Some tough questions to ask your advisor

By now, it’s likely you have seen the near-ubiquitous Questrade ads. The TV spots are great because they show “ordinary Canadians” being conspicuously un-Canadian by confronting their mutual fund advisor and challenging him to explain his true motive. The message is that Canadians need to be more mindful of how much their financial products (especially) and financial advice (sometimes) cost. The difference can be enormous in the long run and the Questrade print ads and billboards re-enforce the overall message.

I’m curious about how this is playing out in advisors’ offices around the country. Of particular interest is the Questrade tag line that people “can retire up to 30% richer” by making the switch. Where do viewers (or readers) think this difference comes from? Let’s say you’re a moderately-successful investor – one who is presently 40 years old and who might otherwise retire at 65 with a $500,000 nest egg. According to the ad campaign, that number could be improved to $650,000. If you’re sitting at home watching the ad, what exactly do you think explains the difference? Who wouldn’t be motivated by a $150,000 increase in their net worth upon retirement?

Related: An investor’s guide to getting what you don’t pay for

For those who don’t know what the Questrade people are driving at, they are making a point that has been well-understood in financial circles for well over a generation now: cost matters. To be even more precise, the phrase favoured by John Bogle, the iconic and legendary founder of the Vanguard Group, “you get what you don’t pay for”. Simply put, the less you pay for products, the better your return and the higher your terminal (retirement) wealth – all else being equal. I would be remiss if I didn’t point out that the same goes for the cost of advice, too, but that’s for another day.

The “all else being equal” part of the previous passage is vital. Obviously, a person cannot buy identical products at different prices. The only way to get a different (i.e. lower) price is to buy a different (i.e. cheaper) investment product. Therefore, let me summarize the value proposition in fairly precise terms. If you could invest the same amount as you currently invest over the remainder of your lifetime, using the same asset allocation throughout that period, how much more money would you have if you simply substituted your current products for products with a comparable mandate, but charging lower costs?

The question above is effectively the one that Questrade wants viewers to ask themselves… and the 30% difference allows for a personalized answer regardless of account size. (It should be noted that the difference might be age dependent- young people may well save over 30%, but people switching just a few years before retirement would obviously save considerably less than 30%.) Still, the rubber hits the road when one looks at recommended financial planning assumptions. I find this interesting because I’ve been an active volunteer in the financial planning community for nearly 20 years now. My experience is that most people who do financial planning work also use those same ‘expensive’ mutual funds referenced in the ads.

Related: How mutual fund fees work

The guidelines put out by the Financial Planning Standards Council (the certification body that provides oversight on Canada’s approximately 17,000 certified financial planners) are clear that any return assumption (including retirement projections) ought to be based on the client’s overall asset allocation and then reduced by the costs associated with the investment vehicles used. As a result, I have a few similarly minded questions that readers might want to ask their advisor when they head off for their annual reviews:

What return assumptions were used for the asset allocation shown here?
Where did you get that assumed return (i.e. did you just make it up)?
Does it take into account product cost (i.e. have assumptions been lowered to reflect costs)?
If ‘no’ to the question above, why not? Accountability is especially important for CFPs.
Either way, please re-run the numbers to quantify the impact of the difference.

The Questrade hashtag is: #asktoughquestions and from my point of view, doing so can help people to have a clearer view of an advisor’s job. I’ve just given you a few questions that are specific, actionable and quantifiable.

John De Goey is a Portfolio Manager with Industrial Alliance Securities Inc. and the author of The Professional Financial Advisor IV. Industrial Alliance Inc.is a member of the Canadian Investor Protection Fund (CIPF). The opinions expressed herein are those of Mr. De Goey alone and may not be aligned with the opinions and values of Industrial Alliance Securities Inc. or any of its affiliated companies.