“Free”  financial advice can be very expensive

Dump your commission-based financial adviser. Their incentive is to sell financial products with high management fees.

This is a conversation I had in the past with a few people.

“My advisor is nice, he really takes care of me and he doesn’t charge me anything. It’s completely free.”

If they work for free, you should dump him/her; that’s the first sign that they are lying.

At that stage of the conversation, I say: “oh really, can I see how he’s investing your money.”

This is when I get to see that all the investments are in high commission, high management fees, mutual funds account, generally with expense ratios of 2.4% to 3%.

If you have a $100,000 you are paying between $2,400 to $3,000 for that free account EVERY YEAR. At that rate, “Free” is very expensive.

Look, I am making money

Another scenario I see often is this one. Another friend has a $50,000 portfolio with a major insurance company who also sells mutual funds. When we were speaking about her investments, she showed me with pride how her $50,000 investment was now $52,000.

“That’s good, isn’t it? I made $2,000. I am happy. :)”

“Well, let’s not be so hasty. You made 4% return on your investment.”

I looked at her investment. It was mostly Canadian big-cap. I compared it against the Canadian Index which had increased over the same time period, almost 8%. Fees had eaten almost 50% of her return. She wasn’t making as much money as she taught, and the confidence on her adviser was tarnished.

You should dump your commission-based financial adviser. They are misrepresenting your returns.

You are fed up

Ok, after reading some blogs, doing some investigation on your own, and hearing the same thing from many different sources, you realize that the handsome (or beautiful) adviser, with a great smile and the smart suit, has to make a living as well and the way he/she makes a living is by selling you investment products which have a commission and/or high expense fee.

You also realize that you can buy superior investment products with ultra-low management fees, less than 0.5%. You realize that investment cost is one of the most important factors on the return you make on your investment. In short, you are fed up. You want something better.

You discover low-cost index funds and ETFs

You have made up your mind. You want to switch from your good-looking adviser with the great smile to a faceless platform, which is not so charming but which will give you a better return on your investment. One of the problems is that you don’t want to hurt your adviser’s feelings.

I used to be a financial adviser who used to sell mutual funds with high management fees. I was ashamed of my work because I knew my clients could do better. But at that time, I put my priories ahead of my client’s priorities and I sold them the funds that generated the greatest commission for me. I didn’t tell them about the low-cost index funds and ETFs because those didn’t generate commissions.

Every commission-based adviser out there faces the same dilemma every day. Every commission adviser could tell you about the index fund with less than 0.5% management fee, but they chose not to do so because they care about their net commissions at the end of the month more than the return of your investment. Their commission is more important than getting you the best return on your money, so don’t be so concerned about hurting their feelings.

Financial advisers place your money under the management of actively managed funds, which pays a great commission for the referral. But studies have shown time and time again that most actively managed funds don’t beat the index.

Where to go to open your new account

There are many online brokers who can help you with the process. This is their bread-and-butter, so they lots of effort in making this transition as smooth as possible.

If you decide to go with one of Canada’s big banks, it would be preferable to make an appointment with the broker’s arm of the bank. All Canadian banks have a broker subsidiary. For example, my bank account is with TD Bank, but TD bank has a stockbroker called TD Waterhouse, which is a totally different organization.

I suggest that you make an in-person appointment. Being in person makes the process so much easier. There are so many signatures, identification procedures, paperwork that could take 5 minutes explain in person but hours to figure out on your own by email, and mistakes that can be committed. It’s really worth your time to make that face to face appointment to open your account.

How to make the switch as easy as possible

Make sure you bring proper identification, a statement of the account you want to transfer to your new broker’s account. Your new broker will do all the work for you. They will make sure the funds get transferred to your new account. You will not have to meet not nor speak to your charming financial adviser and he/she will not able to talk you out of it. You can dump your commission-based financial adviser without looking at him in the face.  Finally, bring a void check.

When you fill out the forms you will be presented with the option to have your money transferred in cash or in kind. When you request your money in cash the funds will be sold and the cash will be sent. If you request your money in kind, the shares of the mutual funds will be sent.

It’s preferable to have the funds sent in kind, that way remain invested during the transition period. The transition period could take a couple of weeks. However, some funds cannot be transferred to an individual broker’s account. In that case, you have no option but you have your investment sent in cash.

If you receive your investments in kind, you would like to change all those high-fee, high expense ratio mutual funds to low-fee, low expense ratio mutual funds or ETFs.

Don’t feel like you owe an explanation to your old adviser. This is a growing tendency. Most commission-based advisers can see the writing on the wall, they know what’s going on. Also, they are master salespeople, if you call them, they might be successful in making you change your mind.

One last thing to consider

If you are transferring an account for your RRSP or your TFSA, there are no tax consequences with your transfer. However, if your account is in a non-registered account when you sell mutual funds, you may face capital gains or capital losses and you will need to report that transaction on your income tax return.

Related Posts

1. How did we become a consumer society
2. Success is available to all of us, Just reach out and grab it
3. No more coffee dates. Go to park dates instead

Connect with me

I would love it if you connect with me via social. You can find me on Facebook, Twitter, LinkedIn,  YouTube, and Instagram.