Did My Friend’s Investment Advisor Add Value?

andrew hallam

andrew hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (Wiley 2011) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I'm happy to comment on your questions. However, please read the Terms of Use.

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26 Responses

  1. MoneyCone says:

    What do you think of such a high allocation to natural resources?

    I do not know why this fixation on natural resources.

    Do you think the broker made an innocent mistake by not including reinvested dividends for the S&P 500 index comparison?

    Would be helpful to ask the broker how this figure was arrived at

    When my friends asked for an estimation of their total expenses, the broker emailed back and estimated that the total fees amount to roughly

    Much room for improvement! I'd personally go with one of the lazy portfolios with a threshold based rebalancing strategy and stick to Vanguard funds.

    Your friend still have some years left before retirement. He could take on a little more risk. (More EMs?)

    • Thanks for the comment MoneyCone!

      You're definitely right that the fees are far too high. What many people don't recognize is that the dollar value paid in fees annually is something that can't compound in the markets over their lifetime.

      If my friend pays 1.92% in fees on a $250,000 portfolio over a decade, that's $48,000 in fees.

      If you could compound $48,000 instead, over 30 years, at 9% annually, the real cost to paying those high fees amounts to $636,848. But of course, my friends' account would grow over time (and they will add more money to it) so the opportunity cost of those fees over 30 years would easily exceed a million dollars.

      I would also argue that the portfolio is far too risky, considering a 38% allocation to natural resources. Of all the portfolio models I have seen over the years, and of all the finance books I have read (well over 300) I have never seen anyone advocate a percentage that high to natural resources. I think my friends got lucky, because natural resources rose considerably during this time period, but when they fall, my friends are going to get hurt.

  2. DIY Investor says:

    -I don't like the high allocation to natural resources. To me often this is gambling. You're betting on the next person paying more and eventually you come to the end of the line and there is a collapse. I prefer investing in enterprises that provide a good or service that the economy wants and is paying or eventually pay a dividend. 5% max in natural resources ( and a diversified fund at that).

    -investment managers use S&P 500 without dividends as a benchmark all the time and it should be outlawed! Clients don't know what they are looking at and come away misled.

    -1.92% fees are too high! Your examples show that better performance could have been attained at lower fees.

    Excellent post!

    • Robert,

      I especially enjoy hearing your feedback on this, considering that you're a financial professional yourself. Like you, I agree that the fees are too high.

      And of course, that allocation to natural resources seems very unusual to me.

      As for comparing the cumulative 9 year results on an investment statement to the S&P 500 index, not including dividends seems bizarre…and unfair.

      I did dramatize, in my post, how powerful the reinvested dividends would be, over a human lifetime…trying to show that over long durations, they add up considerably. It's highly misleading to draw comparisons without dividends.

      Should it be legal? You suggest that it shouldn't be, and I agree with you.

      If we were reporting the speed of two cars, could we publish the speed of one car after letting the air out of the tires? Wouldn't the car company sue us for that?

  3. 101 Centavos says:

    Andrew, that's a pretty broad definition, "natural resources".

    I have some oil and gas stocks (exploration, production, and pipelines) which could be considered natural resources, but pay a good dividend, which is re-invested, and have in addition appreciated quite nicely. Silver and uranium miners are also natural resources, but have performed in opposite direction (at least only this year for uranium).

  4. Hey Centavos:

    Thanks for the comment. You're right. The breakdown on the pie chart suggests "Natural Resources" making up 35.2% in one of my friend's accounts and roughly 40% in the other. Here are the natural resource holdings in question:

    Franklin Gold and Precious metals fund

    American Century Global Gold

    Clean Energy Fuels Corp

    Interoil Corp

    Mesabi Trust

    Patriot Coal Corp

    Penn West Energy Tr

    Petrobank Energy & Res Ltd Company

    Petrominerales Ltd

    Plum Creek TImber

    Stillwater Mining

    Teck Cominco Ltd Class B shares

    The above consitutes roughly 38% (including both accounts) of my friends' total portfolio.

    So what do you think?

  5. Jenn T says:

    Malkiel's Life Cycle Guide to Investing doesn't have a natural resource allocation. Nor do Bernstein's model portfolios or Swedroes. The advisor is either a gambler with other people's money, or he can see the future. Lucky for him, the resources did well. But there has also been a huge sell-off since March. How does your friend's account look right now, after so many of those holdings have fallen? PennWest and Interoil alone, have dropped 20% since March. Many of the others probably have as well.

  6. Thanks for the comment Jenn:

    I do know that David Swensen, Yale's endowment fund manager, rebalances natural resources, along with stocks, bonds and real estate. He suggests that they can be a nice hedge. He doesn't suggest it in his book for individual investors. But he does mention it in Pioneering Portfolio Management, for institutional investors. Having said that, the percentage that he allocates to oil and gas, timber etc isn't very large. I have seen some portfolio models with up to 10% in natural resources, but not higher than that. My friend's advisor rolled the dice, and it worked out. But I think he took a big risk in doing so.

    I didn't know that so many natural resource stocks had recently been hammered. I don't actually have a natural resource component to my personal account. My account is pretty wimpy, I'll admit. I own short term bonds, where my friends own natural resources.

  7. Marco says:

    Hi Andrew,

    The natural resources allocation seems high. Best to reduce the allocation and add to other sectors that are low or where they do not have exposure.

    The fees are much to high especially with the availability of lower fee products out there.

    The total return S&P500 benchmark should be used. However on the topic of benchmarks, I find that many individuals focus to much time on them. They want to slice and dice their portfolio to see how each sector is doing compared to the relative benchmark. This is then followed by calculating a total fund blended benchmark to see how their total fund return compares. Sometimes, we get lost in these numbers and perhaps a simpler approach to benchmarking for the individual is required. Why not just an overall funding requirement target? Or perhaps the risk free rate? Or the inflation rate plus a certain bps? For the majority of individuals their portfolio is for future funding purposes. Having a benchmark that does not reflect this is missing the mark. Just my two cents.


  8. Thanks for the comment Marco! And you make an excellent point about benchmarking. Personally, for people who create broad market indexed portfolios there's really no point to it. Your asset allocation determines your risk. If you're diversified and balanced, your benchmarking task makes no sense. Your account will essentially represent the benchmark, relative to your desired risk level.

  9. The Dividend Ninja says:

    Hey Andrew, Great Post!

    While I am not a professional financial advisor, here is my bottom line response:

    1. What do you think of such a high allocation to natural resources?

    Your friend has been lucky with this portfolio, because resources and global real-estate for that matter have obviously done so well lately. That scenario can go either way in the future, especially for real-estate, that always seems to lead to bubbles of some type.

    In my opinion, regardless of the risk profile of your friend, the Asset Allocation of this portfolio is completely wacked. On looking at the asset-allocation, your friend has 37% stocks, 35% resource stocks, and 7% real-estate which I am also assuming is some type of equity holding. That brings his total Equities to 78%. Of that 42% (resource + real-estate) of his portfolio is in “high risk” in terms of more volatile equities such as resources and real-estate. And he only has 20% combined in Cash and Fixed-Income. This is a very dangerous portfolio, and needs a rebalance sooner than later. Your friend would be better off with the classic equity/bond split of 60/40. And perhaps 10-15% max in the resources and real-estate. What do you think Andrew?

    2. Do you think the broker made an innocent mistake?

    Are you kidding me? That was deliberately left out to show an over-performance of an under-result.

    3. I don’t think the advisor is being upfront about the fees. He should hire a lawyer to disclose the proper fees paid, since legally the broker would be obligated under law to do so (I am assuming). That 1.92% is meaningless without a record of transaction costs.

    The Ninja Fix:

    Your friend should switch over to a discount brokerage, and get someone to give him a good review of his portfolio (maybe you?). I would NOT suggest he sell his good paying dividend stocks by any means, but he should really cut back on the resources and real-estate, and perhaps put those into solid bond ETFs of various durations to rebalance his portfolio. He should check the ROI in his various stocks to see which ones are worth holding, sell the losers, and replace those with Index Funds or Index ETFs. He should switch to a discount brokerage before making any portfolio changes, so he doesn’t create more fees for his advisor, or for another advisor for that matter.


    The Dividend Ninja

  10. Thanks for such a superb, detailed response to the question Ninja.

    I would like to respond to each of your sequential comments:

    1. You nailed one aspect that is definitely worth raising. The fixed income (bonds/bash) component is pretty low, at roughly 20% of the portfolio total–especially considering that my friends won't have pensions to look forward to, nor will they likely enjoy a nice dose of social security (overseas Americans don't contribute to social security). But I don't know what they said to their advisor, about their risk tolerance either. If they said that they had a high tolerance for risk, then the low bond/cash component (fixed income) could be fine. I am roughly their age (two years older) but my short term bond component is double what theirs is. Ironically, my tolerance for risk is high, but I do enjoy having those bonds, which allow me to be fearful when others are greedy (allowing me to sell large chunks and buy stock indexes when the markets fall)

    You are right that real estate comes and goes in bubbles, but so do natural resources. Gold, as we know, has hardly beat inflation since the 1800s. But it has made spectacular rises and falls along the way.

    My friends own gold (in the Franklin Gold and Precious metals fund), and it's definitely a holding that speaks more to speculation. That's a tough thing to do, of course. We know that $1 invested in Gold, in 1801 would be worth $70 today. One dollar invested in the U.S. stock market in 1801 would be worth $10 million today. With stocks, you can buy and hold, and make money. With gold, you have to prove that you can jump in and out. It's seductive, but few people end up winning, in the long run. I do think a classic portfolio would suffice: 40% bond market index; 30% U.S. stock market index;30% International stock market index. But if you created a portfolio like that, you wouldn't need an advisor (as long as you had the fortitude to rebalance annually…which isn't always emotionally easy)

    2. You and the rest of the readers have a pretty consistent view on the S&P 500 index comparison without dividends. This is certainly a strange way to mislead investors. The statement has a cumulative return section (showing comparable gains over the past 9 years) and juxtaposing the S&P 500 gains (without dividends) alongside the clients' account. Doing so without including dividends for the index is very misleading.

    3. My sense about the fees is this: there is likely a 1% wrap fee, and then the advisor added in the expense ratio fees for the funds owned, to come to 1.92%. I think the advisor was being very upfront, by adding their wrap fee to the fund costs. I'm only guessing the wrap fee expense at 1%, but it could be more like 1.25% because there are very few funds in this account (mostly individual stocks). Considering the scarcity of funds, the average expense ratio of the account itself would be low. Hence, it could be 0.92%. If it's less than that, then the wrap fee would be higher than 1%, to give the average of roughly 1.92%. Either way, this total fee expense was the advisor's estimate, after being asked about it in an email.

    As for what the client should do, there's an even simpler solution Ninja. Instead of combing through all of the individual stocks, they could index the entire portfolio. If they want hands-on management, perhaps their broker would accept a small fee to simply rebalance a passive account. The statistical odds are that they would do far better with this approach over their lifetime of investing, and they would end up paying lower taxes with less "turnover". The more buying and selling that their advisor does, the less tax efficient this account would be. This isn't an IRA, after all.

  11. Nice post Andrew. Unfortunately based on the details you got, you had to assume a great deal. I would do the same.

    Here are my answers:

    1. High allocation to natural resources?

    Yupper. I wouldn't have over 15%, let alone 30+ in NR. WAY too high. Even if these companies are well-established, this is overweight. Almost seems speculative? Then again, I obviously don't have enough information about your friends risk profile. Maybe they are the risky types?

    2. Do you think the broker made an innocent mistake?

    Nope. All by design. That's the great thing about data, you can always make it tell a story if you want it to! 🙂

    3. About the total fees being almost 2%?

    Based on what I've read, certainly no "alpha" here. Even if the advisor was "lucky", he didn't outperform the index based on the time period identified with reinvested dividends – which is always the key in equities. Your friends would be better off with a few dividend-payers and a bunch of indexed products; likely a bond allocation to match their age (late-30s like me :). Further still, if they don't have any pension, they might consider even a higher bond allocation – upwards of 40%-50%. Why? You don't want to lose any capital if you don't have a fallback holding; like a pension. Your friends should not afford to be risky by any means.

    Paying 2% fees annually, they will lose close to 25% of their portfolio value over a 25-year period.

    It would be an interesting experiment to see what a fee-based advisor would recommend your friends, wouldn't it? 🙂



    • Hey Mark,

      I think you're right. It would be interesting to see what a fee-based advisor would advocate. For those of you unfamiliar with objective fee-based advisors, they usually charge a fee for a consultation, and then make suggestions for the client's account. Because they don't earn a percentage of what the investor invests, and because they don't earn trailer fees or sales fees from funds, they tend to be more objective.

      Sometimes, fee based advisors charge a small percentage of the account's value instead but they don't have the assets in their firm's name, so they aren't able to earn trailer fees or sales loads on the funds. Because they don't earn trailer fees on funds, there's a higher tendency form them to act as fiduciaries, and purchase indexes for their clients.

      You're definitely right about fees hurting investors Mark. But the costs of 2% in fees over 25 years is far greater than the 25% you mentioned.

      Take $10,000, compounded 25 years at 10%: $108,347.05

      Take $10,000 compounded 25 years at 8%: $68,484.75

      Just a 2% fee lag would cost 58%, not 25%.

      Of course, these folks will have money some invested until the day they die (when it will be bequeathed to their children)

      Assume that they live another 50 years. Then have a look at the comparative bequeathment of $10,000 in today's dollars, invested for their children:

      $10,000 compounded for 50 years at 10%: $1.17 million

      $10,000 compounded for 50 years at 8% : $469,016

      The difference, in that case, amounts to well over 100%.

      Fees definitely crush account values over time.

      As for outperforming a rebalanced portfolio of indexes, we'll never really know whether the advisor was able to do that or not, over the past nine years, unless we can dollar-weight every purchase they made, and compare it with an equal dollar purchase into a rebalanced indexed portfolio.

      That would be an extremely time consuming task, and I'm definitely not up to it.

      I do believe that this portfolio performed well.

      But like you, I think there was a high degree of speculation involved.

      Going forward, over my friends' lifetime, we all know where their odds of success will be the highest. Whether they choose to do that on their own, via Vanguard, or whether they want to go with professional fee-based guidance is going to be up to them.

      • Again, I think it would be an interesting experiment to see what a fee-based advisor would advocate to your friends. Maybe a followup post if that goes ahead?

        Regarding the math, ouch. I should have checked before I commented but I had a feeling you'd lose more than 25% with 2% fees over 25 years…and your numbers prove it. Again, ouch. Just goes to show us that fees are forever. I can't imagine losing THAT much money due to fees.

        In reviewing the following holdings, I wouldn't own any of them, except for maybe Tech.

        Franklin Gold and Precious metals fund

        American Century Global Gold

        Clean Energy Fuels Corp

        Interoil Corp

        Mesabi Trust

        Patriot Coal Corp

        Penn West Energy Tr

        Petrobank Energy & Res Ltd Company

        Petrominerales Ltd

        Plum Creek TImber

        Stillwater Mining

        Teck Cominco Ltd Class B shares

        Thankfully for your friends, many of these companies and funds have done well over the years, but there are no guarantees. I don't see any of these companies having a huge competitive advantage.

        The evidence remains overwhelming: most investors should pick a few Vanguard, iShares or Claymore products and sit back and relax for 363 days out of 365 and do absolutely nothing. You might need a few hours on 2 days of the year to rebalance your portfolio but not much more 🙂

        BTW – I got my MoneySense magazine in the mail yesterday. I started reading your article 🙂

  12. 101 Centavos says:

    Hi Andrew – just a quick one, I tried the morning star link, and entered the suggested dates:

    "With reinvested dividends, it returned +92.7% during this time period. (You can see the results here: Just ensure that you scroll to the specific date requirements: August 19, 2002 to March 31, 2011.)"

    The S&P shows a growth from a putative $10,000 investment to $16,544. Am I doing something wrong, or does the total return not account for reinvested dividends?

  13. Thanks Centavos!

    After looking more closely, I mistakenly used the September 30th date as the beginning, and not the August 19th date. The new figure I got for August 19, 2002 to March 31, 2010 with reinvested dividends was +70 percent for the S&P 500, including dividends. You were more right than I was.

    Thanks for letting me know. It does shed some light on how tough it could be to compare dollar weighted returns, after the fact, without a spreadsheet and plenty of time. The difference between starting six weeks later ended up being dramatic.

    Thanks again Centavos! I'll make the adjustments to the numbers in the post.


  14. 101 Centavos says:

    Franklin Gold and Precious metals fund

    American Century Global Gold

    Clean Energy Fuels Corp

    Interoil Corp

    Mesabi Trust

    Patriot Coal Corp

    Penn West Energy Tr

    Petrobank Energy & Res Ltd Company

    Petrominerales Ltd

    Plum Creek TImber

    Stillwater Mining

    Teck Cominco Ltd Class B shares

    The above consitutes roughly 38% (including both accounts) of my friends’ total portfolio.

    So what do you think?

    I think that some of these choices are are unnecessarily risky (nutty), and some are quite good (boring). But it tends towards my point that all "natural resources" shouldn't be considered equal, and don't all deserve to be lumped into the "speculative and gambling" category.

    Plum Creek for example, when compared to the S&P and Dow Jones from 1990 to today, returns 396% versus 304% and 378% for the S&P and DJ respectively. I suspect the data coming from Google Finance (or Morningstar) doesn't allow for re-invested dividends. If that was the case though, it would be even more skewed towards Plum Creek, since right now it's sporting slightly over a 4% dividend. As for volatility, it roughly tracks the markets with a beta of 1.03. Same for Mesabi Trust, seems quite stable.

    Other choices I wouldn't even get close to, like Stillwater Mining, Interoil, Petrobank and Clean Energy. All things being equal, I'd suggest going to a company like Bonterra instead of Petrobank (5.45 yield versus zero yield, more reasonable P/E, better operating margins, return on equity and assets, etc.) Whether investing or speculating in the oil and gas sector, I prefer to have a dividend to cushion the ups and downs.

    Don't get why there is *two* natural resources funds — one should be enough. And Stillwater Mining makes no sense at all — it's been a dog of a performer for a long time.

    But, this is my own personal risk profile. I agree that your friends would have been better served by a fee-only adviser, and a more standard standard allocation into ETFs or index funds, and especially these days, cash or cash equivalents.

    • Hey Centavos!

      Thanks again for pointing out the S&P 500 error. I used Morningstar, cross-referenced it with the historical prices at Yahoofinance and made the change. Your number was right on!

      It's great to hear your thoughts on the individual holdings. A fundamental look at business efficiency is always a smart thing to check on. You said:

      "Other choices I wouldn’t even get close to, like Stillwater Mining, Interoil, Petrobank and Clean Energy. All things being equal, I’d suggest going to a company like Bonterra instead of Petrobank (5.45 yield versus zero yield, more reasonable P/E, better operating margins, return on equity and assets, etc.) Whether investing or speculating in the oil and gas sector, I prefer to have a dividend to cushion the ups and downs."

      I definitely agree that operating margins and a high return on equity are key components when analyzing individual businesses. And dividends certainly don't hurt!

      Thanks again Centavos!

  15. The Dividend Ninja says:

    "As for what the client should do, there’s an even simpler solution Ninja. Instead of combing through all of the individual stocks, they could index the entire portfolio."

    Hey Andrew, that wouldn't be a half-bad idea! Almost all of the resource stocks you listed for Centavos to peruse, are high risk, and even Teck has downside potential – after a good run for 3 years. Your friends could sell all their resource stocks, and take all the gains they have made so far. That would be prudent – sooner than later. They could shift some of that capital into some bond ETFs of various durations (to bring their bonds up to 40%). Nobody needs undue risk, regardless of what they THINK their risk profile may be.

    I'm not sure they need to sell all their stock holdings however. If they have some good dividend paying blue-chips why not keep them (I know you would differ on that opinion). But I think they would be better off going discount, and just paying a fee-only advisor to help to them out on an occasioanl basis. I think their current advisor took undue risk with their portfolio, but lucked out 😉


    The Dividend Ninja

  16. Hey Ninja,

    In case you're curious, here at the other stocks they owned, as of March 31, 2011:

    American Superconductor Corp


    Cninsure Inc Sponsored (ADR)

    Cpfl Energia Sa Spons (ADR)

    Delcath Systems Inc Com

    Family Dollar Stores

    Nextera Energy

    Nic Inc

    Vivus Inc Com

    Wayside Technology Group Inc

    Westport Innovations Inc Com

  17. The Dividend Ninja says:

    OMG, Index the whole thing!

  18. I take it they're not the sort of blue chip, high return on equity, durable competitive advantage businesses that you would buy Ninja?

  19. The Dividend Ninja says:

    Andrew, I was certainly hoping for some ABT,JNJ, MCD, KO, and the usual dividend culprits, and some big established asian or european blue-chips. This is a collection of technology, telecom, financials, and more energy. I had a quick peruse of the charts, company profiles etc. Many of these stocks are already trading off their highs, or are not doing well at all. I'm curious what impelled the broker to buy these particular securities.

    I'd be happy to keep AT&T and Family Dollar Stores, and perhaps Nextera, but not the rest. But that is only my opinion 😉

  20. Your opinion is a valid one Ninja!

    Well done, by the way, on your latest post outlining the differences between actively managed funds, index fund and ETFs. It's very well done.

    For those of you who haven't seen it, check out the Ninja's latest post.

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