/how-to-respond-when-your-advisor-tries-to-dissuade-you-from-index-funds/

21 comments

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  1. avatar
    Joel

    Hi Andrew,
    I've read (and heartily recommended) your book, and i have followed your blog for over a year now. I'm Canadian and make regular contributions to the four TD e-series index funds.

    My only question at this point is in regards to tracking. I would like to know if there is a website or software that can track the growth of my investment. I am looking for something that would graph and provide a summary of gains or losses over time. Thanks for your help!
    Joel

    1. avatar
      Andrew Hallam

      Hi Joel,

      Globe investor has a tracking service that will do what you are looking for. There's a free version, and a more detailed version that costs a bit of money.

  2. avatar
    Jordan Benedict

    Hi Andrew,

    Thanks a ton for the blog over the past year. I work in Dubai and luckily found your book within my first year of teaching before I invested with our schools traveling representative. I've been studying many of the books and articles you recommend for the past year and I'm looking to help our school educate our new employees.

    So I have two questions: For my school, how do I approach leadership to help make a change or at least propose using my knowledge to educate? If it helps your perspective, my superintendent used to be at your school.

    For myself though, I just want to ask a little about diversifying. Currently I went with the split from your book: VG Total Stock, VG Total World, & VG Total Bond

    I read the New Coffeehouse investor and it says you can split it further to get more benefit out of rebalancing. Without selling off all my current shares, how can I add a few more? Or should I even bother?

    Thanks so much again. Your advice and articles have saved a lifetime of bad investments!

    Best Regards,

    Jordan

    1. avatar
      Andrew Hallam

      Hi Jordan,

      You can certainly split your money further into different ETFs. Such a split would enhance returns during some years, while being detrimental during other years. If you go to the Assetbuilder website http://www.assetbuilder.com you can see some sample "lazy portfolios" and their results over the past few years. Despite the addition of more complex portfolios, the couch potato portfolio (as you'll see) has recorded the best return. Having said that, it might not be the leader during the next five years. In other words, do what you're comfortable with–there's no real way to see the future.

      As for educating your staff, approach the idea carefully and with plenty of thought. You know much more about investing than your superintendent, who (and I say this because I know him) has money with Vanguard, as well as with a series of Raymond James directed, actively managed funds.

      Unfortunately, his advisor cheerleads the Raymond James portfolio. And he hasn't done a dollar for dollar comparison of after tax returns, based on equivalent asset classes. At least, he hadn't when I last spoke to him.

      As a result, he's invested in Vanguard, but believes his actively managed funds are better. This will create a problem for you.

      I suggest that you get a group of attendees together. Explain what actively managed funds are, as well as passive funds. Don't suggest that one group is better than the other. Then ask the teachers attending to research which type of funds give the highest odds of investment success. If anything, lead them (with a bias) towards active funds being better. Ask them to find academic research supporting this fact:

      "After taxes and fees, you can find actively managed funds that beat a diversified portfolio of index funds"

      Your colleagues will find no such evidence. Everything wil point to the contrary. Now you'll have them taking ownership of this new found knowledge. Then ask them what kind of funds the school's providers are selling. They'll figure they're active, of course.

      Then fill in the knowledge gaps with your group. Once you have some self-educated converts, see if they will accompany you to see the boss. Tread gently. He's a good man. And in time, he'll eventually come around if he sees enough evidence.

      Cheers,

      Andrew

      1. avatar
        Jordan Benedict

        Thanks Andrew,

        Great advice using the inquiry process back on the teachers!

        We already have many teachers who do their own investments and honestly we were going to just propose that we're allowed to put the school's retirement "match" in our own funds in an easier way.

        I think I already have the teacher support I would need (there's a group of us already). I'm just curious what to propose. Should I propose a new financial advisor? Or is that too extreme? Should I instead just propose that I'm allowed to offer an investments seminar to teachers that is not-required?

        Thanks again. Best,

        Jordan

        1. avatar
          Andrew Hallam

          Hi Jordan,

          Call it an investment "discussion" rather than a "seminar" and you'll get the green light. Please keep me posted.

          Cheers,

          Andrew

  3. avatar
    Alexandre Dallaire

    Hello Andrew,

    I'm Alexandre from Québec City! I read you're very interesting book last summer and opened a RRSP account with TD Bank e-series indexes right away!! As suggested, I took one of each TDB905, TDB900, TDB902 and TD909; by the end of 2013 I should no longer have anymore fund fees to pay. Did you know that as soon as you hit 25K….no more fees with TD?

    Since 2009, I've been investing in a TFSA account with the help of a (friend of mine) financial advisor. Over the last 6 months, I've gained some interesting dividend returns each and every month; between $200.00$ and $500.00, sometimes up to $600.00. So my question is:"Should I open another TFSA account with TD Bank e-series and transfer my money into index funds and using the same stocks and bond as well?"

    I hope to hear from you very soon,

    Thanks,

    Alexandre

  4. avatar
    Sasha Degras

    Do you know anything about the SCI group?

    1. avatar
      Alexandre Dallaire

      Hello Sasha!

      If the question is for me, my answer is no!

      Alexandre

    2. avatar
      bongers

      from their website they look like they sell the type of investments that this blog recommends to avoid…namely unit liked life insurance investments…they are not the low cost solution.

    3. avatar
      Bongers

      Sasha

      From their website they sell unit linked insurance based investments. Exactly the type of investments this blog recommends to avoid….Bongers

  5. avatar
    Sasha Degras

    I was recommended Fidelity by someone who has also read your book. I am British and wondering if you have heard anything bad about them?

    Thank you.

    1. avatar
      Andrew Hallam

      Hi Sasha,

      Fidelity is a fund company which sells mostly actively managed products.

      However, if you are British, you don't need to pay the high fees associated with active management. Go with HSBC's tracker funds. They cost 1/5th what you would pay with Fidelity's actively managed unit trusts. Fidelity isn't a bad company (it's certainly no Zurich International) but you can do much better.

  6. avatar
    Alexandre Dallaire

    Hi Andrew,

    Knowing that I already have the four TD e-series index funds with my RRSP account, do you recommend the same index for a TFSA?

    Thank you very much,

    Alexandre

  7. avatar
    Daniel

    Having read the book, and being in the process of transitioning our portfolio from actively managed mutual funds to indexed funds, I wanted to share my experiences with two different financial advisors this year.

    The first, when asked about the indexed funds (or EFTs) they offer, first responded that “active money always beats lazy money”, then after about a week of back and forth send me links to a small selection of indexed funds with short histories and poor performance. In fairness, we never discussed the rebalancing discipline that takes “lazy” out of the equation. But I’m suspicious that we were only shown poor indexed fund performs to dissuade us from moving in that direction. We ended up selling some of our actively managed mutual funds to fund an indexed fund TFSA elsewhere.

    The second, an advisor at one of the big Canadian banks who wanted our business, provided us with a free analysis of our holdings. Her analysis showed that we were too heavily into equities and too light in bonds … but the charts she provided to support that conclusion had all incorrect $ amounts. So the while her list did include funds we were invested in, it didn’t reflect the amounts (or even the proportions) we had invested in those funds. When asked about that, she replied that the $ amounts don’t make a difference … she could have but in $1 in each fund and gotten the same result! ( This same advisor ALSO mentioned that we have too many different funds hitting us with an MER every year, and that we could reduce our MERs by holding fewer funds. )

    Thought you might appreciate the anecdotes. Cheers!

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  11. avatar
    Ben

    Hi Andrew-

    I just finished your book and absolutely loved it (sorry I was a little late to the game). My wife is a public school teacher in the state of Pennsylvania. She has been contributing to her district’s 403(b) plan for the last 5 years, but after doing some research thanks to you, I’ve found that her current investment options are less than ideal when it comes to fees. The vendor she is currently using does not offer index funds, so I sent out emails to all of the other approved vendors asking to see what funds they have available to her 403(b). So far I have received the same response from all of them, we do not offer Index funds and then they try to dissuade me from using them. I approached the school district about adding Vanguard as an approved vendor, but quickly found out that it was a nearly impossible task.

    Since the district does not offer any type of employer match, the only benefit of her 403(b), when compared to a Traditional IRA, is a larger annual contribution allowance. Based on this, we have decided to open a Traditional or Roth IRA though Vanguard and stop contributing to her 403(b). Here’s where I have a question for you. What do we do with the money that’s currently in her 403(b)? I have been told that since she is still employed at the school district, she is not permitted to roll that money into something like a Traditional IRA. I would appreciate any guidance you may have on this subject.

    Thanks!

    1. avatar
      Andrew Hallam

      Hi Ben,

      I’m not American, so I wouldn’t know. However, I just met (online) the perfect guy to answer your question. Like you, he’s a teacher, and he has overcome the same kind of obstacles. He could also shed plenty of light on options, I believe. Here’s his blogsite: http://www.millionaireeducator.com/

      1. avatar
        Ben

        Perfect! Thanks Andrew.

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