Your Complete Guide to Index Investing with Dan Bortolotti

Do You Have the Advisor Six-Pack?

2015-01-25T09:08:36+00:00October 24th, 2014|Categories: Indexing Basics|54 Comments

SixPackWhen people criticize the financial industry in Canada, the target of their wrath is usually high fees and underperformance. These are huge issues and, of course, they go hand-in-hand. But the more I work with new clients who arrive after using other advisors, the more I’ve come to appreciate a different problem. I can’t understand why so many mutual fund advisors seem incapable of building a portfolio with a coherent strategy.

This seems almost ridiculously easy. Is it so difficult to pick one fund for each of the major asset classes (bonds, Canadian stocks, US stocks, international and emerging market, real estate) and then assign a target weight to each? Instead I see what I’ve dubbed the “advisor six-pack.” No, not the guy at Investors Group with the ripped abs. I’m talking about the portfolio built from a half-dozen mutual funds thrown together randomly. It’s like the advisor swallowed the Morningstar database and then threw up in the investor’s account.

“Hmm, how about a few thousand bucks in the Mackenzie Growth Fund (the sales rep just visited and gave me Leafs tickets), a few more in the CI Canadian Investment Fund, and a sprinkling in the RBC Canadian Dividend (ooh, dividends). Add a small sliver in the BMO Asian Growth & Income (that one’s done well lately). And I’m going to put that recent RRSP contribution into the TD Monthly Income and the Fidelity Monthly Income because, hey, monthly income.”

Determining a strategic asset allocation is the first and most critical step in creating an investment plan. But if you’ve got the advisor six-pack, no one has given your asset mix a moment’s thought. This kind of portfolio design has more in common with a harried homemaker who improvises dinner with whatever happens to be in the fridge.

Give me one reason

There is no magic formula for an optimized portfolio, and investors can quibble about which asset classes to include and the proportion assigned to each. But there needs to be a thoughtful explanation for your choices.

The point here is not to agonize over trivial details like whether emerging markets should be 8% or 10%. The idea is to look at each of your holdings and ask, “What role does this play in the portfolio, and is this an appropriate weighting?” Every ingredient should be there to increase the expected return or dampen the volatility (or both). And it needs to be large enough to make an impact, but not so large as to expose you to excessive risk. If it doesn’t fit all of these criteria, then it shouldn’t be in the portfolio.

Yet the advisor six-pack often includes two or more Canadian equity funds that are highly correlated and could easily be replaced by a single holding. It includes balanced funds that make little sense as a small component of a large portfolio. And often it has tiny holdings (1% in gold, or $1,000 in a couple of individual stocks) that cannot possibly have any meaningful impact, other than to increase costs and complexity.

Here’s how I would explain the Complete Couch Potato portfolio, a six-pack of index funds. The equity portion—which is the driver of growth—is divided about equally between Canadian, US, and international stocks for maximum diversification. There’s an allocation to REITs because real estate tends to have a low correlation with the rest of the equity market. The fixed income component is designed to lower volatility with a broad mix of investment-grade government and corporate bonds, plus some real-return bonds, which act as an inflation hedge and have low correlation with other asset classes.

Your portfolio may look quite different from this one, and that’s fine, as long as you have a reasonable strategy and an efficient process for carrying it out. If you can do that, you’re way ahead of the advisor six-pack.


  1. Jake November 6, 2014 at 6:05 pm

    No problem Amy
    Not sure if others will agree but you likely can just convert the rbc monthly income fund into the rbc index funds that CCP has shown on another page and all stays within your rsp accont. cheaper fees and good performance. as well as those oshaughnessy funds can be sold and changed to the index funds.
    treat all your accounts as one big portfolio

  2. Your Investment Manager November 17, 2014 at 10:39 pm

    Nice article! I had a good chuckle. I have heard other advisors express the same sentiments.

    I have been finding that most of the new clients I am taking on either have the advisor 6 pack or the flavour of the month. I come across portfolios where positions haven’t been changed in 10 years. So when I am looking at the funds they have i’m often left scratching my head wondering why the client (A) ever had them and (B) still has them. We often see multiple clients with the same oddball fund from the same time period and it usually coincides with 3 things.

    (1) the latest greatest investment roadshow came through town the year it was bought
    (2) the fund was just created when it was bought (now of-course it’s called something completely different and has a completely different objective…)
    (3) It was outperforming at the time

    Oh well! We will fix it one client at a time Dan

    – Benjamin

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