Indexing With a Financial Advisor

Many investors understand that the highest odds of investment success come from owning a diversified account of indexes, rather than a slew of actively managed mutual funds.

But we also know that most advisors shun indexes for their clients’ portfolios because they (the advisors) make far more money selling actively managed funds instead.

As simple as building a diversified portfolio of indexes is, there are those who don’t want to do it themselves.  And there’s some merit to hiring someone to help.  Beyond serving as a cheerleader for your savings and offering advice on taxes, an advisor could be your objective, disciplined guardian.  Do you have what it takes to re-balance your portfolio when it tanks?  I’m not going to say “if it tanks” because it surely will.  That’s what markets do from time to time.  And when every media outlet is screaming, “It won’t recover this time!” will you be able to ignore the smartly dressed, generally attractive television authorities who call for the financial version of a global Tsunami.

We all know that it’s easy to create portfolios that beat the pros.  But can we emotionally stick to a logical plan?

I’m guessing that when markets drop and losses mount on losses, most “do it yourself investors” will lose their heads.

So what’s the alternative?

Dan Bortolotti, at The Canadian Couch Potato  is putting together a collection of Canadian advisors who fill their clients’ portfolios with indexes, instead of actively managed funds.  So you can invest in the most efficient market products (index funds) while a professional takes the reins. 

But if this is what you’re looking for, don’t accept each name/institution that Dan lists here as a recommendation.  That’s not why Dan compiled it.

Treat each option as something worth investigating.  And set a standard or a maximum price to pay.

One American advisor who I’ve grown to respect a great deal is Robert Wasilewski.  He purchases exchange traded index funds for his clients, and he charges 0.4% as an annual fee.  If the exchange traded index funds (which he buys for his clients) cost 0.15% per year as an average, then the total cost comes to 0.55% for Robert to manage his investors’ portfolios: 0.4% for Robert and 0.15% for the hidden fund fees.  Let that 0.55% be a benchmark.  It’s a small overall price to pay for someone to dispassionately manage your money.

Slightly more expensive, but probably worth the cost, is an American company called Assetbuilder.

Their fees, for different respective account sizes, are as follows:

So if your account size is $100,000, you’d pay 0.45% of your account’s value in assets every year, not including the fees for the indexes they buy for you.  Assetbuilder uses indexes built by a company called Dimensional Fund Advisors which will cost investors roughly another 0.3%.  So you could use Assetbuilder as an American for roughly 0.75% per year on a $100,000 account. 

Watch out Canadians!

Taking your lead from the two examples above is probably a wise idea.  If you find a Canadian firm that will manage an account of indexes for 1% or more, you should probably say, “Thanks, but no thanks.”

When adding that 1% with the cost of the indexes, you’d be paying 1.2% or more in annual fees.

That’s a lot of money.  If the markets make 5% per year over the next 5 years, you’d be giving away 24% of your annual profits each year to the financial service industry.

It’s no wonder that the most represented professional source of wealth for America’s richest people is derived from the financial service industry.  See the List.  And the list could be similar for Canadians.

It’s a lucrative gig.

If you can’t invest yourself, be a discerning “shopper” and find someone who can help you…for a fair price!