Do Indexers Need an Advisor?

Whenever I write about indexing with an advisor, I get questions from readers who wonder why passive investors would work with a professional. After all, in most cases, you’ll pay an advisor about 1% to 1.5% of assets under management—and that’s on top of the MERs on the ETFs or mutual funds. Index investors, who are especially keen to avoid fees, wonder aloud if that’s worth it.

Tony De Thomasis gets the question all the time. Tony is a financial advisor whom I first interviewed last year for an article in MoneySense. His firm, De Thomas Financial Corp., uses low-cost, passively managed mutual funds, and he adds a 1% fee for ongoing advice. De Thomasis doesn’t pick stocks, time the market, make economic forecasts, or rotate sectors or listen to analysts. When he explains this to prospective clients, they often ask: “Then why the heck would I pay you 1% when I can just do it myself?”

How an advisor can help

After 35 years in the business, De Thomasis has some ready answers to that question. He’s collected many of them in a new booklet titled “If I Only Knew…!” and he’s agreed to let me summarize some key points. Here’s why he believes that even passive investors can benefit from the help of an advisor:

Emotional control. The theory of index investing is simple: build a low-cost, well diversified portfolio and stick to the plan through all the ups and downs of the market. But in practice, this is incredibly difficult for most people. Rebalancing is particularly hard, because it invariably means adding money to asset classes that are out of favour. When everyone is screaming at you to get out of bonds or international equities, can you plug your ears and stay the course?

An experienced advisor—and an Investment Policy Statement—can remove the emotional obstacles that impede even seasoned indexers. “You might enjoy the reading, doing the required research, and you might be able to draw your own conclusions,” De Thomasis writes. “The real test is your ability to pull the trigger.”

Risk management. If you need a 4% return to meet all of your financial goals, how much of your portfolio should be in equities? If you’re 10 years from retirement and you have a small pension from your employer, how much of your RRSP should be in fixed income? “Very few investors understand the impact of having a proper asset allocation mix and how it determines their portfolio’s risk and return,” writes De Thomasis.

An advisor can help you determine the target rate of return you need, and then build an index portfolio designed to meet your goals by taking just the right amount of risk.

More efficient portfolios. Index investors with small accounts should keep things simple. But for those with large portfolios, it makes sense to diversify more widely, and this can make portfolio management difficult for the DIY investor, especially if the investments are spread across a number of accounts.

De Thomasis’s portfolios may include emerging markets, foreign bonds, real-return bonds, real estate, commodities, a blend of large and small caps, value and growth, and traditional and fundamentally weighted indexes. “Your plan must be built  to withstand everything life has to throw at you,” he writes.

Performance monitoring. At a recent investment show, when I asked the audience of DIY investors if they thought their portfolios had beaten the market over the last five years, about three-quarters of them raised their hands. It’s possible that I stumbled into a roomful of Warren Buffetts, but I suspect that most of these folks were overestimating their returns.

A good advisor will provide you with regular feedback about how your investments are performing, which will you create a realistic plan your financial future.

Win a copy of “If Only I Knew…!”

Tony De Thomasis has generously offered to send free copies of his booklet “If Only I Knew…!” to a selection of Canadian Couch Potato readers. To enter the draw, leave a comment below or Tweet this post to your followers by midnight (EST) on Wednesday, May 11. I’ll announce the winners on Thursday.