Saturday, 25 April 2015

Talking to Your Financial Adviser about ETFs? Some Questions to Consider

    Recently a family member came to me asking for some advice about the recommendations made by their financial adviser, and he wanted to know for the next time to talks to the adviser. The adviser was recommending some specific Exchange Traded Funds (ETFs) to allocate some money into.

    The main questions that I was asked were:
1) Whether or not ETFs are a good idea.
2) Whether the fees for the ETFs and the advisers on top of that were worth it.
3) Should he just invest in them directly and skip the advisers commission on top of it.
4) What are some good questions to ask the adviser.

I won't go into what the specific ETFs were, as that is more of an asset allocation decision based on the person portfolio.


1) Whether or not ETFs are a good idea.
    My response to such questions is that yes, ETFs are good!! Especially compared Mutual Funds with their higher management expense ratios and additional fees incurred from their more active trading approach, whereas ETFs are generally balanced every quarter(passive) to meet a set allocation target.

2) Whether the fees for the ETFs and the advisers on top of that were worth it.
    This one gets a bit tricky. The ETFs fees themselves are usually quite low, and appear to only be getting lower as companies like Vanguard, Blackrock(iShares), and major banks start to compete for your cash. As for investing in them himself there are a few things to consider on that end. One is that a separate brokerage account would probably have to be opened as that particular adviser is getting a commission for assets managed.

3) Should he just invest in them directly and skip the advisers commission on top of it.
    This one ties in closely with the previous question. You need to keep in mind that an adviser is keeping an eye out for market trouble and making suggestions based on what is happening in the markets. Whereas my family member is not so likely to be closely following or necessarily going to make a correct decision on what to do, or more likely they might get emotional about the news and make a poor decision. Utilizing their professional adviser is probably the correct decision for someone who doesn't have the time or interest to manage their portfolio. The other risk is that if the adviser is only aware of a portion of your total portfolio their recommendations(if you then follow them) might put you at risk of being over-weight in certain sectors, since they didn't know you just so happened to have 10% of your net-worth in TD Bank as he recommends you to buy some.

4) What are some good questions to ask the adviser.
    When you are going to see your adviser to discuss your portfolio, or a specific stock or product there are a lot of questions that you could ask, and should ask about. If a specific ETF is offered, I would ask the following questions:
- Are there any comparable ETFs from other fund companies that have lower fees?
- What is the return history of the ETF? Often newer funds will have better returns as under-performing funds are closed.
- Is the fund liquid? Will you be able to easily buy and sell the fund if needed? If there isn't enough trading volume you may have trouble doing so, and lower volume also tends to have slightly higher day-day volatility as the bid-ask spreads are wider.
 - Ask about any tax considerations. Does the income come from foreign countries who do, or do not have favorable tax treaties with your country? Are the ETFs gains made from dividends, capital gains or interest? How does that get returned to you, and how often?
- Is the product eligible for your registered accounts or will it be more efficient to be in a taxed account.
- Does the ETFs holdings heavily overlap your other investments?

    These are just a few of the questions you should ask your adviser about a suggested ETF. Along with what I think is a pretty common problem for people who are unfamiliar with what ETFs are. Hopefully this article might help you when it comes time to sit down with your adviser. And by all means ask as many questions as you are able to think of!
    

3 comments:

  1. Replies
    1. Thanks for stopping by! As an adviser yourself, any comments on the questions I put forth?

      Delete
  2. Pleased to know about these exchange traded funds. Recently, took services of a registered investment advisor Las Vegas and he explained me about these funds. Got interested and planning to invest there soon.

    ReplyDelete