Tuesday, September 13, 2011

Aligning Interests

When we enter into ventures with others, it's important that our interests are aligned so that we're working toward the same goal. This is true whether you're selling your house or investing your life savings with a financial advisor. Figuring out when intersts are well-aligned can be tricky.

When you sell your house and pay a real estate agent a percentage of the house price, it may seem that your interests are well-aligned, but in reality they are not. One way to look at this situation is that the more you get for your house, the more the real estate agent gets paid. But this is too superficial.

The real estate agent's main concern is her pay per hour worked. Selling your house for an extra $25,000 is much less important to her than selling it quickly. For you, that extra $25,000 makes a big difference. The agent's ethics may keep her working toward your best interests, but her compensation structure pushes her toward making sales fast even if the price is a little low.

The same problem usually exists when investing with an advisor. The advisor gets paid indirectly out of your savings. The returns you get are important to you, but they only make a modest difference to the advisor's pay. However, the situation changes if the advisor invests his own savings along with yours.

This is the situation with Steadyhand funds as Tom Bradley explains. The Steadyhand team have 80% of their assets invested in the same funds as their clients. So if their clients lose money, the team feels the pain as well. (Disclosure: I have no financial connection to Steadyhand, but I like the members of their team that I've met.)

The one area where their interests are not well-aligned with their clients' is the part of the fund costs that make up the Steadyhand team's salaries. This problem exists with all mutual funds I've seen. If these salary costs go up, clients get lower returns, but the fund team gets these costs on their own investments returned to them.

Investors can monitor this potential conflict by keeping an eye on the fund MERs. Happily, Steadyhand funds have low MERs compared to other Canadian mutual funds. For those who prefer not to handle their investments alone, Steadyhand is a solid choice.

5 comments:

  1. R U really recommending mutual funds over lower-hidden-cost ETFs?

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  2. @Dale: Not for DIY investors. For investors who are going to pay for advice, Steadyhand is a good option. I'm sure there are other good options as well, but there are far more bad options.

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  3. Advice payers are not reading your blog.

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  4. @Dale: Yes they are. I don't have enough money to invest (yes) to qualify for most of the places I hear about on these blogs or for the pay per trade model to be worth it.

    Not everyone who reads PF blogs is a high net worth DIYer and I, for one, enjoy that this blog keeps that in mind (I find Rob Carrick equally good in providing advice for a wide range of readers).

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  5. @Melanie: Thanks for the kind words about this blog. Dale is solidly in the DIY camp as am I, but you're right that many people prefer to get advice.

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