Financial advisers are double dipping

Hanging out with my friends.

Not too long ago, a friend of mine showed me the statement coming from her financial adviser. It was from a company called R——- Wealth Management.

Immediately I noticed several things.

  1. All the investment were in actively managed mutual funds, with management fees between 2% to 3%. The main reason for these high fees is that mutual fund companies generally give a kick back to the advisor who sells the fund, these kick back is called the Trailer Fee. The fee is generally about 1% of asset. As long as the investor keeps his money in that fund, the advisor will get his kick back every year, even if never speaks to the client ever again.
  2. In addition to the selling funds which generates the greatest kick back for the advisory service, they charge and advisor fee, every month, to the client. This reminds me of the time I got a traffic ticket in which I was charged for the violation plus a service fee for giving me the ticket.
  3. Although my friend went to the advisor with her husband, both of them were sold exactly the same portfolio. The advisor didn’t see them as a couple, but as two different individuals to whom they could sell the same cookie cutter predetermined portfolio.

The example of my friends is not unique. There is hardly any financial institution in Canada who will offer index funds or ETFs. The main reason for this is that index funds and ETFs don’t offer kickbacks to advisors, so advisors have no incentive to offer them to their clients. None of the big banks in Canada will ever offer you index funds or ETFs, they will offer you their branded actively managed funds.

Considering that most actively managed mutual funds charge 2% to 3% fees, here are some ETF that you can use as comparison.

iShares S&P/TSX 60 Index ETF. This fund is composed of the 60 biggest Canadian companies. Their expense ratio is 0.18%. Wow, that is a long way from 2-3%

If you invest in the US. How about this one: The Vanguard Total Stock Market ETF with a expense ratio of 0.05%

The alternatives are numerous, but only by being aware of this abuse you can protect yourself. Stop contributing to your advisor’s retirement and contribute a little bit more to yours.

In life, generally you get what you pay for, but that rule does not apply to investments. In investments, you get to keep what you don’t pay for.

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5 thoughts on “Financial advisers are double dipping

    1. Alain have you ever had a lawyer perhaps from a big bank contact you about using the word “kickback” implying being illegal. When the prospectus of the mutual fund allows for payment of that trailer. I am just curious, I am against trailer fees

      1. Thank you for your comment. So far, I haven’t been contacted by any lawyer. If a lawyer gets in touch with me, I will just follow their instructions. I don’t have the time nor energy to fight back.

        However, independent financial advisers like to give the illusion that their services are for free. They like to gloss over the information about their commission. Of course, now that the law have changed and advisors are forced to put in writing, in dollar amounts, the cost of their services, a lot of people are looking for alternatives.

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