Financial advisers we talked to, not surprisingly, say most people need advice. After all, it's what they do.
But these days, more investors are clearly choosing to bypass the formal advice route to "go it alone."
A burgeoning market has built up around this "do-it-yourselfer." It's easier than ever to build a portfolio of investments on your own without going through an advisory channel.
With the help of low-cost exchange-traded funds (ETFs), or lower-cost index or mutual funds, these do-it-yourself investors will end up paying less in overall fees and commissions than most clients with commission-based advisers. That's the main attraction.
Of course, they'll have to do all the work themselves. But for some investors, it's well worth the effort to save money, not to mention the satisfaction they get from doing the research and then arranging their own affairs.
The online discount brokerage firms have certainly made life easier — and cheaper — for the do-it-yourselfer. Trading commissions for the "no advice" crowd are often below $10.
Some firms have also developed a special series of lower-cost mutual funds for do-it-yourselfers that strip out the "trailer" compensation fee that would otherwise go to advisers.
Financial magazines and newspapers suggest a variety of "couch potato" portfolios of ETFs for the do-it-yourselfer. There's also no shortage of self-help investing books out there. And so on.
Now, the question is not whether most people can do it all themselves — they clearly can (and many do). The better question is, should they? Is this a model everyone should consider?
Advice has its place
There are certainly people out there who've done their homework and are great do-it-yourselfers.
But a couple of finance academics we consulted say the advisory business isn't about to go away — nor should it, in their view.
The majority of people need financial advice, says Schulich School of Business finance professor Moshe Milevsky, who’s written several financial planning best-sellers.
"Most Canadians would benefit from discussing their financial affairs with an adviser," he said, noting that he too has an adviser whom he can "bounce ideas off of."
To be clear, he's not saying that people necessarily need to give their advisers all of their assets to manage. It's the advice that's key.
Milevsky points out that the financial world has become a complicated place. "Products that didn't exist 10 years ago have become mainstream," he said.
A complex world
Lewis Johnson, a professor at the Queen's School of Business, offers a plumbing analogy to address this complexity.
"Anybody can invest, and with a little research, anybody can invest cheaply," he acknowledges. "I could probably do my own plumbing with a little research. There are two problems with this reasoning," he said.
"First, it ignores the opportunity cost of my time, which I value very highly. Second, and more fundamentally, my plumbing skills probably match the investment skills of most retail investors."
Johnson says it's not enough to just buy and sell assets at minimal cost and at the best price.
"One has to be aware of life cycle needs, asset mixes, tax planning and diversification, among other things," he said. "I'm no apologist for the advisory industry, but they do provide services [at high cost!] which most retail investors need."
The advisory industry says there are other points to consider:
- Can you, as a do-it-yourself investor, figure out how to arrange your financial affairs so that you and your spouse pay similar amounts of tax in retirement?
- Can you figure out whether it makes more sense for you to contribute to an RRSP, or a tax-free savings account, or pay down your mortgage?
- Are you sure you'll have enough money to afford the retirement lifestyle you're counting on?
- Can you keep up-to-date on all the new financial rules and products? Do you want to?
These days, juggling all the financial priorities can be difficult.
|Financial planning — a six-step process|
|1. Clarify your present situation|
|2. Identify personal and financial goals and objectives|
|3. Identify financial problems and opportunities|
|4. Provide written recommendations and alternative solutions where appropriate|
|5. Implement the plan|
|6. Review the plan periodically|
|Source: Institute of Advanced Financial Planners|
A good financial planner does much more than simply recommend a mutual fund to buy for this year's RRSP contribution. Depending on their qualifications, advisers can provide advice on retirement planning, risk management, insurance, financing your children's education, income splitting, estate planning and taxation.
In other words, they can develop a personal financial plan. Getting that plan is an integral part of the advisory process.
Most commission-based planners don't charge extra to design a financial plan. Most are paid entirely through the commissions and trailer fees attached to the mutual funds that you buy.
Much has been written about how some equity and balanced mutual funds — with fees that often exceed two per cent annually — eat into returns. Check out the calculator provided by the independent Investor Learning Centre to see just how much your funds cost you in the long run. You may be surprised.
In the end, you'll have to figure out whether the service you get is worth the commissions and fees you're paying. If you do go it alone, just be aware of what you're giving up and know that you can always buy some hourly advice if you need help.