Make the switch to a low-cost portfolio

Question

We are currently working with a financial adviser from a large mutual fund company. Our portfolio is worth about $500,000 and we have no mortgage or credit card debt. We have been considering the Couch Potato Portfolio but we are afraid to make the change, plus we are unsure what steps we need to take or fees we would pay if we go this way. We also wonder if we should have this decision looked over by a fee-only adviser?

Answer

Did you know that you are paying about $12,000 per year for financial advice?

Hello? Are you still there?

Yeah. I know. It is a huge amount of money. But if we say that your mutual funds have a management expense ratio (MER) of 2.4%, on average, then that is what the cost works out to ($500,000 x 2.4%) for a portfolio of that size. And that doesn’t include any other front or back end commissions that might be applied to your mutual funds.

Here’s the thing: you can save most of that money. You could save big by moving to a fee-based or fee-only financial adviser, or by managing your money yourself. The question is, what is the best fit for you?

I’ll get to that in a second, but let me first answer your specific questions.

How much is a Couch Potato?

The Couch Potato Portfolio is a super simple way to attain performance that mirrors a benchmark index by purchasing low-fee investments, like exchange-traded funds (ETFs). Click here for Couch Potato 101. The only direct fees involved are the commissions you pay to a discount broker to buy and sell the ETFs. You’ll pay no more than $10 a trade because of your asset level. The indirect fee is the MER on the ETF itself, which will be around 0.5% versus a mutual fund at 2.4%.

How to set up a Couch Potato Portfolio?

The steps to set up a Couch Potato Portfolio are pretty simple. Start by opening an account at a discount broker, ideally one associated with your bank for simplicity sake. Then have them transfer over your assets from your current adviser. Once the money is in your account you can purchase a small number of ETFs that fit with your goals.

Are you getting value from your financial adviser?

The hardest part about making the switch to the Couch Potato Portfolio will likely be breaking up with your financial adviser. (Click here for details on how to navigate that process). But before you do, it is worth assessing the value that you’re getting out of that relationship. Right now your gut says it may not be worth it, but take the time to answer this question properly.

Is a fee-only adviser worth consulting?

At a minimum you should have a fee-only adviser review your portfolio to provide a second opinion. You’ll pay for their time—somewhere between $200 and $500 per hour—but I think it will be worth it. And, given your fear about making changes to your portfolio, I think a fee-only adviser might make more sense than a do-it-yourself approach. They will give you some guidance and be able to complete a full financial plan for a few thousand dollars. Click here for some tips on how to find a financial adviser.

Who’s the boss?

The most important thing to remember in all of this is that you’re the boss. You have the power to hire and fire. I know that your confidence level in this area is low right now, but don’t let that stop you from doing what needs to be done to get a handle on your money.

About Bruce Sellery

Bruce Sellery is the CEO of Credit Canada, the country’s longest-standing non-profit credit counselling agency. He is a former MoneySense columnist.