Wednesday, August 8, 2012
Financial Advisers or DIY
But now that you clearly know my bias for DIY investing, I'd be happy to reveal the pros and cons of doing it yourself vs the cons and cons of hiring somebody for your small account.
Don't get me wrong, if I were rich, then I would be very much inclined to take on a wealth management firm to help manage a portion of my money so I could spend more time enjoying life with my family.
So what does a financial adviser do for you and how much does it cost? In an idealized world they would be altruistic individuals who are out to help better mankind one investor at a time. They would thoroughly discuss the options with the investor, the advantages and disadvantages of each and then implement a plan that made them both money. The reality of the situation is however much more bleak. They wanted a job. They needed a job. They wanted a job that pays them a set fee regardless of their performance. They are encouraged to perform better of course because it leads to better returns for their clients and better income for them. But when your account is small, generally do not give you the time you need.
They generally will recommend craptackular mutual funds that pay them a legal kick-back for selling you "the product." (aka fund units) Why? It's easy, it makes them money, and it attempts to sell you into the investing world. (Full disclosure: I started exactly this way. My money did nothing but stagnate and disappear over 10 years all thanks to the high fees from the legal kick-backs and the costs of maintaining the account)
Why will they gloss you over? New investors have a lot of questions as they do not understand anything as to how the market works, how are the ways in which you can invest, and what sort of offerings do various companies provide for these purposes.
How will they sell you on these crappy products? They will no doubt prattle on and on about diversification to remove risk and talk about mutual funds pooling your money with others' as to improve the choice, tell you that you can contribute as much or as little as you like on a regular basis and this will do this magic thing called "dollar-cost-averaging" if (WHEN) the value of the fund units go down. If you do ask about fees they will no doubt lead you down the garden path when it comes to these mutual funds. They will say since you're pooling your money, you don't need to make many expensive trades yourself. Which is based on truth... But the real truth is that most mutual funds have so many things in them that the costs on the fund of all the necessary trades does add up to a significant amount.
Why do they suck? If the fund isn't completely horrible then it will have a blended basket of stuff in it that approximately resembles the market. Then if the stock market goes up, the value of the units go up MINUS the fees. Generally speaking they can be as high as 5%, if you add up the costs of maintaining your full-service account plus any commissions your adviser took plus the management fees of the products they sold you PLUS any "performance fees" that some of these crappy funds charge. (If the fund does too well, they charge you for that!) So: the market went up 5%, your money? 0% If the market goes sideways then you're down 5%, and if the market goes down 5% then you're in the hole 10%. When the market recovers that 5%, then you'll still be down 5%.
Sounds great doesn't it?
Now when you do start accumulating more money in your investment accounts, an adviser worth his/her salt will start recommending individual companies to buy and at which point you may start actually making a bit of money. But when they do the trades for you, the commissions are ruthlessly high.
The pros and cons of doing it yourself? You can actually pick stocks directly and trade them quite inexpensively thanks to the multitude of discount brokerages where you can do everything yourself online. The downside? You'll need to do your own research and make your own picks.
So it costs you time, but at the same time you have a much better chance of actually making some money. If you're a completely underutalized starving artist like myself, you'll have the time you need to research.
And of course, if you buy an Enron and don't keep on top of things then you can lose a chunk of change. But with some tips and tricks that you may or may not learn from reading more of my blog then you stand a good chance of avoiding this kind of fiasco, or at least getting out of the burning building with a good chunk of your money.
I highly recommend you watch Market Call/Market Call Tonight on BNN. (Owned by Bell/BCE. Full disclosure: I do NOT currently own shares of Bell/BCE. I might buy some in 6-12 months) Watch this 30min/1h long program either on the tube or online. Watch it for a few months and you'll start to get a feeling for what to buy and why.
Stay hungry my friends!