The recent introduction by of mutual funds that hold a single ETF and pay financial advisors 1% trailers each year for selling these funds has stirred a debate: are financial advisors worth 1% of your savings each year? Of course, the answer depends on the investor and financial advisor.
Knowledgeable investors won’t find it worthwhile to pay anyone 1% of their assets for financial advice every year. Poor financial advisors aren’t worth 1% each year no matter how little the investors know about investing. But what about the combination of investors with medium to low knowledge and advisors who are middling to very good?
People differ on this question, and I don’t have the data to answer it definitively. However, I can examine my own experience. When I first began investing in more than bank GICs, I turned to a financial advisor who gave a presentation at my workplace.
For about 5 years I owned mutual funds recommended by this advisor. For two years during this period I owned more mutual funds sold to me by another advisor. If we assume that these advisors collected 1% of my savings each year, then they got a total of $2781 (in present-day dollars) from me. Of course, I paid more than double this in MERs, commissions, and deferred sales charges, but let’s assume that just 1% went to the advisor.
For this $2781, I estimate that over the 5 years I took up about 5 hours of these advisors’ time either speaking to them in person or on the telephone. No doubt these advisors spent more time doing things not visible to me behind the scenes related to my accounts.
About half of this time was spent on a brief initial interview to collect information about me and a few brief meetings where I handed over more money to place in my accounts. The other half was spent in a few meetings where they tried to convince me to borrow money to invest more.
One advisor convinced me to borrow enough to use up all my available RRSP room. The other failed to convince me to take out a big mortgage on my nearly-paid-for home. The RRSP loan worked out well because I managed to pay it off in one year. Taking out a mortgage would have been a disaster because the stock market tanked shortly afterward.
Throughout this period, I was pretty naive about investing (but was learning on my own). I should have been a good candidate for getting help from a financial advisor, but it seems clear to me that the “help” I got was not worth the $2781 I paid.
My experience is just one data point. I’ve met investors who are happy with their advisors and others who are unhappy. However, I’d like to see investors figure out how much they’ve paid their advisors and then decide if the money was worth it.