Hey friends,

Today a discussion on why I left wealth management, how the advice business works, and the tradeoff’s between using an Advisor vs DIY. Hope you find it useful.

Quick note: if this article makes you realize you want to DIY but still don’t know what accounts to open, what ETFs to buy, or how to automate it, I built Simply Investing for exactly that. It’s $197, takes about 2 hours, and shows you the system I use.

Eddie

I do not manage people’s money for a living any more. People do not pay me to make investment decisions on their behalf.

All I do is provide financial education and ideas based on my experience in the industry and ways to think about money, investing, and the future.

It’s ultimately on you to take the information and design your own portfolio.

Personally, I think it’s pretty easy once you spend a bit of time learning the ropes.

You only need one platform, an app on your cell phone, and a few ETFs to create a system that works for you and your children around the clock for the rest of your life. The trade off, of course, is that while DIY investing is simple and low (essentially no) cost, and potentially leaves you wealthier over time, you own the responsibilty of the investment returns, portfolio setup, and making sure you don’t do something stupid along the way (like fail to contribute to a TFSA or timing the market).

Why I stopped money management was not because it’s a bad business model; it’s a fabulous business model. If you manage a portfolio of $100,000,000 and charge 1%, you earn $1 million per year, gross, or roughly $500,000 net, after paying the firm their share (for providing the technology, compliance, legal support, etc). Less $150,000 for an associate or 2, and you get to ~$350,000. That is a lot of money.

And the thing about this model is clients are pretty sticky and therefore the income is recurring, almost annuity like. If you are a good advisor, you can assume your portfolio of assets will grow at a steady 5% per year.

This breaks down as roughly +5% from new clients, +5% from portfolio growth, less 5% clients leaving/dying/spending their money. Portfolio growth is steadier at ~5% since most client portfolio are balanced, i.e. lower risk, lower reward. Advisors are not paid to outperform the stock market. They are paid to lower volatility and meet the requirement of a financial plan.

Even with low cost DIY options like Wealthsimple, there’s always going to be room to manage wealthy people’s money. Some people have complex situations, while others simply want someone else to be responsible for the investment returns. They are willing to pay for that, sometimes, huge amounts.

A $5,000,000 investor paying 1% or $50,000 per year is a lot of money to spend for those services. And if the advisor is using active mutual fund managers or private equity/debt funds, the all in cost could easily be 2% or more.

Despite that high cost, many people are clearly comfortable paying that. “Fees are only a problem in the absence of value”, the industry will often say. It would be different, perhaps, if the clients were forced to “cut a cheque” every year for that amount. Perhaps it would sting more. Instead, fees are taken directly out of the portfolio so the client doesn’t explicitly see it unless they ‘look’.

Whether clients fully understand the impact, they potentially sacrifice a lot of future portfolio growth.

A 2% all-in fee might seem small, but it can make a huge differences in future net worth.

Take these two scenarios. DIY investor no cost investing earning 8% vs advisor earning 8% gross less a 2% fee for a net return of 6%:

Almost $2.65 million less.

Now, advisors provide many value add services that don’t show up on the performance statement, such as:

These are indeed valuable services, but do you really need to give up millions of dollars for those services? Maybe, maybe not.

Also, is the advisor experienced or qualified enough to actually navigate all those complexities efficiently? And are they more focused on growing their client base or helping you? New advisor recruitment programs focus far more on ability to gather assets. The hard reality is if a new advisor can’t bring in $30 million of new client money in the first 3 years, they probably have to find another job. Therefore an advisors ability to “sell” often matters more than true wealth management skill.

Furthermore, if you are being charged for all those “potential services” as part of the advisor’s all-in offering, but you don’t need anything to do with comprehensive estate planning, donor advised funds, or business structuring, do you get a discount from the fee rate? In most cases, no.

Back to why I ultimately left money management.

Most clients will “say” they understand that market beating returns are hard to come by, but they’re almost always looking for higher returns and lower risk. And unfortunately, that just doesn’t exist.

So as an advisor, especially as a new comer to the industry, in order to gain the confidence of prospective clients, you end up having to tell a white lie or two in order to appeal to the client’s emotional bias so they decide you are the best to care for their money. Eventually, you can educate them to the point where they truly understand that high returns and low risk don’t exist, but it’s sort like pulling teeth and it didn’t sit well with me. (As an aside, if anyone has interviewed an advisor and that advisor espouses market beating returns, you should say thank you and leave. It sadly happens alot more than you think.)

Also, gone are the days of the traditional stock broker model; it still exists, but it’s increasingly rare because we know that beating the “index” is incredibly difficult to achieve over the long term. So if you get into the industry thinking you’re going to do a lot of analysis of individual equities (something I was attracted to initially), you’re in for a surprise. Instead of analyzing stocks you end up mostly analyzing ETFs and Mutual Fund managers and how to arrange them so a portfolio is “optimized”.

At the end of the day, I found myself essentially a financial therapist. Even the most wealthy people with tens of millions, even hundreds of millions, have emotional challenges when it comes to money. Donald trump issues a tweet and 50 clients are sitting in their living room wondering when their advisor is going to call and how they are going to reposition the portfolio to make sure the portfolio isn’t losing money. If the advisor doesn’t call, a competitor will. So too when stocks are rocking and rolling, you will get asked to explain why the client portfolio isn’t up as much as the Nasdaq (“ahem, you’re old, and we agreed to put you in a balanced portfolio”).

Particularly during Covid, by the end of the day, my voice box would hurt and mind emotional drained.

Lastly, what annoyed me was the necessary but heavy compliance regulations; making a post on Linkedin would require pre-approval. Worse, having any outside business arrangements was pretty much a non-starter. Even becoming the chair of your strata council would have to be approved.

And so ultimately, I determined the retail money management business wasn’t for me.

Now I syndicate real estate partnerships, which is more about identifying opportunistic investments and having sophisticated conversations with experienced investors and brokers. This is the kind of work that I really like, though it has its own challenges of course.

It wasn’t all for naught, though. It provided endless relationship opportunities as well as the ability to share and publish financial education content to help others with a useful perspective.

Most importantly, it’s a really rewarding and enjoyable process, writing this newsletter, and making short videos on instagram, especially when people share their own financial successes as a result.

Thanks for reading.

If you have been enjoying the Journal, please share with your friends and family.

PS: there are some really great advisors out there, just be sure you understand the tradeoffs.

“Without commitment, you'll never start, but more importantly, without consistency, you'll never finish”

—Denzel Washington

Polling the audience: do you have a financial advisor, DIY, or a combination of both?

Learn to do it yourself Simply Investing, my course. Everything I'd tell a good friend, in one place: what to actually buy, which accounts to open, and how to put it all on autopilot so your money grows without you babysitting it. Built for beginners, and the ~100 people who've gone through it have loved it. It's $200, a rounding error against what getting this right is worth over a lifetime.

For your kids SmartMoneyKids an AI-powered financial literacy app for Canadian kids ages 6 to 18. TFSA, FHSA, saving, investing, business, in language they understand.

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