As for the costs conversation, it’s best to get in front of clients, says Robert Broad, vice president and investment counsellor with T.E. Wealth in Toronto.

“Of course they’re better off not paying my fee. Anytime you can save 0.75%, that’s money in your pocket,” he says. “But I say, ‘Look, you came to me x number of years ago because you had an unbalanced portfolio, and you needed advice and a plan that could be executed over time.’ ”

Broad and others concur the cost issue can often be resolved when clients see the level of work and time required of them to save the management fee.

Steel says an alarm goes off if clients cite cost as the first reason to invest on their own.

“The type of client that tries to save the 1% management fee can also be the client calling me saying markets are topped out, let’s sell—or the market’s bottomed, let’s buy,” Steel says. “That kind of person can fall prey to market bias and that is the kind of person I would caution against going alone.”

And then there’s the time.

“When you go alone, you have to track all your costs, any dividend reinvestments, capital gains, adjust for splits, among other things,” Steel says. “Also most people need someone helping them plan their investments and income after retirement.”

Trainor adds that as much as have been portrayed as a simple investment tool, their popularity has in many ways made them even more complicated.

“The level of sophistication you can use to structure a portfolio and manage risks has risen quite a bit, and while those tools are available to the public, it’s legitimate to ask whether they have the time and skill sets to do it,” he says.

“There are more than 1,000 ETFs now, it’s like mutual funds in the 1960s,” Trainor adds. “The concept was great, but before you knew it there were more mutual funds out there than stocks on the New York Stock Exchange.”

Even with the supportive press for ETFs as a pancea for investor ills, the majority of etf investments are in the hands of advisors.


All the research, meanwhile, shows the investors drawn to ETFs are exactly the investors advisors should want as their clients.

A survey by Cerulli Associates, a U.S.-based financial services industry research firm, found ETF investors tend to be wealthier, better educated and younger than mutual fund investors. Specifically, it found people having between US$5 million and US$10 million in assets under management formed the investor group with the highest percentage of ETFs in their portfolios.

Likewise, research by the Investment Company Institute, a national association of U.S. investment companies, found the median annual income of ETF investors was US$130,000, compared to US$80,000 for mutual fund investors.

The research also found the median amount of invested assets of mutual fund investors was US$200,000, compared to US$300,000 for ETF investors.

Further, SPIVA (Standard & Poor’s Index Versus Active Funds) reports regularly publish findings that bolster the merits of passively managed index funds. Mark Webster, Vancouver-based vice-president of regional sales, ETFs at Bank of Montreal, says such findings reinforce the notion that advisors should not fear losing ETF investors, but rather should covet them.

“Although there have been, and will continue to be, investors who choose to manage their own assets, there is clearly an advantage for advisors to prospect ETF investors.”


Exchange-traded funds (ETFs) have been widely described as the salve to the investor who has an itch to go-it-alone. But a growing volume of material online urges those investors to keep their portfolios with advisors.

“Although most don’t like to admit it, it’s very easy to be overconfident in one’s ability to resist behavioural mistakes,” writes the owner of www.financebuff.com.

“The hidden cost of such behaviour can be many times the investment management fee we pay to an advisor.”

The Canadian Couch Potato personal finance website outlined one case for using an advisor for passive investing, called “If I Only Knew…” by Thornhill, Ont. advisor Tony De Thomasis.



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Originally published in Advisor's Edge