# New Direction for Financial Advisors



## dogcom (May 23, 2009)

I was listening to a sort of infomercial on the radio with three financial advisors for the fun of it because there was nothing else on the radio.

Anyway someone phoned in and asked why not just buy ETF's instead of mutual funds. Of course they said that you want managed funds because they should be able to perform better because they are professionally run. You of course can look back in history to see how these managers have performed. They did say the past is no indicator of the future but it is really all you have to go on. They also said ETF's can be expensive because of trading costs.

Is this all advisors can do and are they correct for the average person. It may be that is all people can do unless they have a lot of money to get better or learn to do it themselves. 

I think it is time for the industry as a whole, should offer investors something better then just managed funds to hold long term. What should the industry do to offer value to the average investors out there that they would be happy with. Or are they correct in the way they operate today for the average person.


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## Argonaut (Dec 7, 2010)

I'm fresh out of university and taking the Canadian Securities Course with the goal of becoming a financial advisor/money manager. I would never put any of my own money into mutual funds, and therefore wouldn't put any of my clients' money into mutual funds. I would care about making my clients money, not necessarily the bank or firm, which is the only entity that wins in the long run.

In general, ETFs just flat-out beat mutual funds for the average investor. Even for the advanced investor they are a great way to compliment or diversify a portfolio.


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## OptsyEagle (Nov 29, 2009)

Argonaut said:


> In general, ETFs just flat-out beat mutual funds for the average investor. Even for the advanced investor they are a great way to compliment or diversify a portfolio.


That is only because most people put their money into mutual funds. If 90% of people used passive investment strategies the few mutual fund managers left would take them to the cleaners.

Not a big problem, since most people use an advisor and mutual funds are kind enough to bury their fees inside a 106 page prospectus, so I suspect most people in the future will still use mutual funds.

By the way, once you net out your fees, ETFs do not do that much better, so be careful about your future strategy for your future clients.


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## kcowan (Jul 1, 2010)

OptsyEagle said:


> By the way, once you net out your fees, ETFs do not do that much better, so be careful about your future strategy for your future clients.


Do you have a citation to back that up?


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## steve41 (Apr 18, 2009)

I wouldn't be surprised if, in several years, the financial services industry abolishes commissions altogether. Australia is just about to, and I think other countries may just follow suit. Financial advisors/planners will derive their income solely on a fee-only or fee-for-service basis.


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## OptsyEagle (Nov 29, 2009)

kcowan said:


> Do you have a citation to back that up?


Do you?

Just something that most people miss. It definitely puts a big dent in the outperformance of ETFs, I know that for a fact. If this guy is willing to work for free, I am sure his clients will do much better than mutual funds. If he decides to make a living instead, his clients will be no better off, on average. 

Lets call that, my opinion. Citations are so cumbersome to look up.


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## warp (Sep 4, 2010)

Argonaut said:


> I'm fresh out of university and taking the Canadian Securities Course with the goal of becoming a financial advisor/money manager. I would never put any of my own money into mutual funds, and therefore wouldn't put any of my clients' money into mutual funds. I would care about making my clients money, not necessarily the bank or firm, which is the only entity that wins in the long run.
> 
> In general, ETFs just flat-out beat mutual funds for the average investor. Even for the advanced investor they are a great way to compliment or diversify a portfolio.


Ahh, the idealism of youth!!

You may "care" about your clients when you start out...but as always temptation will sneak in when your wife decides she needs a holiday, or you decide you need a new BMW.

It sounds funny...but I've seen it happen.

Too bad most people either dont understand investing, or more likely, in my experience, are afraid of it,,,,,and so will always need a "financial advisor" to hold their hands.

Either way , its like the sheep being led to the lions......and the lions always seem to be driving that new BMW.

Guess who's paying for it?


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## Four Pillars (Apr 5, 2009)

OptsyEagle said:


> That is only because most people put their money into mutual funds. If 90% of people used passive investment strategies the few mutual fund managers left would take them to the cleaners.
> 
> Not a big problem, since most people use an advisor and mutual funds are kind enough to bury their fees inside a 106 page prospectus, so I suspect most people in the future will still use mutual funds.
> 
> *By the way, once you net out your fees, ETFs do not do that much better*, so be careful about your future strategy for your future clients.


Not in my case. I don't have an advisor, so there no extra fees to net out.

Sure if someone is making extensive use of a fee-only planner, they probably aren't coming out ahead with returns. However, they are probably getting a lot better advice than someone paying the same total fees from a mutual fund salesperson.


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## Bupp (Nov 13, 2009)

Agreed that once argonaut charges his 1% on equity and 0.5% on fixed income assets managed his clients are no better with etf then they would be with traditional mutual fund..


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## larry81 (Nov 22, 2010)

Naked Investor Revised Edition
http://www.amazon.ca/gp/product/0143055437/ref=oss_product

If you want to read horror's stories about the Canadian finance industry / mutuals funds peddler and insurance con artist.

its a very good read


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## larry81 (Nov 22, 2010)

OptsyEagle said:


> By the way, once you net out your fees, ETFs do not do that much better, so be careful about your future strategy for your future clients.


Yes they almost always do, it just depend on the amount you are investing and the frequency or your purchase.

In situation where someone is investing 6,000$ annually and purchasing every two weeks, the brokerage fee's will kill any advantages ETF might have.


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## OptsyEagle (Nov 29, 2009)

larry81 said:


> Yes they almost always do, it just depend on the amount you are investing and the frequency or your purchase.
> 
> In situation where someone is investing 6,000$ annually and purchasing every two weeks, the brokerage fee's will kill any advantages ETF might have.


Actually, brokerage fees are a small part of the issue. 

You see, the main reason index funds outperform the average managed fund is because if you put together all the managed funds together, they are the index. Since they cannot outperform themselves, their average performance has to be, by law of mathematics, equal to or very close to the index. 

Since managed funds have management expenses, when these costs are factored in, the average performance of managed funds will underperform indeces, by almost exactly the amount of those costs. No more, no less.

Now, since an advisor must obtain their pay somewhere, and those management fees on managed money is where most receive their income, the only way a client could receive returns close to the index, is if their advisor was willing to waive all their fees. Since I doubt many will, including the future advisor who was posting on this thread, the client will be pretty much be back to underperforming the index with EFTs, just like they did with mutual funds. 

Now the management fees for a mutual fund, not only pay an advisor but also pay a money manager. I am aware that the money for the money manager could be saved with index investing, but since no one has come up with the no fee ETF, I believe the savings here, for a client wanting financial advice but using EFTs, will be negligable.

All this is my opinion and of course, laws of mathematics.


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## Argonaut (Dec 7, 2010)

warp said:


> Ahh, the idealism of youth!!
> 
> You may "care" about your clients when you start out...but as always temptation will sneak in when your wife decides she needs a holiday, or you decide you need a new BMW.


But why bite the hand that feeds you? The way I see it, if my clients are making money without big fees they'll refer more people to me.

I really do want to make people money. Been frustrated in the past when I give people investment advice and they don't follow through. Recommended silver in August at $17.89, ExxonMobil at $59, and palladium a few years back at $200. Of course I wouldn't put all eggs into one basket, but still, it's more fun to share successes with others!


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## OptsyEagle (Nov 29, 2009)

Argonaut said:


> I really do want to make people money. Been frustrated in the past when I give people investment advice and they don't follow through. Recommended silver in August at $17.89, ExxonMobil at $59, and palladium a few years back at $200. Of course I wouldn't put all eggs into one basket, but still, it's more fun to share successes with others!


I hope you have more on your resume then that. 

Do you actually think that advisors do not want their clients to make money? Do you actually think that you are smarter, have more experience and are a better investor than the individuals managing our mutual funds? 

It is not a problem of wanting or not wanting to make money and it is not a problem of one person being smarter then anyone else. It is a problem of mathematics and of human beings not being able to see into the future. You will be no better or no different. _It is the law._


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## dogcom (May 23, 2009)

Argonaut what if silver or palladium didn't perform well? I am sure there are recommendations you thought of that didn't pan out so well. When you use real money like your own or someone else it is a different ball game.

In reality the average investor can still use mutual funds, index funds or even ETF's but they are not being delivered properly as you have heard from so many investor complaints. The industry or an institution has to find a way to deliver and to educate their clients why they should invest in the products and what the advisor will do for them in the future.

It may be that advisors need to be trained in what a closet index fund is or why a large fund may not perform as well as it did when it had less money to invest. So when the track record is looked at they can point out the possible problems that they see with those funds in the future that could hurt performance. Or they can point out that a fund had performed well because it stocked up on precious metal stocks in the last 10 years. The manager may have been smart to see this trend or it could backfire in the future if the manager doesn't move to another sector.


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## larry81 (Nov 22, 2010)

Argonaut said:


> But why bite the hand that feeds you? The way I see it, if my clients are making money without big fees they'll refer more people to me.
> 
> I really do want to make people money. Been frustrated in the past when I give people investment advice and they don't follow through. Recommended silver in August at $17.89, ExxonMobil at $59, and palladium a few years back at $200. Of course I wouldn't put all eggs into one basket, but still, it's more fun to share successes with others!


dont confound bull market with skills.


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## Argonaut (Dec 7, 2010)

Curious about the dogpile on me here. The original poster just asked if there was a possibility of a new direction for financial advisors, and I offered my personal case, that yes, I would be different and avoid mutual funds.

I have personally invested in my recommendations and made real money with them, which is why I feel I am good at it and want to pursue it as a career. Looking at the returns of mutual funds, in that the vast majority of them fail to beat the indexes leads me to believe that they are poor investors, or at least average investors who eat up the profits of their clients in fees. And also my assumption is that the best mutual funds managers get hired away fast to run a hedge fund instead.

Larry81 is right in that anyone can make money in a bull market, but I disagree in that it does take skill to pick assets that will outperform. In another thread he mentioned that he is sitting 55% in cash, which means that he certainly hasn't been one to catch the wave. I'll take my 66% gain in silver over cash any day.

Anyway, looks like the markets might get hit tomorrow because of the Korea situation. No matter, precious metals will balance the dip in stocks. It's all about diversity! And just remember guys, it's okay to make money.


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## OptsyEagle (Nov 29, 2009)

Argonaut said:


> Curious about the dogpile on me here. The original poster just asked if there was a possibility of a new direction for financial advisors, and I offered my personal case, that yes, I would be different and avoid mutual funds.


Hey, sorry for picking on you. I just felt a little background on the ETF/Managed money issue would help and I really wanted to point out that everyone has their good picks. Even mutual fund managers have hunches that work out. Unfortuneately as time moves through you it will become more apparent that all they really were, were your random lucky calls. I mean really; what can you really know about Exxon Mobil or the price of oil or whatever led you to that call. I'll guarantee you that there is at least 10 times as much that you can never know, that can have more of an effect on the future outcome, then what you can know. I will also guarantee you that 99% of the little you can know about Exxon Mobil, is already in the price of the stock and will be almost meaningless to your future results.

As I said, as time moves through you, this will become more apparent. It is not that you will stop trying to pick stocks, since I don't. It is just that you will become more cautious and respectful about it ... and especially, I hope, if you get the responsibility of investing other peoples money.

Good luck to you.


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## kcowan (Jul 1, 2010)

When I talk to my friends who use investment advisors (and all but one do), I ask them how much they represent to their advisors annual earnings. They don't know so we try to estimate it. It is a worthwhile exercise.


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## Toronto.gal (Jan 8, 2010)

I agree with Larry with respect to the bull market comment. 

I picked Apple earlier this year, a no-brainer when it became public knowledge that all their *i's* were selling like hotcakes in most markets; when to exit this hot stock however [and others for that matter], is when the smarts will be required! Argonaut, you mentioned that you're fresh out of university, which means you're 20 something and already know a heck of a lot more than I did at that age regarding investments, so keep up the good work, but lots more to learn and that applies to us all! 

Good luck with all your future endeavors!


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## dogcom (May 23, 2009)

Argonaut thanks for your input and don't worry about us piling on you because all we are doing is holding your feet to the fire and testing you. This is actually a good thing and it is great that you respond to it because you will need to deal with clients and respond to them.

I still don't think you should throw out mutual funds all together because specialty funds and so on can be good investments. Also as pointed out you need to make a living as well. This is the circle that the industry has to try to get that square peg into and it will be tough. I think the successful institutions will be the ones that provide the service customers demand and do more then just sell funds or push products for the long term.


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## warp (Sep 4, 2010)

As another poster on here said, and I will repeat:

Read, "The Naked Investor"....

Its a good read for anyone wondering how our financial system and "financial advisors" work.

I read it a couple of years ago......and even though I already knew about the landmines out there , ( and in fact experienced some myself)....it opened my eyes even further.

Go to the library, take the time to read it.....you'll be glad you did.


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## Argonaut (Dec 7, 2010)

OptsyEagle said:


> I mean really; what can you really know about Exxon Mobil or the price of oil or whatever led you to that call.


Not to get too much into it, but that one was mostly a value play. I actually like Chevron better than Exxon long-term, but at that point XOM was noticeably undervalued. Sure, I got lucky that I made a lot of investments in mid-August right before "Helicopter Ben" hinted at QE2. But Exxon has outperformed Chevron by 5% since then, so it was a good call in relative terms.

Thanks for the good luck from others! Same to you all.


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## larry81 (Nov 22, 2010)

warp said:


> as another poster on here said, and i will repeat:
> 
> Read, "the naked investor"....
> 
> ...


x1000


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## larry81 (Nov 22, 2010)

Toronto.gal said:


> I agree with Larry with respect to the bull market comment.
> 
> I picked Apple earlier this year, a no-brainer when it became public knowledge that all their *i's* were selling like hotcakes in most markets; when to exit this hot stock however [and others for that matter], is when the smarts will be required! Argonaut, you mentioned that you're fresh out of university, which means you're 20 something and already know a heck of a lot more than I did at that age regarding investments, so keep up the good work, but lots more to learn and that applies to us all!
> 
> Good luck with all your future endeavors!


When someone mention APPL i cant stop to think that the stock will probably lose ~20% of its NAV when it is announced that Steve Jobs quit/ died from aids/was hit by a car, etc. From my perspective, the cult-like following of APPL is mind-boggling.


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## Toronto.gal (Jan 8, 2010)

larry81 said:


> 1. cant stop to think that the stock will probably lose ~20% of its NAV when it is announced that Steve Jobs quit/ died from aids/was hit by a car, etc.
> 
> 2. From my perspective, the cult-like following of APPL is mind-boggling.


1. Probably more!
2. That is why this stock is a no-brainer [at present time].


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## andrewf (Mar 1, 2010)

Four Pillars said:


> Not in my case. I don't have an advisor, so there no extra fees to net out.
> 
> Sure if someone is making extensive use of a fee-only planner, they probably aren't coming out ahead with returns. However, *they are probably getting a lot better advice than someone paying the same total fees from a mutual fund salesperson*.


Quoted for truth. The advice most of these salespeople give is not worth what they are compensated for it and most people with a decent sized portfolio would be better off with an advisor that is paid through up-front fees, if not on their own.


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## kcowan (Jul 1, 2010)

Toronto.gal said:


> 1. Probably more!
> 2. That is why this stock is a no-brainer [at present time].


Agreed and that makes it (AAPL) a momentum play where PEG counts more than any other measure. I fully expect it to bounce around between 325 and 300 before the next breakout caused by quarterly results.


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## Lephturn (Aug 31, 2009)

With volatility this low I'm looking at being a net purchaser of AAPL options. It has consolidated into a very tight little range here - I expect some upside but I think it will run up ahead of earnings in anticipation.

In case it breaks down instead of breaking up out of this consolidation I'm going to play it with options instead of the stock.


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