DIY Investor Savings vs Advisor Value

Most high-income professionals must build a financial team to help manage their finances. However, there are still parts that only you can do. Plus, only you can lead the team to link the different pieces together. Further, there are aspects that pay you insanely well through the savings, relative to the time spent. You may want to do those high-yield tasks yourself. The savings from DIY investing vs advisor costs and value is attractive.

That is the reason why more people are opting to DIY invest. However, in making any decision to DIY something, you must consider the cost/savings in time and money, the complexity/risk, and how much you like or dislike the job. Apply that thought process to your own decision about DIY investing using the information on this page.

Advisor & DIY Combinations

financial professionals

To consider whether DIY investing is a good option for you, the first thing is to know what the options are. Many different people can call themselves financial advisors.

They usually have some designation to confirm basic financial planning knowledge. However, they may be trained by an employer or have a bias towards certain products. Some are mutual fund or insurance salespeople. Some are investment managers. A few are accountants.

They all have different jobs, expertise, and biases. A full-service advisor should have a team that pulls all of those aspects of a financial plan together and liaises with the other relevant brokers or advisors. Unfortunately, many do not. Regardless, there are also some jobs that only you can do.

You must examine your values and goals to help an advisor effectively plan for them. Only you can develop and use the essential financial skills of earning, spending, and giving.

Splitting out the planner & portfolio manager jobs.

It is very useful to break out the tasks. That way, you can select to do some parts and outsource others.

The most commonly bundled jobs are the planner and portfolio manager jobs as a “full-service advisor”. A high-end full-service advisor may also liaise with other team members (accountant, lawyer, insurance broker, realtor). However, you will still generally have to meet and work with each of those professionals directly regardless of the advisor model that you use. If you do use a full-service advisor, knowing where they potentially add the most value is important to ensure that you are getting it. There is high variability between individual advisors.

On the far end of the DIY spectrum, you can choose to handle all of the planning and investing. That requires the ability to set goals, make a comprehensive financial plan on how to get there, and the discipline to implement the plan. These are the most challenging parts of a successful plan and outcome. The portfolio manager job is actually the easiest part, if you keep it simple. Fortunately, simple is usually better when it comes to investing.

Some will opt to DIY the investing job and work with a fee-only (flat rate) planner as needed. This allows you to save on the portfolio manager cost, but still get the planning and coaching. At a frequency and level tailored to your needs.

advisor fee models

Cost of the Different Advisor & DIY Fee-Models

Whatever model you are considering, it is not just about cost. It is about the value that you get in return for the money that you are spending. Cost and value vary for each individual advisor and client. To make an informed decision, you must understand both.

Financial Advisor Cost Varies by Fee-Model, Products Used, & Portfolio Size

Small portfolios <$100K

A mutual fund salesperson is of moderate cost relative to fee-only. DIY is by far the cheapest.

Mid-sized portfolios ~$500K

the cost is similar across models (except full DIY). As the portfolio reaches $1MM, the “free” advisor becomes extremely expensive. Fee-based (%AUM) advisors are moderately priced compared to other advisors. The fee-only/DIY model is similar, but this example assumes a full plan and coaching every year. That may be overkill for many people when they have gained the experience through growing a million-dollar portfolio. An intermittent second opinion and coaching may be helpful and more cost-effective.

Portfolios over $1 Million

The costs of %AUM advisors rise much more than fee-only/DIY or DIY. The fees embedded in the products used really drive the cost.

Massive portfolios over $5 Million

A fee-based advisor using low-cost products is of moderate cost. The different levels of DIY are about half the cost. At this level of wealth, much depends on how much you want to do. You have so much money, that buying time and convenience may be worth it. Conversely, you may be very proficient having built that portfolio and want to save on costs to maximize your impact as a good financial steward.

You can start in one model and move to another as your portfolio grows.

That move could be towards the right of the chart if you are concerned about costs. It could be towards the middle if you want more complexity and feel that it is of good value. However, it can become increasing difficult psychological to move strategy the longer you wait.

The fear of triggering capital gains also prevents people from changing strategies. However, capital gains don’t matter in a TFSA or RRSP. Even using a taxable account, lower fees usually make up for taxes quickly and then you are ahead. For the rest of your investing life. A corporate account capital gain harvest can even be beneficial to move money out of a corporation more efficiently!

Cost is only one side of the equation.

High costs are a constant and predictable drag on net investment returns whether the markets go up or down. However, to get those returns you must save, invest, and stick to the plan. The other side of the equation is whether an advisor helps you do that more effectively.

Financial Advisor Potential to Offset Costs with Added Value

There are a few studies that try to quantify the “value-add” of financial advisors. They are published by firms that provide or support financial advisors. So, that bias needs to be considered since they are attaching numbers to subjective aspects like goal setting and behavior. Also, the benefit of some actions (like rebalancing) depends heavily on the assets and timeframe used. Probably, the best one was by Vanguard. The White Coat Investor also did an in-depth analysis of this and another study on his site. While some of the numbers are suspect, the concepts are important. So, is considering how that applies to you and the DIY options.

Behavioral Coaching is the biggest potential benefit.

When you look at the above list critically, the main value-add for an advisor is behavioral coaching. So, if you DIY, having a simple plan that you can stick too, and self-discipline, are vital. The 1.5%/yr is similar to the behavioural gap for an aggressive and volatile portfolio.

Getting your asset allocation right for tolerable volatility will help. Also of interest, asset allocation ETFs may also close that behavioral gap substantially. Emotions and behavior are very individual and hard to quantify. However, you can learn to minimize your exposure to stimulants like media (fear sells and gets clicks) and living life instead. Investing is long-term and day-to-day “financial news” is just noise.

Another potential value-add that is not in the above study is goal setting.

People that set achievable short-term goals that build towards longer-term goals tend to save and invest more. There are plenty of studies to show that people with financial advisors save and invest more than those who do not. However, it is unclear whether that is because advisors help people to save more, or whether people saving more seek out advisors. Goals and spending are personal and only you can do it. However, some people can benefit from external input.

An external perspective may be helpful.

This another difficult to quantify aspect of having a good advisor or coach. We all have developed our relationship with money due to our upbringing, circumstances, and experiences. That gives us biases and habits. An external perspective could help us move in a good direction that we do not see from the inside. For example, an external opinion helped me to feel more comfortable spending more and working less than my natural tendency would have been.

Portfolio Manager Value-Add

In the preceding sections, we reviewed the cost and potential value-add of retaining a professional for the planning, coaching, and execution tasks. With DIY investing, you are doing the investment manager role yourself. Most of the potential added value is in the “execution tasks” already reviewed.

The above comparisons are assuming that the investment return for all models is equal. However, are you missing out on potential returns, net of fees, by using a DIY passive ETF approach? Or are you increasing them by dodging active funds?

Active vs Passive Management

An active manager uses their expertise and a variety of tools in an attempt to beat the market. “The Market” is the total bundle of investments available in the asset class that they are investing in. For example, Canadian stocks or US stocks, or emerging markets.

Markets are generally efficient because all known information and probabilities are priced in via the collective rationale of the participants. However, they are not perfectly efficient, and an active manager must be able to find and exploit those inefficiencies to beat the market. While the concept of professional active management sounds great (and is marketed that way), in practice, it consistently loses to index investing. More on why below.

A passive indexing approach buys all or most of the holdings of the market to replicate it. This simple approach minimizes costs. It will not beat the market and that argument is used as a selling-point by those selling active products. However, you can beat most active managers by simply not trailing the market due to larger fees. The performance drag from ETF costs is a nothing-burger.

Why you can’t pick a consistently outperforming active manager.

One reason is that market inefficiencies are so small and fleeting, that a manager can’t beat them net of fees. SPIVA has tracked active manager vs index performance for 10-year rolling periods and they underperform >80-90% of the time. Morningstar has similar data and related proportionally higher fees to worsening performance.

The counterargument is that during a less efficient market, active managers make up for it. When markets are volatile, active managers may collectively underperform less frequently. For example, the mid-year 2022 SPIVA report shows 40-60% underperformance during this most recent downdraft. While not the usual >80-90% underperformance, it is close to random chance.

One problem is that markets are efficient the vast majority of the time. The other problem is that you may miss some of the decline, but also must time re-entry to ride it back up. So, longer-term performance still lags dramatically.

You can’t pick a manager that will consistently outperform moving forward based on past performance. The SPIVA persistence report shows that the top managers in a given year, underperform the market in the following five years by worse than random chance. There are multiple reasons why even a skilled manager’s performance wanes due to their success.

The manager group missing from these large fund datasets are small active managers. They are not large enough to systematically track. The big data looks at big players. Does that extrapolate to small active managers? I don’t know the answer nor how I could really evaluate this group. They usually show their performance to prospective clients using a defined timeframe and chosen comparator.

It is always possible to massage what index they compare to or the time window. I would want to be sure that they had a very long track record and a reasonable comparator. Most small managers have an investing style (eg. growth vs value, large vs small cap). These styles (factors) go through long cycles of under and out-performance.

Quantitative Factor Investing

There are stock characteristics (factors) that are associated with excess return beyond the market average. Data mining has identified hundreds of factors. However, there some that are persistent over time, pervasive across markets, and have rationale for the increased risk/return. The main ones are size (small cap), price for earnings (value), profitability, and conservative capital investors. Price momentum is the fifth factor, but it is very volatile and hard to translate into a profitable strategy, net of fees and taxes.

Understanding and using products that quantitatively assess and algorithmically manage a fund to take advantage of these factors could be another way to diversify and potentially increase returns. There are advisor-affiliated mutual funds (like Dimensional) geared towards this.

There are also DIY ETF portfolio methods to attempt this. However, it requires advanced knowledge and the conviction to stick with the plan through long periods (think decade) of under-performance for the hope of a small outperformance over multiple decades. That is very emotionally and behaviorally difficult.

Cost/Benefit Perspective: The Investing Value Pyramid

tax optimization

The largest impact on your financial outcome is time in the markets.

That means you must spend less than you make and invest the excess money for your future. Only you can do that. Further, getting invested with a good plan you can follow is more important than doing nothing while you make a perfect plan. It doesn’t exist and you are usually better off investing, learning, and adjusting. Further, markets rise 70% of the time and waiting to “buy the dip” is also a losing plan. Get invested.

The second major impact on performance is the balance between behavior and advisor cost.

If your advisor does not prevent you from selling or delaying buying in a bear market, help you set and work towards goals, then they may not be providing the enough value to offset their fees. A key to mitigating behavioral risk is getting an asset allocation suitable to your risk tolerance. Check out the comprehensive risk capacity and tolerance assessment in my interactive DIY investing guide. Compare that with what your advisor does. We have put numbers to advisor cost and value. However, much depends on the individual advisor’s actual behavior and not just their fee-model.

The tiny tip at the top is the complicated stuff. It is optional.

Tax optimization is very complex. I have made DIY tools to help. However, it is definitely optional and something to consider later. Or never. You may be trading some tax savings for more execution risk.

Advisors may also market other complex and fee-laden products.

They are not on the pyramid because they are of variable value compared to more conventional alternatives. They usually sound sophisticated and the phrase “the wealthy do it” is often tossed out there.

For example, private equity pools are marketed for increased returns and less volatility. However, when you control for their pricing, complex fee structure, and the leverage used – there is no free lunch. Using a small cap value factor ETF may be a more liquid and transparent option with similar investment characteristics.

Permanent life insurance may trade some tax savings for increased fees instead. It has a low expected return (appropriate for its low risk). Further, it is like a marriage. A long-term commitment that must be for the right reasons with realistic expectations. Similarly, it is also expensive to get out of, if you have made a mistake.

The podcasts linked to in this section are very technical because the products are complex and opaque. That makes for creative marketing potential and can make you feel sophisticated or special, but it does not necessarily lead to better outcomes.

A successful strategy focuses on the big parts of the pyramid.

You can maximize your potential returns with a simple DIY investing plan to minimize procrastination, minimize fees, and minimize behavioral risk. The tools and approach in my interactive DIY investing guide are meant to help you learn and do that for yourself. There are also optional sections for when you can experience and are considering an optional attempt at the summit.

You can also have the best of both worlds and use a fee-only planner as needed. That could be as your portfolio grows, at milestones where your financial life has complex decisions, or if you want the benefit of external coaching and perspective.