Consider this. A young man and woman both have a sense of family and future family. They are both 25 years old and just starting their careers. They decide to devote their TFSA accounts to passing wealth on to the next and future generations. They decide to contribute $5,500 per year to their TFSA accounts for rest of their lives and both plan on passing away at the age of 92.
The young man uses the services of a financial advisor. The advisor places the young man in actively managed equity funds that give exposure to the Canadian and U.S. equity markets. Total cost is 200 basis points (two percentage points) per year. The five cost centres must be paid. The young woman is her own financial advisor. She invests in broad market, passively managed, ETF’s that give her exposure to Canadian and U.S. equity markets. The cost to the young lady is 5 basis points (5/100 of 1 percentage point) per year.
Their portfolios have the same geographical breakdown and the same pre-cost return. Closing in on the age of 93, they look back and do an assessment. The woman earned a pre-cost return of 6% and an after-cost return of 5.95%. The man earned the same pre-cost return of 6% but an after-cost return of 4% because he paid the advisor, the advisor’s firm, the asset management company (think mutual fund company), traders, auditors, board of directors and the government in the form of HST. This is expense and is a drag on the investment performance of his TFSA.
The day before they die they both call in their children and grandchildren to distribute their accumulated TFSA savings. The woman has $4,888,749 to distribute. The family is moved by her compassion and foresight. The man has $1,915,748 to distribute. The family is also moved but wished he had taken the 40 minutes to learn basic concepts that would’ve allowed him to fire his advisor and the other hands in his TFSA. An extra $2,973,001 could come in handy.
Hiring an advisor, and the accompanying four other cost centers, may be the most expensive decision you make in your life. Are you sure you are getting value?
For you who think the advisor will add value through enhanced pre-cost return, I direct you to the active vs. passive tab.