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December 11, 2020

A low-cost index fund is the most sensible equity investment for the great majority of investors” – Warren Buffett

This quote from Mr. Buffett is from his book The Little Book of Common Sense Investing. He goes on to state that “By periodically investing in an index fund, the know-nothing investor can actually out-perform most investment professionals.”

Think about that for a second. If one of the most successful investors in the world offered such advice, you would think that most people would listen very attentively and take heed. Yet it stands in contrast to the advice that the majority of Canadians receive from their banks and financial advisors, which are heavily biased towards selling mutual funds. It’s easy to see why; mutual funds have high fees associated with them — typically between 2 to 3% — and the financial advisors selling these funds earn fat commission. You’d be right to consider this a stark conflict of interest.

While paying such expensive fees, you might assume you would receive added value in the form of tax-saving advice or wealth management help, but you would be mistaken. The fees are often strictly aimed at managing your investment portfolio; not dispensing helpful, money-saving advice.

Fee-Only Financial Advisor

On the other hand, I am a fee-only financial advisor who is not commission-based and whose fee is transparently disclosed. I invest primarily in Vanguard ETFs from the Vanguard Group — one of the world’s leading investment companies, founded by the father of the index fund, John Bogle. The expense ratio fees are a fraction of the management fees of mutual funds, typically between 0.05% to 0.20%.

The common argument for paying higher fees is that you get better performance, but this is simply not the case with mutual funds. Any historical observation points to the contrary — mutual funds actually underperform when compared to the market.

To sum up, if your financial advisor is recommending that you invest in mutual funds, run! If you are interested in finding out how much you could be saving by switching to lower management fees — and most importantly, how those savings could translate to long-term wealth — book a free consultation with Kevin Bell. Your better future awaits.

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