You Get What You Pay For
There was an article in the Financial Post recently drawing attention to the T-Rex Score, developed by Larry Bates and expanded upon on his website www.wealthgame.ca - “Investor’s total return efficiency index which measures the percentage of investment returns that are eaten up by fees over any given period of time.”
A factor of 100% means that you get to keep all of the returns while a factor of 57 in the example provided on the www.wealthgame.ca website, suggests that 43% of your returns go to fees over a 25 year period based on an annual return of 6.4% and annual fees of 1.75%.
Although I don’t deny the math, the illustration on the website does beg a few questions:
- What annual return would you have achieved without any help at all?
- Would you have achieved a higher return net of fees with at least some help?
- If a higher quality of help increased that return, would you be willing to pay for it?
The answer to the first question would be “somewhat less than the market” because you can’t actually buy the market. The closest you can get is buying a market index ETF which would moderately underperform because of the associated costs (MER) of owning the ETF.
Let’s assume you did this anyway. How do you feel about achieving a return of slightly less than 4.7% which is the 10 year performance number for the S&P/TSX composite total return index?
- Would that return be high enough to meet your long term needs & goals?
- Would you have put all of your money in the Canadian market?
- Would you have stayed invested when the market went down 35% in 2008, 11% in 2011, 11.7% in 2015 and 11.02% last year?
If it’s safe to assume that you might have achieved a higher annual return net of fees with at least some help and the quality of that help allowed you to reach your reasonable goals & objectives, what should you pay?
The Wealthgame website addresses that somewhat by comparing different products and/or advisory channels including bank tellers, fee based advisors and brokers, and insurance companies but it doesn’t really address the quality of what you are getting and why there is a difference between them.
There is an old saying, “you get what you pay for” and it applies here.
Do it yourself (DIY) can be the cheapest approach but unless you have the time, knowledge, experience and comfort level to determine how much of your money should be in cash, bonds and stocks, what countries and sectors to invest in and what mutual funds, ETF and individual securities to own, I would suggest staying away from this solution because it would most likely cause some serious pain.
There are always robo-advisors, of course, but do they take the time and care to really get to know what makes you tick; your hopes & dreams, realities & circumstance and worries & fears? Or do they just profile you and then throw you in a pool with other investors, leaving you to hope for the best?
When asked, “what do you really want”, some people might answer, “as much as I can get…with no risk….for free”. The more important question to ask yourself is “what do I really need” because remember, your success in achieving this will be affected a great deal by the quality of advice you get and are willing to pay for.
David J. Angas
Senior Vice President, Financial Advisor
Family Wealth Counsel Advisor Group/Raymond James Ltd.
Family Wealth Counsel is a financial advisory group with Raymond James Ltd. The views of the author do not necessarily reflect those of Raymond James. This commentary is for information only. Raymond James Ltd., Member - Canadian Investor Protection Fund.
