Blogs & Comment

Do you need a financial advisor?

The obstacles to investing on ones own have come down considerably in recent years. Many investors are responding by switching over to solo mode. Are financial advisors on the list of endangered species?
Not by a long shot. They will always be around. But not to be denied is how much easier it is to be a do-it-yourself investor these days:
– the Internet has lowered the time and effort required to gather information on investments and personal finances
– exchange-traded funds (ETFs) have lowered the cost of investing while dispensing with the work of picking individual stocks,
– many books, articles and blogs now provide easy-to-follow guidelines on the low-cost and low-effort passive investing approach (as embodied in the Couch Potato Portfolio, One-Minute Portfolio,and other lazy portfolios).
So, do YOU need a financial advisor?
A recent study of German investorsby three university professors discovered “that advisors actually tend to lower returns, raise portfolio risk, increase the probabilities of losses, and increase trading frequency and portfolio turnover relative to what account owners of given characteristics tend to achieve on their own.
A forthcoming Journal of Finance paperconfirms that mutual-fund companies with lower investment performance (before fees) charge higher management fees because they compete with high performance funds by spending heavily on advertising, marketing and distribution-channel incentives to attract unsophisticated clients.
Three more studies from academiaconclude investors are better off without financial advisors.
Advisors add value but may overchargefor it.
A survey carried outfor the Investment Funds Institute of Canada this past spring shows that 78% of investors surveyed were satisfied or very satisfied with their relationship with their financial advisor, and that mutual funds enjoyed the confidence of 74% of the respondents despite the bear market of last year.
Do ancillary servicessuch as tax and estate planning help explain why many investors are content to have financial advisors? (1)
But a survey sponsoreda while back by the Financial Planners Standards Council (FPSC) showed only 40% of certified financial planners did financial plans for most of their clients in 2006, down from 53% in 2002 (it seems mutual funds fly off the shelf during bull markets, without advisors needing to offer complimentary, value-added services as tax and estate planning).
Footnote1. Here is how one financial planner described (in the comments section of Thicken my Wallet blog) what he does for no direct compensation:
advising them on managing their debts; – providing guidance on preparing wills and powers of attorney; – providing options for estate planning; – pointing out income tax credits/deductions they may not be aware they are entitled to; – deciding whether to incorporate or not; – assisting them in applying for OAS/CPP/Disability/EI Benefits; and, – many other things.
I recently assisted a client on an income tax issue involving the Disability Tax Credit: he is to receive tax refunds totaling approximately $20,000. My fee: $0.