Do Indexers Need an Advisor?

Whenever I write about indexing with an advisor, I get questions from readers who wonder why passive investors would work with a professional. After all, in most cases, you’ll pay an advisor about 1% assets under management—and that’s on top of the MERs on the ETFs or mutual funds. Index investors, who are especially keen to avoid fees, wonder aloud if that’s worth it.

Tony De Thomasis gets the question all the time. Tony is a financial advisor whom I first interviewed last year for an article in MoneySense. His firm, De Thomas Financial Corp., uses low-cost, passively managed mutual funds, and he adds a 1% fee for ongoing advice. De Thomasis doesn’t pick stocks, time the market, make economic forecasts, rotate sectors or listen to analysts. When he explains this to prospective clients, they often ask: “Then why the heck would I pay you 1% when I can just do it myself?”

How an advisor can help

After 35 years in the business, De Thomasis has some ready answers to that question. He’s collected many of them in a new booklet titled “If I Only Knew…!” and he’s agreed to let me summarize some key points. Here’s why he believes that even passive investors can benefit from the help of an advisor:

Emotional control. The theory of index investing is simple: build a low-cost, well diversified portfolio and stick to the plan through all the ups and downs of the market. But in practice, this is incredibly difficult for most people. Rebalancing is particularly hard, because it invariably means adding money to asset classes that are out of favour. When everyone is screaming at you to get out of bonds or international equities, can you plug your ears and stay the course?

An experienced advisor—and an Investment Policy Statement—can remove the emotional obstacles that impede even seasoned indexers. “You might enjoy the reading, doing the required research, and you might be able to draw your own conclusions,” De Thomasis writes. “The real test is your ability to pull the trigger.”

Risk management. If you need a 4% return to meet all of your financial goals, how much of your portfolio should be in equities? If you’re 10 years from retirement and you have a small pension from your employer, how much of your RRSP should be in fixed income? “Very few investors understand the impact of having a proper asset allocation mix and how it determines their portfolio’s risk and return,” writes De Thomasis.

An advisor can help you determine the target rate of return you need, and then build an index portfolio designed to meet your goals by taking just the right amount of risk.

More efficient portfolios. Index investors with small accounts should keep things simple. But for those with large portfolios, it makes sense to diversify more widely, and this can make portfolio management difficult for the DIY investor, especially if the investments are spread across a number of accounts.

De Thomasis’s portfolios may include emerging markets, foreign bonds, real-return bonds, real estate, commodities, a blend of large and small caps, value and growth, and traditional and fundamentally weighted indexes. “Your plan must be built to withstand everything life has to throw at you,” he writes.

Performance monitoring. At a recent investment show, when I asked the audience of DIY investors if they thought their portfolios had beaten the market over the last five years, about three-quarters of them raised their hands. It’s possible that I stumbled into a roomful of Warren Buffetts, but I suspect that most of these folks were overestimating their returns.

A good advisor will provide you with regular feedback about how your investments are performing, which will you create a realistic plan your financial future.

Win a copy of “If Only I Knew…!”

Tony De Thomasis has generously offered to send free copies of his booklet “If Only I Knew…!” to a selection of Canadian Couch Potato readers. To enter the draw, leave a comment below or Tweet this post to your followers by midnight (EST) on Wednesday, May 11. I’ll announce the winners on Thursday.

64 Responses to Do Indexers Need an Advisor?

  1. Amy May 10, 2011 at 10:39 pm #

    Timely article, as this is exactly the question I have been asking myself the last couple of months. I would love a new book to read!

  2. robert wood May 11, 2011 at 12:08 am #

    I am fascinated by the Couch Potato investment strategy, but I am struggling to pull the trigger, at least on a portion of my portfolio. I would be one who would definitely benefit from the assistance of an advisor to get this started and working. The book would be very helpful to me!

  3. Paul May 11, 2011 at 5:36 am #

    Count me in please

  4. jerri May 11, 2011 at 9:53 am #

    I have been mulling over getting into ETFs and whether I am smart enough to go it alone. This book sounds like it will help make a plan to move forward and just do it.
    Thanks!

  5. Gregor May 11, 2011 at 11:59 am #

    Sounds like a book I should read.

  6. Chris May 11, 2011 at 5:13 pm #

    Would love to read this book!!

  7. Mike H May 11, 2011 at 10:54 pm #

    Certainly is food for thought. Still not sure it is worth it though. Maybe I need the book!

  8. Angela May 12, 2011 at 6:08 pm #

    It’s definitely a booklet I want to read.

  9. Andrew G May 12, 2011 at 6:34 pm #

    I have been working with investments for the last 16 years. It has been interesting to watch the kinds of articles and books that are written on investing and when they come out. We tend to see a lot more books on DIY when the markets are good or at the very least better and they seem to tail off when the markets are showing chaotic moves. This very fact is a response or reaction involving emotion. Money and emotion go hand in hand because of what money represents to those who own it… It is there dreams, their future,maybe even their children’s and grandchildren’s future. It is extremely difficult to take the emotion out of money decisions and because of that 98% of all people need to work with someone who can help them with that at some level. The problem is that most advisors are salespeople and not advisors at all… My advice is work with someone that you know you can trust… Do your homework! I would love a copy of your book, I would love to know your thoughts! Thanks for your time, Andy

  10. Peter May 13, 2011 at 2:02 pm #

    I have been managing my wife’s and my investments for the past 10 years or more and about five years ago decided to use the Global Couch Potato strategy. So I cashed in all of our mutual funds and rebalanced everything using the GCP. I have been quite pleased with the performance. My wife and I are now retired and I we are feeling that now might be the time to engage a financial advisor since we may need to consider a different strategy. I would welcome a copy of this book to help in that decision.
    Thanks.

  11. Michael May 22, 2011 at 7:52 am #

    Yes, having an objective, knowledgeable coach at your side occasionally can help when things get emotional or complex, but with a small portfolio I think a simple approach is best for now. But I have so much to learn and would love to have a booklet!

  12. Jasmeet March 21, 2012 at 1:07 am #

    Everyone needs some help one time or another. Even with passive investing, the need to stay focused is very important as mentioned. Should be a great book to read.

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