This is a video post by Ed Rempel.

Financial Planning is not about the money itself. It is about what the money will do in your life. This video will highlight why you DO NOT get financial security by paying off debt and safe investments. It comes from having a huge nest egg.

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Question: From your experience, how do people really benefit from financial planning?

Financial planning is not about the money itself. It’s about what the money will do for you in your life. A plan is not a bunch of numbers – it is about your life. Our clients find that our planning meetings are actually fun.

For example, we ask clients: “What’s important about money to you?” The #1 answer we get is security. They want to know there will always be enough income for their family, for emergencies, or for things important to their lifestyle.  A plan can help you and your family achieve financial security.

Question: Can’t they get financial security without a plan?

We find most people that want security do exactly the opposite of what they need to do to get it. The common mistake people make is to think they can be financially secure by paying off debt and having safe investments.

We call it this the Zero Plan. Their goal is to retire with zero debt, zero investments (nearly), and zero income (except a bit from the government). Investing very little money and buying low return investments means you never build up much of a nest egg.

Real security: comes from having a huge nest egg.  I’ll give you a simple example. Who is more secure?

  • Person A: With no mortgage or.
  • Person B: With a $200,000 mortgage and $1 million in investments. That’s what real financial security is.

Question: How do you get financial security then?

Building a nest egg probably means you need to invest in the stock market. It does not have to be scary, though. You can invest successfully and safely in the stock market. Here’s what you need to do:

  • First, you need to think long term. The growth of the stock market has been quite consistent if you invest long term.
  • Second, you need a solid investment strategy. Our strategy is to hire the world’s best investors. We call them, “All Star Fund Managers”. Knowing they are investing for us gives us confidence.
  • Third, you need a long term, written plan so you know what you are doing.
  • Fourth you should work with one financial planner you trust.

In short, you do NOT get financial security by paying off debt and safe investments. It comes from having a huge nest egg.

“Disclaimer: Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Opinions expressed are the personal opinion of Ed Rempel.”

About the Author: Ed Rempel is a Certified Financial Planner (CFP) and Certified Management Accountant (CMA) who built his practice by providing his clients solid, comprehensive financial plans and personal coaching.  If you would like to contact Ed, you can leave a comment in this post, or visit his website  You can read his other articles here.


  1. Greg on October 31, 2012 at 10:47 am

    This sort of content makes me less likely to read this blog. A big ad influencing people to borrow to invest with advisers and fund managers that skim fees and expenses that are a percentage of your total investments. Not even an all-star fund manager can beat the markets after expenses. It is better to invest in a low expense index tracking product. This post is not good advice.

    Now if only I could find an advisor or fund manager that would charge me a percentage of my invest gains *and* pay me the same percentage back of investment losses. Then our interests would be aligned.

  2. FrugalTrader on October 31, 2012 at 11:13 am

    @Greg, although it may appear commercial, this post is not sponsored. The message I get from this post is that people should invest in inflation beating assets. My opinion is that people should pay down debt first BUT invest with the free cash flow after the debt is eliminated.

  3. Ed Rempel on October 31, 2012 at 11:47 am


    The point of this video is that what most Canadians do to try to become financially secure is precisely what prevents them from ever being secure.

    Financial security is important to them, so then focus on paying off debt and investing in very safe investments. As a result, they end up retiring with a paid-off home and very little in investments. They end up being “house poor” or “poverty millionaires”.

    I have seen many of them. People living in a large paid-off home on less than $20,000/year before tax. You can call them any time day or night and they will answer – because they have no spending money.

    It comes down to how you look at financial security. Here is the question: “How would you feel if you had a portfolio of $1 million invested in the stock market?”

    For most Canadians, that is a scary thought. Therefore, obviously those Canadians will never have a significant portfolio. They are scared of it.

    At the same time, most Canadians enjoy a comfortable lifestyle that they do not want to give up. Most families have 2 incomes, with an average family income close to $80,000.

    At retirement, they want a similar lifestyle, less the mortgage payment and cost or the kids, plus a bit for additional travel and entertainment, which means they want at least $50,000/year before tax as a retirement income. (The majority we see are quite a bit higher than that.)

    If you use a rule of thumb based on the “4% solution”, you would need $1.25 million so that you can take out 4%/year and take your modest $50,000/year retirement income.

    My point is that financial security comes from having a large portfolio, say $1 million or more. Most Canadians are scared to have $1 million in the stock market and will never get anywhere close, yet at the same time would consider retiring on less than $50,000/year to be very low.

    We find this to be an important issue that needs to be discussed. We have always seen with many Canadians, but this is even a bigger issue today with the very cautious mood of investors.

    – If you have a paid-off house and $100,000 in investments, are you financially secure?
    – If you have $1 million portfolio, are you financially secure?

    How do you do define “financial security”?


  4. Traciatim on October 31, 2012 at 12:16 pm

    I know it’s a little silly, but I think you should not capitalize the d in “Planning with ED” on your logo . . . ED makes it looks like it’s initials of something completely different ;)

  5. Ed Rempel on October 31, 2012 at 12:32 pm

    HI Traciatim,

    That’s hilarious! I never realized that. I always get a kick out of the ED commercials.


  6. BenE on October 31, 2012 at 12:45 pm

    If this post is not an ad for self proclaimed financial experts, it is just bad advice. However, the proof that something shady is going on:

    Person A: With no mortgage or.
    Person B: With a $200,000 mortgage and $1 million in investments. That’s what real financial security is.

    That is not an honest argument because the difference between A and B mostly doesn’t have to do with the fact that Person B has a mortgage. It has to do with Person B having $800 000 more net worth. An honest argument would be:

    Person A: With no mortgage and $800 000 or.
    Person B: With a $200,000 mortgage and $1 million in investments.

    Obviously having a larger net worth and getting better returns is what everybody want. However, since money doesn’t grow on trees…

    The post then follows with these ‘non-sequiturs’ that
    1) Stocks are best because they have been in the long term past.

    Markets are anti-inductive ( trying to reproduce past performance on any time frame is a sure way to lose your shirt.

    2) Hire the world’s best investors.

    This is what people tell you when they want to get you to pay fees and skim your savings. On average you lose when you do this. An honest good investor would only charge you for returns he gets above a broad index. For example, if the SP500 gets 5% and he is able to get you 7% you would each get something like half of the difference (7%-5%=2% means you keep the 5% plus each get 1%). He would also split the cost if he makes below index performance. If someone really thought they could beat the market they would offer this to you. I’ve never seen it though.

    3) You need a long term, written plan so you know what you are doing.

    Writing it down is not going to make money appear out of thin air. The insinuation here is that you need someone to help you with that. This is always for a fee or a cut of your money.

    4)You should work with one financial planner you trust

    Ah… here the ad for financial planners is even more explicit.

    The truth is that you should never ‘trust’ your financial planner and be very skeptical of anything he tells you that diverges from buying low cost broad index funds and safe bonds. But you don’t need a planner for that. Just buy low cost broad index funds and bonds!

  7. Al on October 31, 2012 at 2:08 pm

    The real point worth taking away is that unless you take some risks in your life you won’t have financial security at retirement and you most definately will not get there with a ridiculously conservative portfolio skewed towards bonds and GICs (unless you make boatloads of money or are in line for a substatial inheritance). There are other ways to to the destination of financial security than levering up and being invested long-term, other ways that let you sleep at night… more education leading to career progression, taking another job, starting a business, more savings, investing in individual stocks, real-estate, commodities (sans leverage thank you). There is no magic bullet [such as leverage] to building financial security and no easy solution – the ethos of this blog speaks to that journey and discipline required to actually get there.

    To BenE – if you don’t trust your financial planner get a new one. They’re really not all bad and just because they recommend funds rather than index stocks or ‘safe bonds’ doesn’t make them untrustworthy. It’s worth noting that ‘safe bonds’ currenty have negative real returns.

    To Ed – those guys that live in $1 million dollar houses with $20k of income are simply living in houses that are too big – nothing wrong with sizing down to free up some capital into income – they’re not looking so bad then.

  8. Emilio on October 31, 2012 at 2:21 pm

    Hi Ed,

    How do YOU make money by having your clients invest in the stock market?
    Do you charge by transaction, every time they buy or sell, or do you work on a monthly fee basis?

    I would like te replicate your business model, on my way to building a huge nest egg. I would rather have somebody else take all the risk, and get paid on either side of a transaction.

    Thanks in advance

  9. Ryan on October 31, 2012 at 2:35 pm


    Can you please explain why you think “All-Star fund managers” are better than low cost index investments? The SPIVA Report is pretty hard to refute. 97% or mutuals over the past 5 year have lost out to their index and the other 3% probably just got lucky.

  10. Ed Rempel on October 31, 2012 at 3:17 pm

    Hi Greg & Ryan,

    The way I align my interests with my clients is that I have 100% of my money invested in exactly the same mutual funds that I recommend for my clients (in the same risk category). This is also true of every member of my team.

    This is not really the point of this article. The point is that most people need a solid investment strategy that does not leave you overly conservative in just bonds and GICs if they want any hope of becoming financially secure.

    I have a strategy that I am confident in. I can tell you that I personally have never – and expect to never – own any ETF or index investment of any type. I think they are fine for most people, but every fund manager I am invested with has beaten his index over many years and his career, and I believe this results from skill.

    A far more in-depth study on the index vs. active management issue is discussed here: .

    This does not guarantee I am right, but I do sincerely believe it, which is why I personally have all my investments with these fund managers.


  11. Badcaleb on October 31, 2012 at 9:25 pm

    Ed. Can you give an example of a manager who has beaten the tsxcomp or sp500 over many years? I have heard even some big money managers who recommend index funds/efts for the average investor. Thanks.

  12. SST on October 31, 2012 at 8:36 pm

    @Ed: “My point is that financial security comes from having a large portfolio, say $1 million or more. Most Canadians are scared to have $1 million in the stock market and will never get anywhere close…”

    You are correct, Ed.

    Currently, less than 1% of Canadians have $1,000,000 in investable assets. This has been true for a very, very long time.

    If the trend continues, at the height of Boomer retirement, ~2% of Canadians will have $1,000,000 in investable assets. That percentage drops after that point in time (ie. Boomers start dying).

    Seems obvious that giving money to the stock market and/or financial “professionals” is not going to result in that million dollar “huge nest egg”, no matter how long term.

    Most people SHOULD be scared to have their money in the stock market (haven’t forgotten about LIBOR, have you?).

    For example, this:

    Real liquidity is now down to 96%. And that’s just one which was made public. Whose to say true liquidity — that is actual non-computer beings BUYING; these HFT bots don’t buy, by the way — isn’t 74% or 41% or even less?

    The public equity markets — both mechanisms and participants — have been deeply and substantially compromised. Look else where for financial security.

    Of course these are only analysis of facts, anything can happen in theory.

  13. uptoolate on November 1, 2012 at 12:31 am

    ‘every fund manager I am invested with has beaten his index over many years and his career’

    Please Ed give us a break. I think that I will take my chances with Jack Bogle and Bill Bernstein. I totally agree with Greg and other sentiments expressed above. This kind of content certainly lowers my opinion of the MDJ.

  14. Greg on November 1, 2012 at 1:06 am

    Hi Frugal Trader and Ed,

    Thanks for responding to my somewhat harsh comment.

    Even though it’s not a sponsored post, it sure is very much a promotion for Ed’s business.

    Beyond the basic investing advice about saving and making long term investments in higher risk assets for more return, I understand this post and FT to be proponents of leveraging via the Smith Manoeuvre (contrary to what FT says in #2 about paying down debt first).

    Ed, I believe you when you say you are sincerely convinced of your investing approach and back it up by investing in the same funds as your clients. I’d be even more convinced if you confirmed that you invest under exactly the same conditions (same management expenses, no discounts) as your clients with similar sized asset bases.

    As for picking all-star managers and having read about active share, I’m still not convinced. Can you provide some data to back that up? Who are your all-star fund managers and what are their long term returns above the indexes and net of fees? Are their betas close to the markets they beat? And what are their excess returns and betas in the time that you have invested with them?


  15. Paul T on November 1, 2012 at 8:36 am


    I’d like to see what those fees are as well, and have a true comparison with an index ETF net of fees. And a track record of years, not months or quarters.

    That’s the TRUE test whether any financial planner is worth their salt.

  16. Sarlock on November 1, 2012 at 12:22 pm

    *Person A: With no mortgage or.
    *Person B: With a $200,000 mortgage and $1 million in investments. That’s what real financial security is.

    That’s not even close to an honest comparison. “Real financial security” is having $800,000 more in net worth than the other scenario. Whether the mortgage is paid off or not is irrelevant in your comparison. A better comparison is no mortgage vs. $200,000 mortgage+$200,000 investments. Both still $0 net worth. That would be a worthwhile discussion on the difference between the two. (In my experience, though, most people will spend the $200,000 and be $200,000 in debt…)

    And someone making $80,000 per year will never achieve $1,000,000 in investments (in today’s dollars). Even if they manage to save $20,000 per year (very unlikely) and can beat inflation by 2% per year, it would still take them 36 years to save up $1,000,000.

    And I do agree with other posters… this story reeks of “advertising for Ed (ED?)” under the loose disguise of actually trying to be helpful. Then again, the general content of this blog has detiorated significantly over the past year or more.

  17. nobleea on November 1, 2012 at 1:15 pm

    I agree that the million dollar vs 200K comparison was disingenuous.

    I think the Chou funds have beaten the index, consistently for 15 years or more. Not very well advertised and not very large.

  18. Andrew Spencer on November 1, 2012 at 2:25 pm

    Hello Ed,

    I agree with your main argument in this post, mainly that financial security comes from being liquid. But I think we disagree on how that comes about.

    Paying down debt and building up savings and investments shouldn’t be mutually exclusive. In fact, I would argue that financial security hinges on both. The key to financial planning is to figure out the right balance between your needs today and your needs tomorrow…its as simple as deciding what you value now and then saving the rest for the future. So long as those investments at least keep up with inflation (net of taxes and fees), then you are better off by saving than by not. If those savings generate a return that is greater than inflation, then you’ve done quite well for yourself.

    Out of curiousity though…what is your fee structure when selling mutual funds?do you use deferred sales charges (DSC)?

  19. khai on November 1, 2012 at 5:19 pm

    I don’t see any problem with this post except the content being too general. Most of us here have some idea about investing and know, whether we need (to pay) a financial adviser or not. So I don’t mind Ed’s “branded” video.

    As for managers vs. index again, everyone is entitled to his own opinion. I don’t agree on everything with Ed, but have to admit, that he many times brings interesting ideas and points of view to the discussion table.

    I still like the blog very much, although agree with recently lowered value of the content. But I don’t think this article is one of those which bring it down. (example of recent useless articles can be the one about unions or another about benefits…)

  20. Ed Rempel on November 1, 2012 at 6:09 pm

    Hi BenE and Sarlock,

    The question comparing the mortgage-free person to the one with a large nest egg is meant as a concept question. It is very common for Canadians to believe that being debt-free = financial security, rather than understanding that a large nest egg = financial security.

    Making the 2 options equal is not the issue. If you think that financial security comes from paying off debt and conservative investments, your nest egg will be small and your net worth will be almost entirely your home.

    However, once people realize that the nest egg is what provides financial security, they tend to invest much more and more effectively, which tends to give them a much higher net worth over time.

    That is why I did not make the 2 choices equal. It is a concept question. hat What gives you financial security?


  21. Ed Rempel on November 1, 2012 at 6:54 pm

    Hi Greg & badcaleb,

    I am very open on MDJ about anything, except I prefer not to reveal my specific fund managers. There are also compliance reasons for doing this, since it could be interpreted as recommending the fund manager to all readers.

    There are quite a few fund managers that beat the index over their careers, though. Our entire investment process is trying to identify them. I’m arguably not really an investor – I am an evaluator of investors.

    I don’t try to pick sectors, countries, or trends. I just study the fund managers and different methods and styles of investing and try to figure out who the best investors are.

    I am always surprised how many people believe nobody can beat the market. The “Efficient Market Theory” has been proved false and is not really believed by any finance professors today. In every field, there are exceptional people. Investing is no different. Identifying them can be complex, though.

    There are quite a few fund managers that have beaten the index over their career, though, and you can find them if you search for them. One of the fund managers we used to use until he passed away was Peter Cundill. He managed the Cundill Value Fund for 35 years with a return of 12.8%/year vs. the MSCI World index of 10.7%/year. $10,000 invested with him at the end of 1974 would have grown to $843,392 vs. $427,458 in the index.

    Note this is after all fees – including paying a financial planner for advice.

    His 15-year beta was .68% and he only lost money 6 years of 36, so he was about 1/3 less risky than the index.

    Just to give you an idea of how many exceptional fund managers there are, here is an independent web site that tracks a few: .

    The studies by the index industry are generally very basic. Nearly all even include all index funds in their under-performing fund category and they make no attempt to identify which fund managers are actually trying to beat the index. Most mutual funds underperform because they are “closet indexers” (funds that claim to be managed but are quite similar to the index), because it is generally much easier to sell a closet index fund to investors. However, they are not really trying to beat the index.

    The Active Share article is far more in-depth and did conclude that fund managers that have a high Active Share, which means their holdings are 80% or more different from the index, the average fund manager beats the index and this outperformance tends to persist.

    The other advantage of investing with top fund managers is that they can make the allocation decision much more effectively on a bottom-up basis. Index investors have to choose which index or ETF to invest in, which is a top-down allocation decision. Studies show investors tend to be very bad at investing with top-down allocation decisions and usually choose the areas that have done well recently. The Active Share study even showed that professional fund managers generally do not add value when they make top-down allocations, and hardly any of our fund managers use that type of strategy.

    With a top fund manager, you can invest with a global equity fund manager and he will make all the allocation decisions much more effective bottom-up, based on where he finds the companies with the best value.

    Investing with ETFs or indexes is fine for most people. However I have never bought one and am far more comfortable today with my All Star Fund Managers.

    I am just off to the Argos vs. Ti-Cats game. I’ll post tomorrow about the fee structures.


  22. SST on November 1, 2012 at 8:50 pm

    I see the issue of facts was skirted once again.

    With only 1% of all Canadians holding $1,000,000 in investable assets — that is, Ed’s proclaimed “huge nest egg” ($1.25 million in his example, #3) — and with decade after decade of investors giving their money to financial “professionals”, how come more people don’t have a million dollars? Surely the other 99% of us aren’t that scared to have a million dollars in stocks.

    Shouldn’t there be more than 2% of Boomers retiring as millionaires, they have had a “long term” investment span as well as the Greatest Bull Market of All Time in which to pad their wealth.

    What are the financial “experts”, and financial industry as a whole, doing so wrong as to prevent the other 99% of Canadians from achieving the $1,000,000 mark?

  23. trevor on November 2, 2012 at 12:05 am

    Gotta agree with most of the people here. Don’t like the video posts. Not that I dislike Ed personally, but it just doesn’t seem to fit the vibe of mdj.

    That said, I FULLY plan on having at least a $1-million (indexed to inflation) when I retire in 28-33 years. All on a gross family income of about $60,000. I also plan on paying for most of my two children’s education.

    No household debt IS A HUGE PART of this plan.

    The house will be paid off before I turn 39 (7 more years). The mortgage payment moves to the kids RESP for 4 years.

    At 43 years old the mortgage payment gets pushed to the retirement, add in the value of my house over the next 33 years,(assumed to match inflation) add the work DC pension and TAADAA! at 65 years old I’ll have the $1-million nest egg.

    All I need to do is index or select a nice mix of blue chip dividend stocks with a smattering of bonds and GICS, make about 6% a year and I’m set to go.

  24. Goldberg on November 2, 2012 at 11:26 am

    To get $1,000,000 portfolio from median incomes means you’ll be 65 years old and not have lived a day of your life.

    People trade health for money then trade money for health…

    You will not need savings or income after you are 75 years of age. Most people don’t have the energy to do crazy “expensive” things. Especially if they never had an expensive lifestyle before.

    So you will only have 10 years of travel and “expensive” living. What do you need $1 million for?

    At 65-67, CPP and OAS will provide you with about $20,000 for you and your spouse. You need an extra $20,000 to $50,000 for ten years. Therefore, $500,000 is already too much.

    If you need more money then provided by CPP and OAS after you are 75 years old, then take equity in your home (or a reverse-mortgage)…

    Nobody needs a huge nest egg…

  25. Ed Rempel on November 2, 2012 at 2:02 pm

    Hi Al,

    Yes, you have the main take-away message right – you can’t really become financially secure without taking a certain amount of risk.

    You are right that leverage is something we believe in for people with the right temperament and long term outlook. It is not part of this article, but it can be an effective way to boost returns. It magnifies gains and magnifies losses by a lot, so it can be a far more reliable way to get higher returns without investing in very risky investments.

    You are right that people with a $1 million house that are living below the poverty line could just downsize. Our experience is that most seniors are very comfortable in their homes and don’t want to downsize.

    What we see much more commonly in the Toronto area is seniors living in $500,000 paid-off homes that are living below the poverty line. The issue here is that downsizing is often not worth it. If you sell a 2,500 sq.ft. house and buy one at half that size, 1,250 sq ft., you will probably clear less than $100,000. That is a huge cut in lifestyle for not much money.

    In the Toronto area, unless you are willing to leave the city, down-sizing is usually not worth doing.


  26. Ed Rempel on November 2, 2012 at 2:51 pm

    Hi Greg & Paul,

    Regarding your question about the funds we all invest in, everyone on our team invests in exactly the same fund managers and funds that we recommend for our clients – with the same fees.

    We think this is an important point of integrity that aligns our interests with our clients. It does not guarantee that we have the best investments, but it does show we sincerely believe we are recommending the best ones. Essentially, we study fund managers to identify the ones that we would want to invest with ourselves, and those are the ones we recommend.

    I personally pay the same MERs as everyone else except for 2 things:

    1. Institutional pricing – Most of my personal investments have lower fees based on institutional pricing, which is typically about .3% lower than regular MERs. This is available to anyone with the required minimum investment. The amounts that need to be invested are not that high. Depending on the company, they are $100,000 per fund per account or $250,000 in all accounts in your family with that fund company.

    2. Advisor portion of the MER – The MER of most funds includes 1% for the advisor. Since I am the advisor, I can buy a version without this 1%. This would also be available to anyone in a Fee-For-Service account, but for any clients, we would have to charge them an advisor fee.

    In short, we all buy the same version as we recommend for our clients. I can personally avoid the advisor fee, but the only other discounts would be available to anyone with the required minimum investments.


  27. JStyLeZ on November 2, 2012 at 4:30 pm

    The word ‘security’ infers safety, guarantee, protection. Investing in the stock market offers very little of that unless you properly hedge(this may be an added value fund managers can provide).

    The journey to the huge nest egg can have setbacks and downfalls. Without adequate safeguards both in your personal and financial life, you do not have ‘security’.

    Having a huge nest egg should be dubbed financial independence/success, not necessarily ‘security’.

  28. BenE on November 2, 2012 at 4:39 pm

    Ok I like this last post. It’s almost honest. We get the fees of the advisor which are 1%.

    The only thing we need to calculate now is how much this fee amounts to.

    Let’s say I want to spend 30k to 40k a year when I retire and retire not too late (early 60s) I will need about one million dollars saved. If I can get 4% return on my investment, I will need to save about $1450/month for 30 years.

    Let’s see what happens if I give 1% to my adviser. Using a savings calculator I find that with 1% taken out and thus a 3% return I will end up with 844000 instead of a million. The advisor pockets the rest. The price for the advice is thus $155 000.

    The fee will be roughly around this value whether the advisor beats the market or not, these advisors usually offer no guarantee and don’t give back the $100 000 or more they made off of you if they didn’t get you returns above market. Research shows they usually don’t beat the market. This is especially true nowadays where they need to beat sophisticated high frequency computers that can process much more data much quicker than humans.

    Is your advisor worth in the hundreds of thousands of dollars? This is what they charge you.

    Here is the savings calculator I used which can help you check my numbers or modify them for your situation:

  29. Ed Rempel on November 2, 2012 at 5:04 pm

    Hi Paul,

    To do a true comparison of ETFs with mutual funds net of fees, you should look at the F class mutual fund or adjust for the advisor portion of the fee.

    There has been a lot of question about the high cost of mutual fund MERs in Canada, but the main reason is that advisor compensation is included, which it generally is not in the US.

    For example, if a mutual fund has an MER of 2.5%, the figure consists of:

    Operation costs & HST .5%
    Fund manager fee 1%
    Advisor fee 1%
    Total MER 2.5%

    For an ETF, the fee may be .2%-.5%, which is only the operation costs. There is no amount for the fund manager or advisor.

    In our situation, if we used a low cost index product for a client, we could use the TD e-series in a Fee-For-Service account. The cost would be MERs of our fee in the account of 1%, so the client would make the index return less 1.3%-1.5%.

    If we invest with mutual funds, we choose the best fund managers and would really only need to do better than the index return -1.3% for our client to be ahead of the low cost index products. However, we believe our fund managers can make more than the index itself, not just more than an index fund or ETF.

    Is it worth it to pay 1% for the fund manager? That of course depends on the stock-picking ability and investment strategy of the fund manager.

    Is it worth it to pay 1% for the financial planner? That of course depends on the quality of the advice and how comprehensive it is.

    From our experience, we find that our clients benefit from our advice even more than from our investments. Without actually experiencing comprehensive advice, we find most people don’t fully understand the benefits.

    The fact that they have a written plan and know exactly what their goals are and what they need to do to achieve them, leads to far better choices of what to do with their money.

    They know line-by-line what their retirement lifestyle will be and when they will retire, they use the most effective tax strategies for their situation, they know what type of investment vehicle is most tax-efficient in their situation, they know exactly what they can afford, where their investment dollars will come from, they don’t waste money on expensive insurance or mortgages, they know how all their other goals will be achieved, they don’t make the common financial mistakes most people do, and they also know when they have saved enough and can spend without feeling guilty.

    The biggest part of this benefit is that they invest more (and know where the money will come from), that they stick to their plan and don’t keep changing it, that their tax is minimized, and that they avoid common mistakes.

    Financial planners are supposed to provide all of this comprehensive planning in a written plan, plus recommend the best, appropriate investments.

    My point is that when you compare the returns after fees of mutual funds vs. ETFs, you are comparing investments that compensate an advisor with investments that don’t.

    In our case, we try to pay for ourselves. Our view is that if our All Star Fund Managers continue to beat their indexes, then they have actually paid for themselves and for our financial advice. Our clients do not have to pay us separately for our advice and yet they will have done better than with an index product.


  30. Ed Rempel on November 2, 2012 at 5:39 pm

    Hi Andrew,

    To answer your question, we use deferred sales charge (DSC) or fee-based accounts, whichever makes the most sense.

    Since we do a lot of planning up front (comprehensive written plan), for smaller accounts DSC is more effective, since we do not have to charge the client anything directly. If we started fee-based with smaller accounts, then we would need to charge separately for the planning.

    Once the account grows, we convert to the fee-based account and then to institutional pricing. Depending on how many accounts you have and which specific companies we invest with, the institutional pricing works with a total portfolio starting somewhere between $500,000 to $1 million.

    There is a lot of misunderstanding about these 3 options:

    1. Fee-based: is not as beneficial as most people think. Most fund companies have an F class version of their funds, which excludes the advisor compensation. The MER is generally about 1% lower. The advisor then charges a 1% fee and you are paying a similar total fee – except that there is HST on the advisor 1%. Looking at this company-by-company, the total fees with fee-based accounts, including HST is usually about the same, but in some cases slightly higher or slightly lower than the regular MER of the fund.

    The advantage of fee-based is that the advisor fee is tax deductible if you are in a non-registered account. This usually makes no difference with RRSP accounts. However, the MER is applied against taxable investment income, so you usually get the most or all of the tax savings anyway (depending on how tax-efficient the fund is).

    In short, fee-based accounts are generally somewhat of a benefit for non-registered accounts.

    2. DSC – is not necessarily a bad thing. The deferred charge is usually “the fee you don’t pay”. If you stay invested longer term (usually 6-7 years minimum), you don’t pay this fee. The MER is usually exactly the same, regardless of the purchase option for the fund. Even most “no load” funds have MERs similar to DSC funds, so there are no actual savings if you stay invested.

    DSC does not necessarily restrict your ability to change investments either. You can switch within the fund company generally for no fee. (We don’t charge one.) In our case, if we recommend changing a fund and moving it to a different fund manager that is with a different fund company, we rebate the DSC fee to our clients so this does not cost them anything.

    In practice, there is an advantage of DSC in that it tends to encourage people to stay invested, especially when the market are down.

    In short, DSC fees generally don’t cost anything for long term investors.

    3. Institutional pricing – Few people are aware how this works or even that it exists, but once your accounts or the specific fund reaches the required minimums, you can invest in lower fee versions that usually save about .3%. In addition, in most cases the entire cost is tax deductible every year.

    For example, instead of having a 2.5% MER paid within the fund, you have a 0% MER but 2.2% of your holdings are sold to pay fees each year, which is generally tax deductible (depending on a couple factors) in a non-registered account. In some cases, you can also use your non-registered investments to pay the fees for your RRSP investments so they also become tax deductible.

    In short, institutional pricing can be a significant benefit, especially for non-registered accounts, but also for registered accounts.

    Does that answer your question, Andrew?


  31. Ed Rempel on November 2, 2012 at 5:51 pm

    Hi Khai,

    Thanks for the support. It looks like I need it on this thread. :)

    I do agree with you that this article/video is too general. Videos are generally 2-5 minutes, which is really not enough time to adequately explain most financial issues.

    Clearly, quite a few of the points on the video required further explanation. I was thinking of using video mainly as a discussion starter, and possibly something that the financially interested readers on MDJ can show to their on-financially interested spouses.


  32. SST on November 2, 2012 at 9:09 pm


    A lot of work doing that much dodging!

    Ed, you give the example of an average family needing $1.25 million in investable assets at retirement in order to continue their current lifestyle.

    Why would you use this when barely 1% of Canadians have $1,000,000+ in investable assets? Ultimately unrealistic.

    With the current average savings rate @~3.5% (remember, ‘savings rate’ is defined as savings from after-tax income), that would give the average household ~$2,400 per year of savings.

    To reach that golden $1.25 million mark, said average family would have to net (after all costs and inflation) an average 12.5% annual return for 45 years straight (assuming age 20 for a starting point).

    We’ve had 40+ years of the financial industry and its “experts/professionals” selling the general public the Million Dollar Retirement Dream.

    Thus far they have a 99% failure rate.
    (As well as almost zero accountability.)

    Why are they allowed to continue?

    Perhaps a more proactive question would be why do you, the customer, continue to give your money to the financial industry?

    Of course the financial “experts” will blame their lack of results on the customer, giving an absolutely inane excuse such as we are “too scared” to have $1,000,000 in stocks.

    Theories and examples and past performance etc. et al are great advertising tools; factual data portrays a completely different picture.

    Have a great weekend!

  33. Ed Rempel on November 3, 2012 at 5:05 pm

    Hi Goldberg,

    We actually find that once people reach their late 70s or early 80s, they are thinking a lot about whether or not to move to a retirement home and whether or not they can afford it.

    If they do go to a retirement home, their expenses may be significantly higher than when they first retired.

    Whether or not you need investments after age 75 depends entirely on the lifestyle you want to live. From our experience, we find that people that have enough money tend to remain much more active than those that have to be very careful with every dollar.

    Have you ever tried to live on $20,000/year? When we have a retired couple that is older, staying home most of the time, living in a paid-off home with one car, here is typically their lifestyle:

    Property taxes $4,000
    Utilities 7,000
    House & car Insurance 2,500
    Car purchase 1,500
    Food & drugstore 7,000
    Clothing 500
    Car gas & repairs 3,500
    Medical 2,000
    Spending money 5,000 ($100/week)
    Gifts 1,000
    Entertainment 2,500
    Home maintenance 2,000
    Vacations 3,000
    Miscellaneous 500

    Total Expenses $42,000

    Income tax 2,000

    Income Required $44,000

    If they rent, the home costs would be a bit higher.

    This is a relatively modest lifestyle. Yes, people could live on less and they will eventually get rid of the car.

    Most Canadians today under age 65 are already accustomed to spending this much or more. Most seniors generally want to maintain the lifestyle they had before, less the mortgage and kids costs, and then usually add more for travel and entertainment.

    When we plan retirements, we don’t usually assume a significant reduction in lifestyle at age 75 or 80. How would we know that? If we plan for it and the client stays healthy then we would be short of money. Also, if they move to a retirement home or have higher medical costs, their expenses may go up.

    It is rare for a 40-year-old, for example, to say that when they reach 75, they will drastically cut their lifestyle.

    They could sell their home, but our experience is that few seniors want to sell their home and rent, unless they are moving to a retirement home.

    If they get $20,000 from the government, then they need $25,000/year increasing by inflation (say 3%) for 20-25 years (age 75-100). If they invest in a balanced portfolio and average 5%/year, then they will need about $450,000 when they are age 75.

    Note that this is all of this is in today’s dollars. If you are 50 today and planning for age 75, with 3% inflation, the cost of living would double by then, so all these figures should be double.

    Also, an actual retirement plan would typically start at age 60 or 65, not at age 75.

    This is, of course, different for every couple and you can change any of the assumptions.

    We have helped thousands of Canadians plan for their retirement. They biggest surprise for most is that the nest egg required to support a basic lifestyle is usually much higher than most people think.

    Having $1 million 25 years from now, adjusted for inflation, would provide you income of about $25-30,000/year of today’s dollars in addition to your government pensions. That is certainly not a lavish lifestyle.


  34. Andrew Spencer on November 4, 2012 at 12:52 am

    Ed…thanks for the reply. That answered my question.

    However, I’d like to summarize your post to the rest of the readers of this blog.

    1) You advise your clients to borrow against the equity in their homes to invest in the stock market.

    2) You sell them mutual funds through a deferred sales charge (DSC) that gives you an up front 5% commission on the total amount invested.

    3) You also collect the 1% per year trailing fee.

    4) If your client ever gets his account to a certain point (let’s say $500k or more), then you put them on a fee structure by which you charge by the hour.

    5) The above mentioned hourly wage is collected in addition to the 1% trailing fee that you continue to collect.

    6) The 2.5% MER (or higher) that your “all star” mutual funds charge means that the fund manager has to get a return of 2.5% APR (compounded daily) just for your clients to break even.

  35. Andrew Spencer on November 4, 2012 at 1:04 am

    Now for an example:

    I attend one of your seminars and end up convinced that I need a huge nest egg for financial security. This has happened because I am similar to my fellow Canadians in that I don’t understand the first thing about financial security or retirement. I then talk with one of your advisers in person and agree to give you a shot.

    During a subsequent four hour session you convince me that stocks are 100% guaranteed in the long run and I need to take out a HELOC against my home so that I can obtain financial security thru you. So I go see my local banker and pull whatever I can from my home equity and invest it in your mutual funds thru a DSC. There’s also potenial here that you (or an affiliate that you can recommend) is giving out the loans through your “mortgage referral service.”

    You collect a 6% commission in the first year after the money is invested with the DSC,. Every year as I pay down my mortgage I increase my HELOC (on your insistence) and invest the money thru you. Its possible you’ve also convinced me to break my current traditional mortgage in order to obtain a readvanceable mortgage.

    Each time you take your up front commission and you always collect your trailing fees. If the stock market doesn’t crashed, I don’t lose my job or my health, interest rates don’t spike, or any number of other bad (but possible) things happen to me then I might actually make it to retirement.

    Along the way, you’ll have started charging me hourly rates just for your “advice”. This is because there’s no more money to be made from me on up front commissions.

    Now I’ve read all your other posts on this blog as well as most of your responses to people who’ve questioned your ethic. And I can see right through you. Everything you’re doing is completely legal…and maybe in your world it’s also moral or ethical. But deep down you know just as much as me that you’re no better than a snake oil salesmen. You are what is wrong with the financial services industry in Canada. I’ve never been a big fan of big brother telling me who or what I can invest in….but there are times I wish the regulatory agencies would step in and put an end to this nonesense.

    The foundation to retirement (any retirment) is being debt free…that’s mortgage debt, student debt, and consumer debt. A leveraged portfolio is fine so long as the returns pay off the interest and you’re not digging into principal just to make ends meet.

    But what you’re selling is something else completely. And for that your customers need to give their heads a shake.


  36. SST on November 4, 2012 at 1:43 am

    @Ed (#33): “We actually find that once people reach their late 70s or early 80s, they are thinking a lot about whether or not to move to a retirement home and whether or not they can afford it.”

    Wait a second…why wouldn’t they be able to afford it?

    If someone is 80 years old (I’ll use 2010 for ease of example), that would mean entering the work force sometime around 1950 — the start of the Greatest Era of Prosperity in North America — and retiring in 1995 at age 65 — riding the tsunami of the Greatest Bull Market Ever.

    Using all average stats, said new senior would have only to start buying the S&P 500 with $10 per month at age 20 and $180 per month at age 64 in order to hit the $1,000,000 nest egg in time for retirement. Completely feasible. Very modest and very average.
    (This example excludes all dividends, fees, taxes, inflation, and the nagging FACT that the S&P 500 index as a whole could not be bought by the average citizen until the mid 1970’s.)

    Since retiring in 1995, the now octogenarian has seen their S&P 500 nest egg remain at that million dollar mark (1995-2012; assuming 3% inflation, 4% withdraw rate).

    But…but…only 0.6%* of Canadian citizens (age 15+) have $1,000,000 or more in investable assets!
    (Some well respected reports put average investable assets at $175,000 per household, or less than $88,000 per person, with equities making up 52% of these assets.)

    Ratio applied with age equality (which it is NOT in real life), that means there is a mere 4,300 eighty year old millionaire. Assuming ALL people born in 1930 are still alive (because when using theories we can do whatever we like, right, Ed?), millionaires among them number just over 3%.

    Now we come to the reality part.

    Shouldn’t there be a substantially far, far greater number of these people in “their late 70s or early 80s” who have that huge million dollar nest egg? After all, they have had lived through immensely prosperous times and have had the longest long-term possible.

    Why is it that after 60 years of investing in the stock market and financial industry, and employing “help” from financial “experts/professionals”, are there not more elderly millionaires?

    Even under the most optimal economic circumstances — longest time frame, biggest booms, etc. — the financial industry has, at best, a 97% FAILURE rate when it comes to fulfilling their million dollar retirement marketing scheme.

    Again, Ed, your numbers are horrific when it comes to real life. That is, unless, you can show us the millionaires…

    *After new data research I’ve had to downgrade my millionaires-among-us figures from 1% to 0.6%.

    p.s. — some reports mention millionaire population in Canada will grow ~35% by 2020. That’s great. It gives us a projected 250,000 millionaires out of a projected 37,000,000 population…or 0.6%…just the same as it is today. You figure it out.

  37. Ed Rempel on November 4, 2012 at 8:56 pm

    Hi JStyLeZ (#27),

    Thanks for the insightful comment. There is a lot of truth to your post, that a large nest egg can provide financial independence/freedom more than security.

    We ask all our clients about their values related to money and the most common answers are security and freedom, with independence not far behind.

    People that are looking for freedom/independence are often more aggressive in their financial plans and with their investments than people that are looking for security.

    From talking with many people in each of these groups, I think what I would tell you is that these are emotions and different people experience them differently.

    After creating the framework for a financial plan together with clients, we go back to see whether the plan gives the client the emotional value they are looking for.

    For example, having a plan that works can give clients a feeling of confidence that their retirement may be okay, and that confidence may feel like financial security. This is especially true because most people have never had a retirement plan done and inside were worried that they probably would not have enough.

    You are right that many people experience the stock market as the opposite of security. But if you ask them who they know that is the most secure, they usually name either someone with a large pension or someone that has lots of money (which is usually invested).

    The stock market is also just one risk level. There are strong growth fund managers and very defensive value fund managers. Clients looking for security can still have a high proportion of equities, perhaps by focusing on the more conservative/consistent fund managers.

    In practice, this is more an art than a science. In most couples, one person is more security-focused and one person is more focused on freedom or independence or self-confidence. If the husband is looking for one emotional value and his wife is looking for the opposite feeling, we still need to develop a plan for them where the numbers work, plus both feel that it provides the value they are looking for.


  38. Ed Rempel on November 4, 2012 at 10:04 pm

    Hi JStyLeZ (#27),

    Correction to the last post. It should read:

    “The stock market is also NOT just one risk level.”


  39. Ed Rempel on November 4, 2012 at 10:14 pm

    Hi BenE,

    I wish your post was true. :) You pay the advisor $155,000?

    You calculated the difference in return, which would be like the advisor left his compensation invested in your fund to compound for 30 years. That is how you get $155,000. In your example, the amount you pay the advisor is far less.

    However, you are correct in how much it could reduce your returns and your net worth IF there is no value to the advisor’s advice.

    The most significant benefit should be the financial planning, followed by the investment selection. That is why it is important to select a financial planner carefully. You don’t need a salesperson marketing something to you that makes you feel comfortable.

    If you are paying 1%/year, you need real financial planning and a solid investment strategy.


  40. Ed Rempel on November 4, 2012 at 10:56 pm

    Hi Andrew,

    I think you have me mistaken for somebody else. Have you had a bad experience?

    The main service we provide is comprehensive financial planning. This is based on the 6-step process prescribed in the Certified Financial Planner program.

    We sit down with each client and help them figure out what they want in life (conceptually and emotionally) and then work out their goals very specifically (line-by-line). We help them work out what they need to do to achieve their life goals.

    This is very individual for every client. The plan is their plan – not our plan.

    For example, the most significant goal is usually retirement. We help them work out the exact lifestyle they will want (example in #33), we go through all the assumptions involved to make sure they are reasonably conservative, we use an investment return based on their risk level, and we look at how much they can reasonably invest and where the money would come from.

    We help the clients work through each part of this process until we develop a plan that will achieve what they want in their lives and that is reasonably do-able.

    We also look at all their other financial goals, their cash flow and how they use it, how their debts are financed and lower cost options, their emergency fund, the cheapest insurance, an estate plan and any other concerns they have. After doing the planning, we look at investments and what is appropriate, including some basic background education. The stock market is never 100% guaranteed. It does generally produce good returns long term for investors that stay invested, including during down markets.

    After implementing their plan with them, we stay in contact and review the plan fully several times a year to make sure the goal still makes sense, are they on track, what steps are necessary each year, where does the cash come from, we e-file their tax returns and recommend the best use for the refund, and discuss any financial concerns they have.

    All of this is professional planning advice. You seem to think this is a canned sales pitch. I can assure you we have no salespeople. I was an accountant and still follow the same professional approach. All our financial planners are detailed financial/math people.

    We believe in leverage and use various leverage strategies, such as the 7 Smith Manoeuvre strategies, quite a bit, but leverage is only one of many tools. It is only appropriate for more aggressive people wanting to build wealth that have a long term outlook and the temperament to stay invested through market crashes.

    It is certainly not for everyone. It can make an effective contribution to a retirement plan by allowing clients to borrow against their home to invest in addition to using their cash flow.

    Regarding your concern, the regulatory agencies are heavily involved. There are clear guidelines that outline what is appropriate. Our process and investments, especially any leveraged investing must be approved by our dealer and is reviewed by the regulatory agencies.

    You also have a few of the fee details incorrect:

    – The commission is not 6%, it is 5% (if there is one).
    – The trailer fee is usually on .5%. Of the MER, 1% is allocated for the advisor, which is used to pay both the commission and the trailer fee over the years.
    – There is no hourly fee.
    – Larger portfolios can get a lower MER that is tax deductible annually (not an hourly fee.

    This process may or may not be worthwhile in your case, but we find a huge need for this. Most Canadians are not confident in their financial situation, are not able to do comprehensive planning themselves, and are not effective investors.

    It is hard to explain the real benefit of financial planning without experiencing it, but our clients really appreciate our advice – and it is mostly the financial planning advice they appreciate (even more than the tax strategies or investments).


  41. Rob H on November 5, 2012 at 10:56 am

    So basically, it comes down to the usual refrain: “I (think I) have the time, energy, conviction and skills to do it myself so paying a fee to a professional for advice is an evil scourge upon the earth and must be wiped out.” Sorry for the following rant, but I’ve read it so many times that I need to get this off my chest.

    Yes, advisors get paid to advise. Shock! Too much? Maybe yes, maybe no. That’s a market decision, though, and if you think it’s too high, go ahead, do the work yourself. A full financial plan takes time, and it’s not one of those things you want outsourced to India. If you want to do it yourself, go take 4 semesters of night courses and get your CFP.

    How much do planners actually make? Let’s take an example of a planner who will make $2500 DSC on a $50,000 investment. From my experience*, it will take three hours with the client to determine their goals, 10-15 hours to run the numbers and design the plan, and two hours to present the plan and get moving. That’s 15-20 hours, or $125 to $166 an hour. But wait – the dealer gets a cut – I forget exactly how much but 1/4 sounds about right. So we’re down to $93.75 to $125 per hour. Pretty much the same as a garage will charge you to fix your car. Yes, like the garage, the advisor has overhead. Software, office, advertising, assistants… make the list as long as you want.

    So now lets ask the question if planners are robbing the public blind? If you have a choice of whether to use them, then my answer is no. If the price is too high, nobody will pay. Just because you don’t see the value doesn’t mean others will not benefit from the service. The same can be said for all types of advise-based professions – from the highly trained ones like lawyers and accountants down to the “I took a 2 week prelicensing course so I’m da shizzle” real estate agents. If you don’t agree with their prices, do the work yourself or go shopping for a cheaper alternative. Depending on your diligence, you may do a better job than the professional. You may also screw up royally, but that’s your right.

    Haters gonna hate. Keep up the good work, Ed. Not everybody needs your services, but for those that do, the work you do is invaluable.


    *disclaimer: former client AND former employee. Now out of the industry completely as I can make better money elsewhere.

  42. SST on November 5, 2012 at 11:21 am

    Ed: “I can assure you we have no salespeople.”

    Ed: “Building a nest egg probably means you need to invest in the stock market.”

    Don’t kid yourself, Ed, YOU are a salesperson, whether you think it or not. This article/advert is a great example.

    You also try to sell your clients on the stock market because that is how you make money. Unfortunately, that is not how they make money.

    You are not recommending building a nest egg by investing in real estate or physical commodities or even private equity, because YOU don’t get any money from your clients buying from outside your company.

    Here’s something else you constantly try to sell:
    “My point is that financial security comes from having a large portfolio, say $1 million or more.” — Ed

    I just want one answer to one question, Ed: why is the financial industry and its “professionals” unable to fulfill their ‘Million Dollar Retirement’ marketing scheme it’s been hawking for so many years?

    Oh! That’s why! The Get-Out-of-Jail-Free! caveat:
    “Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.” — Ed

    One one hand you try to sell us that “you can invest successfully and safely in the stock market” and then turn around and tell us that our investment might not be successful or safe! Imagine if all industries had a “No Guarantee” policy! Thank goodness we have those strict regulatory agencies!

    FACTS are, Ed, there are incredibly few millionaires in Canada.
    FACTS are, Ed, there are incredibly few millionaires made from the stock market.
    FACTS are, Ed, the financial industry does NOT create millionaires.

    You blame the markets when things go sour — “Mutual funds are not guaranteed” — and you blame the customers when things don’t work out — “They are scared of it”.

    When do you blame yourself and your industry for failing, Ed?

    That is, unless, you can show us the millionaires….

  43. Goldberg on November 5, 2012 at 11:59 am


    Respectfully, I don’t doubt that you provide a great service to people who don’t know anything about money, don’t read about it, and hate to even think about it (ie, most of my neighbors). Someone shows up with credit card debt and some savings invested in 2% savings account, and have no family budget, etc… no doubt you help them.

    However, for those more financially savvy (as most who read financial sites, as this one, might be)… a few of us (myself included) find it hard to believe that your All-Star mutual funds returns will consistently beat the index by more than 2% MER? Actually, 2% above index return would make ETF better since you must pay tax on that 2% extra return.

    My main point is this: The owner of this site (FT) invest in a diversified dividend-based portfolio which he makes public. No advisor fees, no MER, nothing. I do something similar myself. Are you saying that we could earn at least 3.5% more per year, at an equally low risk, if we went with you? (2.5% mutual fund fees + 1% alpha to make it worthwhile = 3.5%)

  44. nobleea on November 5, 2012 at 3:50 pm

    I always thought that in Canada, the returns published by mutual fund companies was inclusive of the MER. Some posters here seem to suggest it is not?

    For example, if you invest yourself in a diversified portfolio of stocks and get 6% return, and a similar mutual fund publishes a return of 6%, it is the same return to you as a client (though the mutual fund actually earned 6%+MER).

  45. Ed Rempel on November 5, 2012 at 8:27 pm

    Hey Rob,

    Thanks for the post and the kind words.


  46. Ed Rempel on November 5, 2012 at 8:40 pm

    Hi Noblea,

    Yes, you are correct. Published mutual fund returns are after the MER. They are the net return to the investor.


  47. SST on November 6, 2012 at 12:18 am

    Thanks for not refuting the facts, Ed.
    Your silence on the matter (as well as towards your detractors) speaks volumes.

  48. Ed Rempel on November 6, 2012 at 3:58 am

    Hi Goldberg (#43),

    That’s a very interesting question.Actually 2. Yes, I believe the top fund managers can outperform their index over time relatively reliably. That is why I invest with them.

    First, I need to be clear on the threshold and explain the level of consistency. If our fund managers make the same return as the index (or the same as you would have earned otherwise), then you are ahead because the fund has also paid the full cost of financial planning advice.

    That means that you have a custom, comprehensive, written plan created for you, you have on-going advice on any financial issue, we e-file your tax returns, etc. I think you would find in practice that benefit to be much more significant than you may realize.

    Also, ETFs do not get the index return. They always make less than the index by .2%-.5% or more, so if our fund managers make the same as the index, we also have a higher return.

    You mentioned “consistently” beating the index. “Consistently” is a strange word in investing. ETFs do not consistently beat my chequing account.

    The consistency we try to achieve is not to beat the index every year, but to beat the index relatively reliably over long periods of time.

    I study I once saw of the 20 best fund managers in the last 50 years showed that they tended to beat the index about 2 years out of 3. An extreme, but somewhat typical example is Rick Guerin. He had a 19-year career from 1965-83, which is the period of time many articles wrongly call a “secular bear market”, claiming the stock markets were flat. In that period, the S&P500 made 7.8%/year and he made 23.6%/year.

    How consistent was he? He beat the index by 15.8%/year over his career, but he beat the index in only 11 of the 19 years.

    My point is that we try to match or beat the index over time and beat it most of the time, but not nearly every year. The reason for this is that the best fund managers tend to have portfolios very different from the indexes.

    Regarding the fund managers, why is it so difficult to believe that there are people with superior investing skills, just like in any other field?

    Let me start by saying these fund managers do exist. There are quite a few, but they are a relatively small minority. Identifying them does take some effort, since they don’t usually outperform every year and you need to track the fund manager, not the fund. Most are value investors and almost all are bottom-up stock pickers.

    There has been a lot of media coverage about the average fund manager under-performing and about how significant the fees are. However, I am not talking about the average fund manager.

    Averages hide the exceptional. For example, the average Canadian has one breast and one testicle. :)

    We have debated about a proper way to reveal at least some of them, but there are compliance issues. If you doubt they exist, google “Active Share” (the most comprehensive study on this topic), , or read the article “The Superinvestors of Graham and Doddsville”. (It is on my site.)

    So why don’t most fund managers beat the index? In my opinion, the reason is completely different than you may think.

    The reasons commonly given are that you can’t beat the market because it is efficient and because the fund managers ARE the market. I don’t think either of these reasons is true, especially when it comes to the top fund managers.

    The real reason, in my opinion, is because most of the financial industry is focused on marketing investment products.

    Let me explain.

    The idea that nobody can beat the market is based on the belief that it is efficient, which is today nearly unanimously recognized as wrong. “This argument for the efficient markets hypothesis (EMH) represents one of the most remarkable errors in the history of economic thought.” (Shiller)

    When you think about it, it is obvious. The EMH is claims that all stocks are fairly valued at all times by the efficient market. Therefore, bubbles and irrational do not exist. Tech stocks were properly valued when the NASDAQ was over 5,000 and they were also properly valued after falling to 1,300. Further, it claims that irrational pessimism does not exist, such as we saw in March 2009. Of course we all know that bubbles and irrational markets are common.

    The EMH was disproved by behavioural scientists, who have showed that the majority of investors are irrational the majority of the time. (This is, incidentally this same logic flaw applies also to economics.)

    The other argument that fund managers cannot beat the market because they ARE the market is also wrong for the top fund managers. Most top fund managers tend to have very focused portfolios and they are usually very different from the index (high “active share”).

    For example, a top global fund manager has 20 stocks while his index, the MSCI World index has over 6,000. Of his 20 stocks, only 5 are in the index. Clearly, he is not the index.

    The problem with the average fund manager, in my opinion, that most fund companies and fund managers try to create a fund that people will buy, instead of focusing on the best quality investments. We call this “The business of investing vs. the profession of investing”.

    The biggest problem is “closet indexers” – fund managers that claim to be active investors yet hold stocks close to the index. The “Active Share” study found that 30% of US fund managers and 70% of Canadian fund managers are closet indexers. They are not really trying to beat the index. They are trying to be similar to it, which means they cannot earn their fees. Being similar makes investors more comfortable buying their fund and means they do not lose money when nobody else is.

    Top fund managers tend to invest very differently from the index, which is a risk for them because no equity investment strategy works all the time.

    Most fund managers that are employees of a large firm, bank or insurance company also have bosses that want them to own popular stocks and be in popular trends. Again, this tends to attract buyers. Many funds do “window dressing” just before month ends to buy a popular stock (such as Apple or a Canadian bank), which they then sell immediately on the 1st, just so that stock appears in their published top 10.

    The top fund managers tend to have all their own money in their fund, so they won’t just try to mimic an index. The usually have their own investment firm, so they usually don’t have a boss.They have their own philosophy on what is the most effective way to invest.

    That, in my opinion, are the real reasons that most fund managers don’t beat the index.

    Regarding Frugal Trader’s portfolio, he uses mainly indexes for his international and bond investments, but his Smith Manoeuvre non-registered portfolio is mainly Canadian dividend-paying stocks.

    I’m not sure that he is actually trying to outperform the index. You should ask him this, but in my opinion, a leveraged portfolio should often be somewhat more conservative because it is a high risk strategy. By focusing his Smith Manoeuvre portfolio on dividend-paying stocks, I believe FT is targeting a lower risk and more defensive portfolio, and not necessarily trying to beat or even match the index.

    There are 2 articles on MDJ about “All Star Fund Managers” that explain much more about why they outperform and what we look for to identify them. There are also examples, such as Peter Cundill.

    Does that make it easier for you to believe that an All Star Fund Manager could match or beat their index over time, Goldberg?


  49. nobleea on November 6, 2012 at 12:00 pm

    Then if mutual fund returns are after MER, why does everyone spout off that they have to beat the index? I mean, on a gross basis, they do, but comparing the published returns to the index they can be the same and the investor sees no difference. The advisor wins, but it’s the same to the investor.
    There are more than a few mutual funds that have beaten the index (that would be after MER) on a 15, 20 yr time frame.

  50. Paul T on November 6, 2012 at 12:31 pm


    The issue isn’t whether some mutual funds can beat the index.

    The question is: How 15-20 years ago anyone could have picked which mutual fund would have beaten the index over the next 15-20 years. Or to put it in terms of today: how would you go about picking a mutual fund today that will beat the index for the next 15-20 years?

    Based on past performance? Read the disclaimer at the end of Ed’s article. “past performance may not be repeated”

    The only winners are the mutual fund companies taking your money (2-3% at a time), year in and year out irrespective of performance.

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