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Some recent comments by Warren Buffett should be mandatory reading for anyone who works with or plans to engage an investment adviser.

The investing world's voice of reason has a strikingly jaded view of people whose job it is to help others invest their money. In his recent annual letter to shareholders of the company he runs, Berkshire Hathaway Inc., Mr. Buffett said paying for expert help causes investors "to earn only 80 per cent or so of what they would earn if they just sat still and listened to no one."

Call this a roundabout endorsement of index investing, where you buy mutual funds or, better, exchange-traded funds that make virtually the same returns as major stock and bond indexes. The ongoing fees associated with owning ETFs are much lower than mutual funds because, unlike mutual funds, there are no built-in costs to pay investment advisers.

But let's say you're the sort of investor who wants and needs an adviser, even while you're sympathetic to Mr. Buffett's view on how you can make more money just sitting still and listening to no one. Can you get both advice and index investing in the same package?

Yes, you can. Should you take advantage? Unless you have an account in the high end of six figures or more, probably not.

A persuasive case can be made that indexing as carried out with ETFs is an ideal strategy for do-it-yourself investors. By tracking the major indexes and avoiding the advice costs folded into mutual funds, it's possible to make returns that compare favourably with most mutual funds.

But the appeal of indexing is diminished, if not nullified, when the cost of advice is added in.

Advisers who use indexing generally work on a fee-based system, where the client pays a preset percentage of his or her assets every year. The percentage might typically start at 2 per cent for small accounts around the $100,000 mark and fall to 1 per cent or less for people with $1-million and more.

Making what the indexes make minus one percentage point is a reasonable proposition. But subtracting two percentage points from index returns may cut too deep.

The logic of indexing is that you can make a better return from a fund or ETF tracking a major stock or bond index than you can from the average fund. Take the Canadian equity fund category, for example. The annual average fund return for the 10 years to Feb. 28 was 9.6 per cent, while the S&P/TSX total return index made 10.9 per cent.

A major reason why funds tend to underperform the index on average is the embedded cost of advice. The average Canadian equity fund management expense ratio is 2.83 per cent and about one percentage point of that is accounted for by fees and commissions paid to investment advisers by fund companies for their work with clients.

ETFs have ownerships fees, too. But their MERs are so much lower that funds still have trouble competing. For example, the MERs for Canadian stock market ETFs are as low as 0.17 to 0.25 per cent. Subtract 0.25 percentage points from the index return of 10.9 per cent and you end up with 10.65 per cent, still a full percentage point higher than the average mutual fund.

Here, you see why indexing can make sense for do-it-yourself investors. What these investors save on advice goes directly to their bottom line.

One of the best things about combining advice and indexing is the transparency of the fees you're paying your adviser. To know exactly how much you're paying for advice, just combine this asset-based fee with the MERs of the ETFs your adviser uses.

If you have a seven-figure portfolio of ETFs and are paying an advisory fee of 1 per cent annually, then your total cost would be about 1.25 to 1.35 per cent. Subtract these fees from the 10-year 10.9 per cent of the S&P/TSX composite index and you've got roughly 9.6 per cent, which is the same as the average mutual fund.

Fee-based advice is generally available only to those who have portfolios of $100,000 or more, although some firms may accept accounts as small as $50,000. With a comparatively small portfolio like this, you might expect to pay 2 per cent a year in fees. Add 0.25 percentage points to account for the ongoing ownership costs of ETFs and you've got a total fee load of 2.25 per cent. Subtract that from the 10-year S&P/TSX composite index return and you're left with 8.7 per cent, which is well below what the average fund made.

The chart that accompanies this edition of the Portfolio Strategy column offers a detailed analysis of how indexing with an investment adviser compares to using conventional mutual funds for a $250,000 portfolio. The first part of the chart uses a simple portfolio of funds with MERs and performance based on average data for the 10 largest funds in various categories that have been around for at least a decade. The thinking here was to test the funds that are most popular with investors. Second, an ETF portfolio was assembled and a middle-of-the-road advice fee of 1.5 per cent was applied.

The point of this analysis was not to definitively pronounce on the relative merits of funds and ETFs when used through an adviser, but to offer an indication of relative performance in the past. As you'll see in the chart, the Top 10 funds by assets handily outperformed the ETF portfolio after advice fees were included. From this, you might conclude that unless you squeeze your advisory fees down to a minimum, you may be worse off with an adviser who uses indexing as opposed to traditional mutual funds.

Now for some comments from three advisers who use indexing: John De Goey of Burgeonvest, Ted Rechtshaffen of TriDelta Financial Partners and Jim Steel of WDS Investment Management. All three of them took issue with the way mutual funds are typically compared with indexing, which is by using index returns and average fund returns.

Their beef with this method of comparison is that past fund returns reflect a survivor bias, which means they don't factor in the results of the many poor-performing funds that are closed or folded into other funds. Mr. Rechtshaffen cited a U.S. study showing that accounting for survivor bias could knock as much as 2.5 percentage points off long-term performance averages, while Mr. Steel said data from Standard & Poor's shows that about one-third of Canadian equity funds that were around five years ago were gone at the end of 2005.

He said putting too much emphasis on average numbers would be a mistake because it would not represent the actual investing experience of those people who owned poor-performing funds that were discontinued.

"It would be like a high-school kid calculating his average, but excluding the bottom third of his marks," Mr. Steel wrote in an e-mail in which he said the tax benefits of investing in ETFs must be considered as well, at least in non-registered accounts. Because there's generally much less trading of stocks in an ETF than a traditional equity fund, the year-end tax bill tends to be a lot smaller.

The last word goes to Mr. De Goey, who made the important point that the cost of advice must be weighed against the services an adviser provides.

"The primary consideration is not just 'what does it cost,' but also 'what am I getting in return (and is it worth it)?' "

Index investing: For DIY investors only?

The low cost of indexing has made it an obvious choice for self-directed investors who don't want to pay for advice. But some advisers believe that indexing can work well even if you add in extra costs for advice. Let's test the theory with $250,000 invested in two sample portfolios that compare the returns of the sorts of portfolios advisers might create out of mutual funds and

Adviser A: The fund fan

He says his services would be paid for through the fees and commissions embedded in the fees charged by mutual funds he recommends. Here's a breakdown of the costs and returns of his fund portfolio, using data for the 10 most popular funds in various categories with a 10-year track record:

FUND CATEGORY _AND ALLOCATION

	AVERAGE MER	AVERAGE 10 YEAR RETURN
30 % FIXED INCOME	+ 1.51%	+ 6.70%
35% CANADIAN EQUITY	+ 2.19%	+ 11.24%
35% GLOBAL EQUITY	+ 2.33%:	+ 7.22%
	WEIGHTED PORTFOLIO MER	WEIGHTED 10 YEAR RETURN
	+2.59%	+7.08%

Adviser B: The indexer

He says the services he _provides would be paid for through a fee equivalent to 1.5 per cent of your assets each year. He would then build you a portfolio of ETFs, which have much lower ownership costs than mutual funds. Note: Because there is no ETF covering all major stock markets of the world, this portfolio employs an ETF that tracks the U.S. market through the S&P 500 stock index and another that tracks the Morgan Stanley Europe, Australasia Far East (EAFE) Index:

EFT AND ALLOCATION	MER	ACTUAL 10 YEAR RETURN *
30% IUNITS CANADIAN BOND _BROAD MARKET INDEX FUND	0.30%	7.42%
35% IUNITS COMPOSITE _CDN EQUITY INDEX FUND	0.25%	10.65%
17.5% ISHARES
MSCI-EAFE INDEX FUND	0.35%	4.38%
17.5% ISHARES _S&P 500 INDEX FUND	0.09%	6.81%

	WEIGHTED	WEIGHTED
	PORTFOLIO MER	10-YEAR RETURN
	0.25%	7.92%
	SUBTRACT THE ANNUAL ADVICE FEE	1.50%
	NET RETURN	6.42%

*estimated by taking the 10-year return of the underlying index, as measured in Canadian dollars,

and subtracting the management expense ratio of the ETF.