The Value Of Professional Financial Advice

Mr. Greg Pollock, President and CEO of Advocis

 on Lang and O'Leary

Where To Find It
After seeing the President of Advocis on the Lang and O'Leary Exchange, I couldn't refrain from posting this.  I have not connected the link to the image because CBC requires you to watch 10 minutes of commercials to see a couple minutes of programming.  I don't want to waste your time, so will give you an overview, but if you really want to see the clip, be forewarned.  The segment starts around 28:50 in the clip.  http://www.cbc.ca/player/Shows/Shows/Lang+O%27Leary+Exchange/ID/2438219196/

Concerning Fees...
Mr. Pollock doesn’t want to see choice in how advisors are regulated, which I can understand, but he does want choice in how they are compensated.  He says eliminating advisor commissions on mutual funds would result in less advice for Canadians.  To me, the irony is that  advisors are the reason Canadians are so deep into mutual funds in the first place.  In Canada, we can buy better investments than mutual funds, but rarely can we pay more than we do for mutual funds.  Apparently, that is not one of Mr. Pollock’s concerns.

Surprise!!
Regardless, Mr. Pollock and his Advocis organization www.advocis.ca need to get their facts straight.  Advocis likes to claim financial advisors are the reason that clients have more financial assets than people who don’t get the advice of an advisor.  The truth is, the study, “New Evidence on the Value of Financial Advice” by Dr. Jon Cockerline, https://www.ific.ca/wp-content/uploads/2013/08/New-Evidence-on-the-Value-of-Financial-Advice-November-2012.pdf/1653/ only included people who were happy with the advice they were getting (those who were, obviously, making money) over periods of time, in the “advised“ group.  Their results were compared to another group (anyone not currently dealing with a financial advisor) which included anybody who left their advisor because they were not making any money, or worse, were losing money even at the advice of their advisor!  Guess which group came out ahead?

Good Advice?!?
In actual fact, the report states, “The large difference in assets that is observed may be the result of other variables besides advice.”  Since advice, alone, failed to account for the gap in performance, the report goes on to explain how an increase in the rate of savings for advised accounts could explain the difference.  It is not surprising to think people would direct additional money to advisors they were happy with, while others don’t, particularly after being unsuccessful in the past (even with the “help” of an advisor).  

What the study actually proves is that people who find a good advisor should take their advice!  While Advocis may not be lying to us, they sure as hell aren’t telling us the truth when it comes to the true value of  professional financial advice.

Has your financial advisor made you money?  Any idea how much that advice cost you?

The Four Percent Rule

Click Here To Play The Video

The 4% rules dictates that, given historical market returns, we can't afford to withdraw more than that amount from our retirement portfolio after age 65 when we, presumably, stop contributing to it.  From what I understand, this is before fees, and other related costs.  On that basis, does it make sense that we should be paying more than half of our potential retirement income to the mutual fund industry in the form of management expenses?  Whose money is it, anyway?  I plan on withdrawing more than 4% from my retirement portfolio.  Given the high fees relative to performance, I won't be parking my funds for retirement in any mutual fund!

Have you looked at your mutual funds, lately?


 

Brokers vs. Fiduciaries

It's About The Money
If you haven't seen this video, you need to watch it.  It is more than a clever story.  It is also the fundamental basis of why I do what I do.  Most financial advisors are not telling you how they are being compensated.  The goal of corporations is to make money, and the goal of employees, then, should be to help the company make money.  Generally, the more money they make for the company, the better they are compensated.  How much their customers make in the process is, mostly, irrelevant.  I know because I have worked for these organizations.

Product
Also, we don't normally shop at Toyota for a Ford product.  Sales people (including financial advisors) are going to sell you their products, not those from elsewhere.  A friend recently asked me to look at his portfolio, and, not surprisingly, it was jammed with mutual funds owned by the advisor's company.  We don't go to a car dealer to buy a washing machine, either.  It is up to us to know what we need to buy, and not let the sales people spend our money for us.  Even personal investors who already know of the undisclosed conflicts of interest between most financial advisors, the talking heads on TV, and their own financial health shrug their shoulders and say, "What else am I supposed to do?"

Education
The first thing we all need to do is to become better educated.  Get a second opinion.  Ask why the differences exist between the first and the second set of options.  Eliminate unnecessary expenses.  Why pay an extra two percent for a mutual fund when an Exchange Traded Fund (ETF) will accomplish the same result!  Anybody with access to Google can determine the difference between a mutual fund and an ETF!  Not only can we avoid ending up with a lemon by doing a little research online, we can even find better prices.  Anyone who is trying to tell us anything different is trying to sell us their own agenda.

Whose Money Is It, Anyway?
So, then what?  We either make the people managing our money accountable, or we do it for ourselves.  Anyone who can fill in a form can open their own online brokerage account.  Start small, and don't take large losses.  Not interested?  Then direct your own broker.  Listen to what they have to say, but don't let them talk you out of anything - especially selling anything that is losing your money.

Specialists
We don't do surgery on ourselves, but then we don't just write a blank cheque and tell the surgeon to fix whatever he thinks might be a problem.  We use specialists to handle specific problems (that's why they are known as specialists).  If "make me wealthy" is your only goal, then most of us should fire the people we have given our money to anyway, since they are the only one's pocketing the cash.  It pains me greatly to see other people taken advantage of, but there is also the father in me which knows that some people will never learn until it happens to them.  Don't let it be you.

For a lot of people, it is getting late.  Do you know where your money is?

Alison Griffiths on Lang & O'Leary Exchange

Interview with Alison starts at 47 min. and 30 sec. into the video

The first thing I want to talk about the interview is what she had to say about using advisors.  In her words, "Very few advisors add value to most investors."  She isn't saying advisors never provide value, but that few do, most of the time.  She also said up to 75% of the portfolios of people she talks to are in the negative position!  Even if it is only 50%, that means the average advisor is making more money than the average investor!  She says that, "Advisory services are about selling product."  Of course, Kevin O'Leary disagrees, and he isn't the only one who compares investing to brain surgery.  I agree with Alison - it doesn't need to get that complicated!  Again, advisors and people like Kevin want us to believe that so they can sell us more product.

Alison says "Don't buy junk."  I agree, stick to quality.  We don't get more RRSP contribution room because we lost money buying junk.  She also makes the point that depending on how much money you have saved, GIC's (guaranteed investment certificates) might even work (despite losing to inflation).  She recommends we  forget mutual funds (too expensive); buy broadly based exchange traded funds (ETF's), instead.  Keep it simple - we don't need a lot of product.

When asked about yield she failed to mention REIT's.  There are ETF's which consist of Real Estate Income Trusts.  Globeinvestor.com shows the yield of iShare's XRE as 4.8%.

I haven't read her book, but I may do just that after seeing the interview!

Are you a fan of what Alison Griffiths is telling us?

Twelve Reasons For Not Investing/Taking Control

Being a bald guy, there aren't too many bald jokes I haven't heard.  I think I have a pretty good sense of humour, but after a while, even a funny joke starts to get old.  Likewise, I have been around long enough that there aren't too many reasons I haven't already heard from people who say they can't invest in the stock market, other than mutual funds.  Bald jokes I don't care about so much.  I do care about the reasons people feel they can't generate at least a little income by putting some of their money to work in the stock markets.  Here's a dozen, I will add more next time.

"I have my money in mutual funds, why change?"
There was a time when mutual funds made sense for the personal investor.  Today, Exchange Traded Funds (ETF's) are cheaper, and as such, can often outperform all but the best mutual fund.  Also, there is no penalty for selling an ETF, just a regular commission.

"No money!"
Ever see the Fram Oil Filter commercial - "You can either pay now, or pay a whole lot more later!"  Even a very small amount of money can grow to a reasonable amount given a sound strategy and the power of compounding.  Catching up later requires much, much more capital.

"You make things sound worse than they are - I am happy with the way things are!"
Expect higher taxes, more expensive health care, more volatility in the stock markets, slashes to pension funds, lower paying jobs.  I don't think people who have suffered the ill effects of any of these would say I am exaggerating.

"You are just putting others down!"
On the contrary.  Many people have done remarkably well, given the current environment.  That doesn't mean there isn't a better way.

"Clearly, you  have some sort of hidden agenda!"
I play with my hands above the table for all to see.  What you see is what you get.  I have no difficulty showing people what I do.  If nothing else, I want them to become more educated in dealing with the people who are after their money.  Anybody who knows me can tell you just that.

"What about ROI, or free cash flow, or company management, or preferred shares, or rental properties, or... ."
They are all important.  It is normal for newer ideas to raise all sorts of questions.  However, we want to focus, and concentrate on the things that determine our expected outcome.

"You can't live on the income from $5,000.00!"
The important thing is to start now.  I have yet to find "someday" on any calendar!
 
"I don't have enough money to do everything!"
It isn't this or that, it's both.  We should put a little money into other things, and use a little to learn how to improve the returns on our equity investments.  Once that begins to happen, we will find ourselves putting more money into the things that give the greatest return (those without exceptional risk).

"I'm not interested in a get rich quick scheme!"
Get rich quick schemes don't work.  Improving returns will not make us rich overnight, but it can make us more money in a shorter period of time.

"Why does it have to be all about making money!"
Money is only a unit of exchange.  More money means more time for friends, relatives, self, and others.  Few are truly motivated by money - usually, it's what we can do with the money that is most important.

"How can you say anyone can do it?"
Knowing what to do is one half of the solution.  People with a willingness to practice applying it is the other half.

"How can you/we possibly expect to do better than the professionals?"
Actually, the professionals are involved in an entirely different game than us, for a whole variety of reasons.  Few realize it, but our smaller size is our greatest advantage over the professionals.  Also, the internet has made available the tools and information which can benefit the personal investor like never before.

Do you see yourself in any of the above reasons for not getting more involved and taking greater control?

Investing Expenses & Returns

The Border Crossing
I once heard the story of a man who worked as a border crossing guard.  During the time he worked there, he would often see one man, in particular, riding a bicycle across the border.  The interesting thing about his bicycle was he always carried a box of sand on the handlebars.  Needless to say, the guards felt compelled to, usually, check by sifting through the sand to make sure there was nothing there.  Finding nothing, they would wave the man through, and let him cross.  Week after week, the same man could be seen riding his bicycle across the border.  Each time they sifted through the sand in the box, they found nothing.  Obviously, the guards found this behaviour suspicious, but were never able to find anything illegal.

Sand, or ...?
Many years went by, and finally, the border guard retired from his job.  From time to time, he would remember the man on the bicycle and wonder what it had all been about.  One day, to his surprise, he ran into the man on the street, who himself was now much older.  He stopped to chat for a moment, and the subject of the man's frequent border crossings came up.  He mentioned that in all those years, they never found anything other than sand, so what was he doing with all those boxes of sand?  The man smiled and said, "It wasn't sand I was taking across the border, it was bicycles!"

Market Returns
It makes me smile when I listen to people who think financial institutions make their money in the stock markets, and that personal investors can't.  While there is a component which is made up from investment returns, don't be fooled into thinking that is how the professionals make the real money.  Financial institutions make their returns from fees and service charges (in good times and in bad).  Historically, the stock market has done something around a nine percent average annual return.  Very few managers have consistently beat the markets over a long period of time.  Ask your financial advisor what return to expect on your investments and they will say five, or six percent.

Do The Math
Are we really expected to think returns of five, or six percent account for the lion's share of financial institutions earnings?  Have you ever wondered why so few people know about Exchange Traded Funds, and everybody (almost) knows about Mutual Funds?  Might the difference in service charges and loading fees, and management expenses, and commissions explain some of the discrepancy?  I'll let you do the math.

Expenses
The easiest way for personal investors to increase returns is to decrease expenses.  Obviously, that would not be in the industry's best interest.  I find it interesting how returns receive so much attention, while so little interest is given to explaining expenses. 

Could it be that our bicycle riding friend also worked for the financial services industry?  It seems they both know how to distract others from seeing what really matters.

Do you still own mutual funds?  

Attitude

Character Traits
First, I want to correct a mistake I made in my first post about traits.  I called these traits I am describing, personality traits.  Wrong.  They are not personality traits, but rather, character traits.  As a means of making the distinction between the two, think of many personality types sharing the same character traits.  Every person has the capability of being courageous, or disciplined, even though we may find it hard at times.  Which leads me to what I think of as the most important trait of all, for personal investors.  Attitude.  Yes, I know we all have attitude, but few of us cultivate it enough, or master it.

Money
Take our attitude about money, for instance.  If we fail to have an abundance of money in our possession, then we have either given most of it away, or we have a poor attitude about money.  In any aspect of our life, if we think we can, or if we think we can't; we are correct.  What do you tell yourself about money?  Or, is it really you?  I can still hear my mother reminding me that money doesn't grow on trees.  How many times did I hear my parents say, "Just when we started to get ahead of our bills..."

Beliefs
I can teach people how to invest money in the stock markets, but their success has more to do with their attitude than it does about what they know.  Do we see the stock market as a zero sum game, where our winning means somebody else has to lose?  Do we know there is an abundance of wealth in this world, or do we see it as being limited to only a few lucky individuals?  Do we think making money has to be difficult, and time consuming, or do we see making money as an exchange of value?  In every case, what we believe makes us right!

Focus
Even if we manage to amass a significant amount of money, it will soon disappear if we have the wrong attitude.  Studies have shown that lottery winners and their money are soon parted when they have a poor attitude regarding money.  That is why I find it important to designate a portion of what I make to charity.  I am grateful for the opportunity to do so.  One of the best things about gratitude is it forces us to think about what we are grateful for, as opposed to the things we don't want, and don't like.  I also get to share the fruits of my success with others less fortunate - others who may not have the capital to invest, or a good strategy for doing so.

Do's & Don'ts
To be honest, attitude is something I struggle with in writing this blog.  We are all being manipulated by the humongous advertising budgets of the financial services industry.  Most people believe nobody can time the markets because the "experts" don't want us to think otherwise.  They will promote the ideas of any academic or "expert" who says so.  Even though we can achieve a better return from Exchange Traded Funds (ETF's), their solution is to invest in Mutual Funds.  Guess why?!?  In the face of all of the misinformation designed to mislead and confuse, I find it very difficult to ignore the things that people should not be doing and focus, instead, on only those things we should be doing.  (See, more proof that their plan works!)

Positive Thinking
Fear begets fear, just as love has the power to change everything in our lives.  We can choose one, or the other.  No person can be fearful and loving at the same time.  We can go from one to the other in a hurry, but we cannot hold onto both emotions at the same time.  Fear is the enemy in investing as surely as it is the enemy in life.  Positive things are always, always, the result of thinking about and believing in positive things.  Mother Teresa was known to have said she would never attend an anti-war rally.  However, she would be happy to be invited to a peace rally!

Positive Results
The change in attitude is sometimes really very subtle, as in the previous example.  To believe we can achieve one result while thinking about a different one, is impossible.  I admit, it is one of the things I could  be better at.  Not only do I believe it would make me a better personal investor, I believe it would also make me an even better person.

Do you have the attitude for success?