If you are new to WhereDoesAllMyMoneyGo.com you should know that most Fridays I run a post called “A Lap Of The Blogs” in which I link to some articles of interest I’ve read in the past week. I also include a weekly “racing video” because my former life was in the auto racing industry… Enjoy!
A new W Expert has been crowned! The final episode of the W Experts Search II aired on Wednesday night. For those that missed it, it will be airing again (Saturday at 6pm on W Network). To see who won, you can visit the W Network’s website here. In lieu of a weekly racing video, I’ll post some pics from the set and the wrap party from Wednesday down below…
Episode 11 of the WhereDoesAllMyMoneyGo.com Internet Radio Show
Approaching the 1,600 subscriber mark for the WhereDoesAllMyMoneyGo.com Internet Radio Show! Episode 11 was just published and should show up in iTunes shortly (subscribe to the podcast here). Don’t have iTunes? You can listen to it here too.
From Around The Blogosphere
If you don’t know who Dan Hallett is, you would be wise to read through some of his blogs on The Wealth Steward. He leads off this week’s Lap of the Blogs…
Dan Hallett: More evidence that Canadian mutual funds are not the most expensive in the world
Squawkfox: Back to school tips – Student Budget Planner!
Money Smarts Blog: 8 things you need to know about withdrawing money from RESPs
Rob Carrick: ING launches a no-fee chequing account.
Canadian Capitalist: Mutual fund lobbyist report not meaningful
Million Dollar Journey: Overseas Canadian residents and tax returns
Michael James on Money: The costs of an in-ground pool.
Big Cajun Man: Dumber Than Snake Mittens
Larry MacDonald: An alternative to buying bonds
Jonathan Chevreau: 3 out of 5 boomers can’t retire?
Thicken My Wallet: Tough times for life insurance companies.
This Week’s Racing Video
Skipping the racing video this week as mentioned above. Here are some pics from the set for the W Expert Search II, and the wrap party. The host, Karen Bertelsen, writes a fantastic blog: The Art Of Doing Stuff. Quirky, funny and really interesting posts. Jenny Tryansky Faba is half of the duo behind Communal Table – if you like food, you’ll LOVE Communal Table. Enjoy!
Thanks for the mention, good photos, glad there is a Financial Blogger who looks good on camera (there are a few of us who have faces that look best on Radio). Have a great weekend.
Thanks for the link Preet – great photos. I didn’t know Karen B had a blog – will check it out.
Thanks for the mention. Hallett’s argument seems to be that Canada is really bad, but there are worse countries. I take his point that the comparison missed some important factors. However, I get no comfort from knowing that there are worse countries. What matters is the absolute costs, not relative costs. Paying more than 2% of your assets in fees each year is a problem even if there are others who pay 3%.
Preet – thanks for the mention and the kind words.
Michael James – perhaps I need to sharpen my writing skills because I apparently didn’t get through my most important points to you (and perhaps to others). I have three main points.
First, the trio of academics from fancy schools took on too much. All they wanted to do was take fee differences between countries and regress those differences against a number of factors in hopes of explaining those differences. But their research is very questionable because their calculation of fee differences (the media’s focus) is fraught with problems.
Second, while Canada’s average fund fees can be characterized as “high” in absolute terms, the problems with the aforementioned study highlight that no firm comments can be made relative to other countries, other than the U.S. My illustration using data from the Telegraph article simply demonstrates how easy it is to show how just one missing data point wreaks havoc with their comparisons.
Third, regardless of whether a particular country is the world’s cheapest or priciest it seems more meaningful to measure a country by its breadth of choice for different investors, rather than by averages. And by the measure of breadth, Canadians have access to more than sufficient choices no matter what kind of investor you are.
Michael, you wrote that…”What matters is the absolute costs, not relative costs. Paying more than 2% of your assets in fees each year is a problem even if there are others who pay 3%.”
DIY investors can pay as little as 0.3% annually (or less) for a portfolio. But DIY investors tend to incur other costs, often attributable to their own efforts to actively manage portfolios. U.S. research pegs this at about 2% annually for American investors in lost performance and costs.
What you may have a problem with is the cost of advice, which results in portfolios costing close to 2% whether it’s passive or active, fee-only or commission. And that’s another discussion entirely.
Preet – lots of other good posts mentioned this week. Canadian Capitalist nicely drills down on parts of the IFIC survey. I’d say at least 90% of industry surveys (such as those released during RRSP season) can be picked apart in a similar way.
@Dan Hallett: I’m not sure how what I wrote is incompatible with your points. The only one of your points I didn’t discuss was the third one about choice. It’s certainly better to have choice than to not have it, but we have a problem if such a high fraction of investors make such expensive choices.
Michael, when I quipped that I need to sharpen my writing, that was a genuine poke at myself. I sometimes go off on some details and don’t zero in on key points at times.
I would say that the “Canada is really bad” comment probably sparked my initial response. I think that a country that has the breadth and variety we have can’t be characterized as “really bad” – particularly when there is plenty to cater to cost-conscious DIY investors (including access to cheap U.S. exchange-traded and closed-end funds). But DIYs, as a group, end up costing themselves a lot of money in ill-timed trades and trading commissions – so investors face stiff costs either way.
@Dan: I don’t think choice is enough to say that the situation is good. It’s true that DIY investors lose money to ill-timed trades. However, the evidence I’ve seen says that the same is true of investors who use advisors. So, advised investors get hit doubly.
Looking at things on a macro scale, there shouldn’t be enough money in helping investors to support the incredible number of financial advisors of one type or another that Canada has. This is a symptom of a serious problem. Having said that, I think the solution must remain with a free market. What should change is the obvious lack of information investors have. Some means of making people better aware of their choices and better aware of their costs is needed.
Thanks for the mention Preet! What bothers me most is not the cost of advice. It is that a lot of investors (from what I see among family and friends) receive little in return for the “advice” they are paying for. If all advisors create financial plans, set asset allocation and guide, then we could have the debate on whether the fees are worth it. All too often, we find investors with no financial plans, a grab bag of mutual funds and silence in periods of market panic.
But DIYs, as a group, end up costing themselves a lot of money in ill-timed trades and trading commissions – so investors face stiff costs either way.
Dan, how do you know this?
Even if true, as MJ says – there certainly is no evidence that investors with advisors fare any better.
The other consideration is that “DIY” can mean a lot of things. It can be lazy people like myself who put the “passive” into passive investing. I haven’t touched my account in 2 years. :) It could also include active traders who may or may not be hurting themselves (I think the former). In that case, it’s the investing style that might be the problem rather than the amount of advice.
To respond to a few things, I’d prefer to direct you to another recent blog post and, if you’re so inclined, to follow the links contained therein. There, you’ll find a link to a G&M article where I reference some of the research on DIY investing.
http://thewealthsteward.com/2010/04/no-free-lunch-with-etfs-unless-youre-a-disciplined-diy-investor/
In response to Money Smarts Blog:
I had the unique opportunity to spend more than three years at the head office of an investment dealer that serviced both DIY investors and clients of full service advisors.
I often viewed and consulted on the portfolios of both discount (DIY) and full-service (advised) investors. I concede that advisors need help – which creates demand for the kind of work I do. But I can tell you that I was absolutely stunned by what so many of the discount clients were doing with their life savings. I could see all of the activity and between the trading frequency and the number of funds held, my jaw hit the floor more than a few times.
You also wrote that where frequent trading is occurring, “…it’s the investing style that might be the problem rather than the amount of advice.” Perhaps, but to the extent that advice can reduce trading, clients can deliver tangible benefits to clients. Also, the U.S. research (see above blog post) also suggests that there is an inverse relationshp between trading frequency and total returns. DIY clients, in my experience, also trade much more frequently than advised clients.
This too is anecdotal but it’s a much larger sample of investors (i.e. thousands) than I’m guessing you’ve seen. Plus, when we look to the U.S. research regarding what affects investor success (or lack thereof), all signs point to DIY investors doing worse than advised investors. Not conclusive or scientific but I’m not pulling this stuff out of the air.
To Michael James:
To your comment about the sheer number of advisors in Canada, it would be interesting to see stats on the # of advisors per capita around the developed world. Because something Canadian Capitalist wrote above triggered a thought in response to you. If so many advisors are not calling their clients often enough, it may be because they have too many clients.
I don’t think I’ve met an advisor that has less than 100 clients. That’s the low end. The vast majority I’ve spoken to have hundreds and a surprising number have a few thousand. Some would have teams capable of adequately servicing clients but many couldn’t possibly have even one meeting annually with every clients. If that’s the case, is there really an over-supply of advisors? I don’t know the answer and am not trying to lead the conversation but this could be a topic worth exploring further.
Thanks Dan, yes you have seen way more examples of diy investors than I. :)
As for the number if advisors, I’ve known people who sold mutual funds part- time so maybe it’s like the real estate business where there are way to many agents, but most of them are pretty casual.
Part-timers proliferated in the 1990s but they’re much less prominent today. One firm ‘shrunk’ from 3300 advisors to 1100. A good 1/4 (or more) of that shrinkage was from getting rid of part-timers. I’m sure they still exist but much tougher to do today. Dealers are responsible for the actions of their advisors and there is higher risk in part-timers. It’s much tougher for PTs to find a place to hang their shingle. Most dealers will propose they get serious and make it full time or get out.
@Dan: 100 clients sounds like a lot, but at one meeting per year, that’s only 2 meetings per week. I can’t see why the typical Canadian needs more than a half day of advice per year. If we had perfect efficiency (which is unlikely), that means an advisor could handle between 400 and 500 clients without any additional support. In the real world the numbers would be lower. I would think that you would have a better chance of finding out how many financial advisors there are in Canada than I would. Given that number we could estimate how many clients the average advisor has.
The number is a tricky one to nail down and will vary based on the kind of advisor and the range of services provided. For instance, advisors who provide comprehensive financial planning might have a tough time keeping 100 clients well serviced. But I recall, in the 1990s, a Scarborough-based firm with lots of “top producers” who would have their days complete with meetings. The advisor was mostly the face person while support staff did everything. All the advisor did was meet clients, which he did 5-7 times daily.
All I can tell you is that I’ve spoke to a lot of advisors. And many have been candid with me, saying that they just don’t have the time to meet face to face with every client at least once annually. Their biggest clients want to meet 2-4 times annually so your capacity is quickly eaten up. We won’t solve this one but my gut tells that saturation isn’t the problem.
Preet
I posted this over on Dan H.’s blog. For what it’s worth, perhaps it’s relevant to this forum as well.
In collusive or cartelized industries, the price of the product is held above market-clearing rates through various restrictions. And those higher prices benefit not just the cartel but also the non-cartelized providers that follow the price leadership of the cartel.
I’m not saying the mutual-fund industry in Canada is tacitly collusive or cartelized, but there seem to be hints of such, considering some of the restrictions placed on the choices of Canadian investors. For example, according to several sources, it appears mutual-fund companies have blocked discount brokerages from selling F-class funds without trailers fees.
But markets are usually in a state of flux and choices have emerged for financial consumers, thanks in large part to the entry of ETF companies. This suggests, to me, anyways, that the final arbitrator in the discussion over whether or not the mutual-fund industry charges too much for its package of active management/financial advice will be the market.
In other words, if service is truly not commensurate with price in the mutual-fund industry, there could be a broad migration toward the emerging alternatives. And at present, the market seems to indicating that is a possibility — as I recall, growth rates for ETF assets have been noticeably surpassing those for mutual funds.
This could very well change. Indeed, the cynic would say, in other cartelized industries the response sometimes has been to rein in competition in various ways, such as acquiring new entrants or marshalling financial depth to subsidize entrants that engage in ruinous competition. But, for now, the message implicit in current market dynamics seems, to me at this stage, more supportive of the alternatives.
Preet
Hopefully Fiona will be mollified that you kept arms folded (or at your sides) in the “cheek-to-cheek” pictures of you and the ladies at the party.
Larry – I always kept my hands to myself, although some photos you can’t clearly see where my arms are which leaves it open to interpretation… and I am known as a pincher… lol
Thanks for the link. The photos are great.