With the current economic situation, the big question is whether you should stick it out in stocks, or sell some stocks now and raise cash?
Before you ask an investment advisor this question, you want to find out if their answer will be filtered through the most dangerous bias in the investment industry.
Here is the issue: If an investment advisor is paid 1 per cent a year to hold stocks, 0.5 per cent a year to hold bonds and 0.25 per cent a year to hold cash, how likely is an investment adviser to suggest selling stocks and holding cash?
Let’s come back to the question of the day. Should I be in the stock market, or bonds or cash? Now let’s think about how a good percentage of advisors get paid.
Would you be biased in your job if your salary was going to be four times higher to make suggestion A as opposed to suggestion B?
Now let’s imagine it is June, 2008. The Toronto Stock Exchange is over 14,000 points. You suggest to your advisor that you are worried about the markets given all of the global turmoil. You think you want to get much more conservative. You ask for advice.
Your investment adviser says “I think that most of the bad news has already come out. I am confident that markets will be strong in the second half of the year.” Is that their honest opinion or are they afraid to take a serious pay cut? How angry would you be when your portfolio drops 30 per cent over the next few months, if the advice was biased by how the advisor is paid?
This article is not a knock against professional financial advisors. In fact, stocks do outperform bonds and cash in the long run and are often the best place for your money. However, this is a plea to fix the fee structure of mutual funds. This is also a plea to the public to be willing to pay differently.
I believe the best solution is for clients to pay a fee that is based on the amount of money being managed. This fee shouldn’t change based on how a portfolio is managed. Your fee should be the same if your portfolio was all in cash at the moment, as it would be if the funds were all in stocks.
If this was the case, you would probably end up paying more for investments in cash/money market and bond funds than you do today and pay less for stocks. If the fee was the same for all assets, advisors would have no financial bias towards stocks or bonds or cash. They would not be financially penalized by recommending that you have a high cash position today.
This doesn’t ensure that you get correct advice, but it helps to ensure that you get the best advice someone can offer you today. A good financial advisor can be extremely valuable in this environment. Now is the time to get the unbiased advice that you are paying for.
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