I am a bit late to this one but Globe Investor recently featured a financial facelift of a couple with $2.57 million in assets (only $380K of which were in the form of real estate) with no debt and was currently netting $6,165 on a monthly basis. These assets also included a defined benefit pension plan indexed to inflation (which is like the holy grail to a retiree nowadays). In most respects, this couple was going to be alright and the soundest advice without getting into specifics would have likely been ‘keep on trucking and don’t do anything too drastic to rock the boat, you don’t need to’. What advice did they get though?

From the article:

“Logan and Tina could benefit from simplifying their investments by moving from an investment dealer to an investment counsellor, a firm that has a legal duty to act in the best interests of its clients, Mr. Ardrey says. Investment counsellors charge an annual fee that is a percentage of the client’s assets.

For the fixed-income side of the portfolio, he suggests supplementing traditional fixed-income securities with some alternative income investments such as private debt, international real estate and accounts receivable factoring. This would improve fixed-income returns and lower overall risk because alternative investments are less correlated to the broader financial markets.”

Yes, you read that right. The couple that is nearing retirement with a great amount of savings and rock-solid pension, that from the article appears to be fairly risk adverse, is being told to own AR factoring products, international real-estate and private debt! Not only that, but they are being told to go from what sounds like a total fee of 0.8% and move it to an advisor who can charge them at least 1% before fund costs. All of this is made to taste just a little more bitter with a title for the article called ‘Great Savers, not so great investors'. With saving like this, you do not need to be a good investor! You just can’t be a bad one, which a strategy like this seems to almost be a guarantee of! It’s almost ironic.

Other comments in the article also hit a reader in a very strange way. The article notes that their returns have been 3.87% as if it is a bad thing. While we do not know the timeframe here, regardless, with a 30% cash and cash equivalent position, just shy of 4% is not that bad! This means on the invested portfolio, they were actually making 5.6% if we assume 0% on the cash portion. Sure, you are not beating the market but that is a pretty competitive rate for a total portfolio return. Now if this is a five or ten-year period, it gets a bit more questionable but the point remains is that their level of returns generated is not really the problem here.

Other comments about the mutual fund fees of 0.8% being on the high side strike a reader as odd. Again, this is pretty good for a mutual fund, especially in Canada where 2% and 2.5% is almost common. So sure, 0.8% could be lower, but it is hardly something to pick on.

Needless to say, the internet was not impressed. Peter jumped all over this one quickly:

It also tore through the personal finance sphere with many questions and raised eyebrows. I am not here to criticize the article itself (too much) or the author. There could have been additional details left out and different investors utilize different strategies. It also would have been a boring article if they just said “own a 60/40 ETF portfolio and enjoy your money, you’re going to be fine.” This does highlight a bigger issue throughout the industry though and one we often try to speak out about and educate others on. That is; the conflicts of interest and the lack of any help for an individual investor.

Conflicts:

Before I jump in here, I know many advisors all of whom are great people with their client’s best interests in mind, so I am talking in general and am not referring to every advisor out there. However, while there are a lot of great ones, the more people I talk too, the more convinced I become that there are also many bad ones, intended or not. Inherently those who manage money have an embedded conflict of interest with the client. This is not a bad thing, just a reality. It becomes a bad thing when it is not managed responsibly. If someone is managing money and taking a fee for their service, in any form, they have an incentive to gain and keep those assets. An advisor is rarely going to say ‘you know what, you have a simplistic situation that can be served by holding a few ETFs in your portfolio, you don’t need me’. An advisor is in many cases going to ‘take action’ to show that they are doing something and adding value. This is understandable, but also conflicts with the idea that doing nothing is often the best bet. We are not even getting into the more thorny and clear conflicts of incentive payments for advisors through funds or encouragement to own company branded products over competitors (overt or subconscious).

This article we think highlights another big conflict though which is to get assets and provide ‘value’ even when it is not needed or of marginal benefit. If you’re an advisor and a prospective client comes to you, you are probably not going to give a glowing review to the portfolio that is presented. You are incentivized to pick it apart and find something wrong with it. Even if you are not going to pick out the faults, you are going to show all of the extra value you can add by gaining exposure to exotic hedge funds, private debt, international real estate, and yes, even receivables factoring! Essentially, if there is an asset class they don’t own, that is an opportunity to show that you are different, even if it is a pointless 1% of the portfolio. These are differentiators and impress the end investor (while charging high fees). What’s more, these are typically the things that the end investor does not understand (and is probably too nervous to admit so in a meeting) and in a lot of cases, the things that the advisor does not understand. Add in the fact that they are probably only going to be owned in such small weightings that they add no real value to the portfolio in the first place and it just becomes a waste of everyone’s time and a fee vacuum. What these advisors miss though is that these same holdings that may have provided an edge in a prospective client’s portfolio are also the easy targets for the next advisor to pick on. Easy come, easy go. 

Regardless, the issue here is less with the article and more the idea or conflict that something always needs to be done. Sure, the portfolio is not perfect, but it probably just needed some tweaks around the edges. The changes suggested here were more likely to increase fees materially on a couple that honestly doesn’t need the help, good or bad. But this raises the second issue. Who else can these individuals go to? 

Who ya gonna' call?

If you have some financial questions, want to bounce some ideas off of someone or just want a second opinion, what does an investor do? There are a million advisors out there happy to charge at least 1% of assets to help you with that problem. But what if you don’t need it? What if you have a pretty simple situation with a modest portfolio, let’s say sub $1 million, are a blue-chip dividend investor or a passive ETF investor. Sure, you could get an opinion from an advisor, but they are more than likely going to try to get your assets. What if you are using an advisor but just want another opinion to make sure you are not getting taken advantage of? Again, going to another advisor creates a conflict and the current one is less likely to admit they are wrong out of fear of losing you. Maybe you will get lucky and the individual will break bread with you and tell you that the advisors services are not needed but I think this is a low probability outcome. Aside from friends and family, you do not really have any other options, and that is unfortunate. The more I think about this problem, the more serious I think it will become especially in the context of an investment industry that is concentrating more and more on the high-net worth subset of the market and ignoring the ones that probably truly need the help. We are trying to build out a solution to this problem and this financial facelift is a great example of someone who could use it. They don’t need help. They just need someone to bounce some questions off of without being told their portfolio sucks and being sold private debt instruments.

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