Grow your own?

DON MACDONALD The Monteal Gazette Saturday, June 02, 2007

High management fees have some experts recommending do-it-yourself investing

Suresh Goyal has brought his net worth up to more than a million dollars. Not paying investment fees was part of his strategy.
Suresh Goyal has brought his net worth up to more than a million dollars. Not paying investment fees was part of his strategy.

Suresh Goyal says you don't have to be a rocket scientist to successfully manage your own investments.

Goyal is living proof of that statement. He and his wife arrived in Canada from England in 1982 with $5,000 in savings between them. Today, they are looking forward to retirement with $1.1 million in savings, a paid-off West Island house worth more than $350,000 and $220,000 of equity in two rental properties.

Goyal, 64, is a professor of decision science at Concordia University's John Molson School of Business and his wife is a real-estate agent at ReMax Royal Jordon. Despite being a business school professor, Goyal has never taken an investing course.

Instead, he's learned from newspaper articles, books and his own mistakes - like buying into high-flying stocks like Nortel Networks.

Years ago, he realized he wasn't going to make his fortune by chasing stock recommendations from a broker or from a collection of high-priced, in-house mutual funds another adviser set him up with.

For the last 12 years, he has been investing his own money through a large discount brokerage firm. Instead of going after the latest hot stock or fund, he keeps his eye on the one thing he can control - the fees and commissions he's charged.

"If you're not careful with your own money, no one else will be," he said in an interview.

Goyal is one of a growing number of Canadian retirement savers who are going it alone without the help of advisers. As a bull market in stocks rages, discount brokerage assets have grown 10 per cent faster than those of full-service brokerage firms over the last two years, according to the Investment Industry Association of Canada.

This spring, a couple of books have been published in Canada urging investors to take their financial future into their own hands. One of these books, The Smartest Investment Book You'll Ever Read by Daniel R. Solin, claims "the vast majority of smart investors do not need to spend money to seek the advice of any adviser." Instead, they can spend about 90 minutes a year setting up and maintaining a portfolio of low-cost index funds that provide market returns, Solin argues.

But not everyone is so sanguine about the ability of average investors to forgo the services of a professional investment adviser.

Certainly, many people feel they don't have the knowledge or don't want the responsibility of looking after their own money. A trusted adviser can play an important role in other financial planning roles beyond portfolio construction. These include not only evaluating risk tolerance and setting goals, but also offering tax, insurance and estate-planning advice.

An adviser can also be invaluable in helping clients to avoid succumbing to their emotions through market ups and downs.

A survey by the Investment Funds Institute of Canada last year found 85 per cent of Canadians are satisfied with the advice they are getting from their financial advisers.

But critics say too many brokers and mutual fund advisers are driven by the desire to generate fees and commissions through the buying and selling of investments, and many investors pay too much for the advice they receive.

Can an individual successfully do it themselves? The answer, according to experts interviewed for this story, is yes, provided they have the desire and devote the time to learn the principles of prudent investing.

They also have to make sure they have the discipline to avoid hyperactive trading and control their emotions through market volatility.

"If you want to do it and think you can do it, then you probably can do it," said Warren MacKenzie, author of the book The Unbiased Advisor. "If you can buy a car, you can buy a sensible portfolio."

MacKenzie, who runs a Toronto firm called Second Opinion Investor Services that offers an independent review of portfolios, said the key for do-it-yourselfers is to focus on the investing process instead of chasing after the latest hot investment.

"The process is to choose a sensible asset mix and then rebalance once a year," he said. "That's pretty simple. The industry would like you to think it's more complicated, but it's not. That's the secret."

Most Canadians invest their savings in actively managed mutual funds either through independent advisers or at financial institutions like a bank. Collectively, they've socked away $700 billion in savings in mutual funds.

But Canadian mutual funds have the highest management expenses in the world and a large majority of funds don't do the job they're supposed to do: beat the market.

Over the last five years, only 10 per cent of actively managed Canadian equity funds outperformed the S&P/TSX composite index while only 14.1 per cent of U.S. equity funds outperformed the S&P 500, according to data from Standard & Poor's.

One alternative available to do-it-yourself investors is to build a portfolio of funds that doesn't try to beat the market, but simply seeks to track it at a much lower cost.

This is the approach Goyal takes. He sticks to low cost exchange-traded funds (ETFs) and index funds offered by the banks that track the market averages and charge management expenses of 0.5 per cent or less compared with more than two per cent for actively managed funds.

"That's a nice saving," Goyal, a slim, ebullient man, said. "Suppose someone has been investing for 30 years ... and has been using ETFs or index funds - they will be thousands and thousands of dollars better off. Why? Because the difference of over 1.5 per cent or even 2 per cent a year when compounded year after year over years - you'd be amazed how much difference it will make."

One diversified, low-cost portfolio is what's known as the couch-potato portfolio. The concept, which was created by Dallas Morning News personal finance writer Scott Burns, is to divide your money between a pre-determined mix of equity index funds and bond index funds to get diversification at low cost. Then you forget about it until the following year, when you rebalance by selling winners and buying losers to return to the original asset mix.

MoneySense magazine came up with a series of Canadian couch potato portfolios using iShares ETFs or TD eFunds (for monthly contributors) that the magazine says can be expected to beat 80 per cent of professionally managed money. Their suggested Global Couch Potato portfolio looks like this: Canadian equity (20 per cent), U.S. equity (20 per cent), international equity (20 per cent) and Canadian bonds (40 per cent).

Over five years to Dec. 31, 2006, this portfolio produced an annualized return of 6.3 per cent vs. 4.3 per cent for the average global balanced mutual fund.

Another possible approach, one espoused by Tom Connolly, a Kingston, Ont., investor and investment letter writer, is to buy and hold a portfolio of conservatively financed blue-chip stocks that have a lengthy history of increasing their dividends. Or you could combine the two approaches.

But some personal-finance experts question whether most retirement savers are suited to going it alone without an adviser. On one side are investors who are convinced they can beat the market and end up hurting themselves by taking on too much risk or trading too actively. On the other, there are those who are fearful of investing their own money or who are uninterested in investing, or both.

"Despite the fact that there is a fairly simple way to do investing, it takes a lot of analysis to come to that point, to realize that," said Keith Betty, a private investor who has put together an extensive do-it-yourself investing primer on the Internet.

"There's a major psychological, not intellectual, barrier to overcome and the proportion of people who can overcome it successfully is actually quite small.

"Most people think it's beyond them. It isn't necessarily, but they think it is, and that makes it beyond them," said Betty, 58, a retired chemist in Lethbridge, Alta.

Universite de Sherbrooke economics professor Louis Ascah agreed that many are capable of doing it themselves but, in practice, few want to.

That sets up a conundrum: most people need advice, but end up getting it through the purchase of expensive mutual funds.

"What I find is that many, many people need to have their hands held when they do this," Ascah said. "But they're paying much too much for their hand-holding."

He recommends investors seek out an adviser who will provide services in return for a reasonable fee, either as a percentage of their portfolio or on an hourly basis.

An investor who goes by the name Bylo Selhi (to protect his identity) said portfolio size should be an important factor when investors think about what constitutes fair adviser compensation. A person with a small amount of savings may be well served by getting advice via mutual funds where approximately one per cent of the total MER typically goes to pay the financial adviser, he said.

"At the other end of the spectrum, if you have $1 million, 2.5 per cent is $25,000 a year," said Selhi, who operates an educational Internet site on smart mutual fund investing. "One per cent of which ... goes to pay for financial advice, which is $10,000 a year. I can hire a professional for $250 an hour and get quite a few hours out of that person for $10,000 a year. So in that situation, going to an investment counsellor or fee-only financial planner makes a lot more sense."

"Where it gets thorny is: where do you draw the line? As time goes on and you have $100,000 or $200,000, it dawns on you that paying 2.5 per cent in mutual fund fees is not a very cost-effective way of investing."

As for Goyal, he's happy to have done it for himself and only wishes he'd started earlier. He encourages others to try it as long as they're willing to devote time to learning the basics of prudent investing.

"You don't have to be scared of it," he said. "If you decided to do it, in a couple of months, you will gain enough knowledge to start and do well."

Internet resources:

Links to Shakespeare's Primer for Canadian Do-It-Yourself Investors, Bylo Selhi's Smart Mutual Fund for Independent Canadian Investors and other useful sites, as well as the Financial Webring Forum, can be found at

Thomas Connolly's dividend investing site is at

MoneySense's couch potato portfolio resources can be found through a Google search using the key words couch potato and MoneySense.

The iShares site also has information on index investing at

Different ways to obtain advice:

Financial advisers come in a variety of models. The most common categories include:

Mutual fund representatives

These advisers are licensed to sell mutual funds and often also have licenses to sell life insurance as well. Typically, they are compensated through commissions as well as ongoing fees, known as trailer fees, that come from the assets of the funds they sell. So every percentage point of what is known as a fund's management expense ratio - the total of the fees charged by the fund company for portfolio management services, adviser compensation and other expenses - reduces the return to the investor by an equal percentage.

Some mutual fund representives are compensated on the basis of a flat percentage of the assets under management. These representatives use what are known as F-class funds where the compensation component is stripped out of the management expenses.

Full-service brokers

These advisers are licensed to sell a full range of securities including individual stocks, bonds and mutual funds. They are traditionally compensated by transaction based commissions although more brokers are going to a fee-based approach where a flat fee is charged as a percentage of assets.

Discount brokerage firms

These firms charge lower commissions than full-service brokers but do not offer advice.

Investment counsellors

These firms cater to wealthier investors by managing their portfolio on what is known as a discretionary basis, meaning they don't consult with the clients before making investment decisions, although they report regularly on the progress of portfolios. This sevice is typically offered for a fee based on a percentage of assets.

Fee-only financial planner

These professionals prepare financial plans and offer other advice and services, typically for an hourly fee. Investors should also be aware that many advisers are licensed as financial planners in Quebec, including those whose primary business is selling mutual funds.

© The Gazette (Montreal) 2007