Is this adviser worth his keep?

Working with a financial advisor from a major Canadian bank, one of our members is looking after his father’s upper six-digit portfolio.

What follows in black letters below is an email from the adviser in response to our member’s wish to change his father’s portfolio to one that parallels what Warren Buffett wants for his own estate. The Monday Morning Millionaire Program comments to our member are in red.

Changes to Investments

You want us to sell your dad’s existing holdings and put 90% of the money into VOO-US, (a US$ stock) which is an S&P 500 EFT that is operated by Vanguard.

The portfolio is currently generating a dividend yield of 5.14%. Switching over to the VOO will reduce the dividend yield to 1.8% (in US$).

One of the best-performing stocks over the last fifty years has been Berkshire Hathaway (BRK) which has never paid a dividend.  BRK investors simply sell some of their shares (say 5.14%) each year to live on. Their portfolio just keeps on growing; the stock has averaged much more than 5.14%.

All advisers need to be aware of my standing $100,000 bet payable by the loser to the winner’s favorite charity, claiming that an investment in VOO will beat any other investment over the course of the next decade. (There will be a few investments that will do better than VOO but we can only see them with hindsight.)

We currently have a very defensive asset allocation of 81% Cash/ Fixed Income (low or no risk)

Like many large banks, this one is a bank as well as a security firm. Your dad’s cash earns him very little. The bank lends it out to borrowers for a lot more. That is why they can afford to charge $0.00 commissions on stock transactions. That is why they will make every effort to keep as much of your dad’s portfolio in cash as they can.

and 19% Equities (higher risk). Once we make the changes you have requested we will have an Asset Allocation that is 10% Cash (no risk) and 90% Equities (higher risk). We will be buying an ETF made up of 500 stocks, so the portfolio will be quite diversified in the sense of holding a wide variety of companies, but it will be very heavily weighted to stocks. While this ETF has done very well, there is always the risk that global stock markets, including the US market, could pull back sharply, resulting in a significant loss to the value of the portfolio.

When global stock markets pull back, and they certainly will someday, Canadian markets will be included, guaranteed. Being in the Canadian markets and not in the US markets offers absolutely no protection from portfolio losses during market pullbacks. None, whatsoever.

We discussed this risk and you are prepared to accept it. Not only do you think the VOO ETF will do well over time (although you acknowledge a short-term pullback is possible), but you also want the simplicity of having the portfolio reduced to a single holding for ease of management purposes, both for your dad now and then after he passes and the holdings are moved to the estate.

The 81% Cash/Fixed Income and 19% Equity asset allocation is appropriate for a man of your dad’s age. However, a less conservative asset allocation would be better for his estate. Your dad’s portfolio will outlast him.

The upper line on the chart above shows how VOO has done over the last decade. The lower line shows the Toronto Stock exchange.

VOO growth over the last decade has significantly exceeded the dividend yield of your dad’s RBC-structured portfolio.

Does anyone want to bet on the next decade? Your dad’s estate will be around.

 Timing

We will start the process now by selling the holdings now and then spread the buying of the VOO over a few different days to see if we can get a lower average price.

Coming from a financial adviser, the above statement is unbelievable!

There is a 50% likelihood that the market and VOO with it, will go either up or down “over a few different days”.

There is a 50% likelihood that your adviser will either get a lower or a higher average price on any given day.

Please confirm that you are in agreement with the above. Please let me know if you have any other thoughts and questions.

All the best

RBC financial adviser

Forgot to mention that VOO is traded in US $.  Are you ok with that?

Over the last 50 years, the US dollar has been stronger than the Canadian dollar the whole time except for two brief periods. Drug money, black market money, dirty money, honest money,  all want to be in the US$. That is what makes it so strong.

The average financial advisor salary in Canada is $60,000 per year while experienced advisors make up to $102,000 per year. Is this adviser worth that kind of money?

Please note that the Monday Morning Millionaire Program contains opinions only. It does not provide any investment advice or endorsements.

 

 

Dr. Milan Somborac

The Monday Morning Millionaire Program supports do-it-yourself (DIY) investors which I have been for over 50 years. About my team and me

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