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rob carrick

ETFs for oldies?

That was the question a West Coast couple asked me in a recent e-mail. They have been trying to hammer down the investing/advice fees they pay and wondered if exchange-traded funds would be a suitable replacement for their mutual funds. The answer is yes, for sure, absolutely. In fact, ETFs are an ideal way to connect investors with both advice and low costs.

This couple wants an adviser who offers financial planning. Investing directly in ETFs without an adviser is not an option. The question they faced was how to get that advice and still reduce costs below the 1.8 per cent charged by their mutual funds (part of those fees go to an adviser).

My suggestion was to look for a fee-based adviser who uses ETFs to build portfolios, and that's just what this couple found. They're working with someone at a big investment firm who charges a reasonable 1 per cent advice fee. ETF costs will be extra, but that's OK because you can find bond, equity and dividend funds with management expense ratios as low as 0.06 per cent to 0.5 per cent. Combine advice and ETF fees and this couple might get an all-in cost of, let's say, 1.3 per cent. That represents a substantial and worthwhile savings of 0.5 of a percentage point off the cost of that mutual fund portfolio.

Fee-based accounts can hold anything – individual stocks, ETFs or F-class mutual funds, which have reduced fees to reflect the fact that clients pay for advice directly. ETFs are a great choice because they offer instant diversification (the classic ETF replicates the returns of major stock or bond indexes), transparency and low costs. Investors can have the advice they want plus a soundly build portfolio at a very reasonable cost.

Not all advisers are onside with ETFs, though. As hyped as ETFs have been for the past 10 years, many advisers are more comfortable using mutual funds and wrap products (basically portfolios built with mutual funds). There can be incentives to sell in-house wraps, so don't be surprised if an adviser bad-mouths ETFs when you bring them up in a conversation. That would be a shame because ETFs are the easiest way to satisfy investors who want both advice and low fees.

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