Is Your Investment Advisor Biased Towards Stocks?


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?

Tips for Communicating with your Financial Advisor

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.

Getting Mortgage Insurance? Consider This First


Mortgage iBe Wary of Mortgage Insurancensurance is one of the most important decisions when buying a new home, but unfortunately, many people do not consider it carefully.  Many mortgage representatives at the big banks will always tell you to get mortgage insurance. Stressed, vulnerable and without having shopped around for insurance, many new homeowners say “yes” without a second thought. After all, insurance is meant to protect you, right?

Not quite.

What exactly is mortgage insurance?

The bank’s mortgage insurance is also known as Creditor Protection. What this means is that the beneficiary of the insurance policy is the bank.  In the event of death, the bank is repaid the mortgage loan but surviving family members receive no funds from the insurance (except for a mortgage-free home). Depending on your mortgage and personal situations, it may not be in your best interests to pay off your entire mortgage. Concerns about property taxes and income may force your family to sell the house.

Important Facts about Mortgage Insurance

  • Bank mortgage insurance is usually more expensive than the same product through an independent insurance advisor.
  • It may be cancelled at the bank’s discretion if you move to another financial institution, default on or pay off your mortgage. The insurance is also not guaranteed at your mortgage renewal
  • The insurance only covers the value of your mortgage. For example, if you pay off your $400,000 mortgage to $250,000, upon death, you will only receive $250,000. However, the premium stays the same and does not decrease in conjunction.
  • The banks perform “Post Claim Underwriting” meaning medical issues are explored on claim (i.e. after a person dies), leading to a higher chance of a claim being denied

What is a better alternative?

The right type of life insurance product can ensure that your beneficiaries have enough funds to take care of your mortgage, property taxes and other financial needs as they arise, as well as the flexibility to use the funds as necessary. When in the market for a house, apply for insurance outside of the bank right away (and waive the bank’s mortgage insurance) to protect your home and family.  In addition to dealing with realtors, mortgage representatives and a home inspector, when buying a new home,  include a licensed Insurance Advisor who can help you with this.

If you liked this article, learn more about different insurance products: The Difference Between Critical Illness and Disability Insurance.