Personal Investor: What kind of advisor do you have?
There are two types of investment advisors: ones that study their clients and implement long-term strategies, and ones that sell mutual funds.
Good investment advisors
The first kind of advisor might also sell mutual funds but they do so much more. Qualified advisors start by gauging the client’s knowledge of investing, and learning their goals and tolerance for risk. From there, they build a diversified portfolio of investments designed to cushion short-term market shocks as it grows. At the same time, they initiate a long-term tax strategy by utilizing the client’s registered retirement savings plan (RRSP), tax-free savings account (TFSA) and other tax advantages they may have. When the client retires, they help them decide which investments to liquidate as the funds are needed, and how to pay as little as possible in fees and taxes as they draw them down.
Fees can be high for a novice investor with modest savings. In most cases, mutual funds are the only professionally managed way to diversify. A typical fee on a mutual fund in Canada is 2.5 per cent annually. That can severely hobble portfolio growth over the years, but as the portfolio grows, a good full-service advisor will lead the client directly to the market through stocks, bonds, options or exchange-traded funds. Good advisors find they can generate bigger fees from large portfolios and eventually lower annual fees to a flat rate as low as one per cent as the portfolio grows.
Bad investment advisors
In most cases, advisors who sell mutual funds receive a one per cent hidden commission, called a trailer fee, from the mutual fund company. In some cases they also receive a fee when the fund is bought or sold. Technically, the fees are intended for ongoing advice but in many cases that advice is to remain in the mutual funds that pay them the best commissions.
What kind of advisor do you have?