Most investment advisors or Financial Planners invest their clients' assets in what's called "managed money" such as mutual funds or some other type of product that has a money manager ( not your broker) calling the shots. These funds charge an annual fee in the neighbourhood of 2 to 2.5%, on top of any sales commissions that your advisor charges. Most clients are not aware of these fees as most advisors do not disclose them. There is an alternative that advisors can suggest to you but they don't. These are called Exchange Traded Funds or ETFs.
ETF's have the same characteristics as managed money with several BIG differences:
- The fees can be as low as 0.05% (not a typo) and are usually tax deductible, unlike mutual funds
- Taxes on gains are substantially reduced
- There is greater transparency; you know exactly how your money is invested
- ETF's consistently beat the returns of mutual funds or managed money
Why hasn't my advisor suggested these investments for me?
The simple answer is that they get less commission for these investments. Unfortunately there is an inherent conflict of interest in my industry. Investment advisors and Financial Planners who work for banks, investment firms, and insurance companies get paid based on the type of product they sell. Some products such as mutual funds pay a LOT more commission than others.
How can I invest in ETFs?
There are 2 ways an investor can access ETFs. First, some Financial Planners have adopted a new method for running their business. This model is called "fee based financial planning". In this model, the client pays an annual fee to their planner that they negotiate at the beginning of the relationship. This way the advisor is not biased when making investment recommendations. Many fee based planners use ETFs as their choice of investments due to the advantages stated above. This is the type of model that we have at Merit Financial Planning. Second you can purchase them directly at the discount brokerage firm of your bank.
If you are interested in finding out about more ETF strategies let me know at john.kalos@meritfinancialplanning.ca or get in touch with me on LinkedIn.
You can also get my free consumer awareness guide that I was asked to write called "The 6 Questions Business Owners Must Ask A Financial Planner Before Hiring One". This guide will give you all you need to know, in very simple terms, about how to interview a Financial Planner and can also be used to make sure you are working with a Planner that is qualified to advise business owners.
