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There’s more to financial advising than finding rock-bottom fees

There are two types of investors – those who work with a financial advisor, who are willing to pay for advice; then the do-it-yourselfers who are probably more focused on price.

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Increased trading opportunities, along with new technologies and products that allow for enhanced do-it-yourself options, have benefited investors in the pocketbook, with prices on trading commissions diving sharply.

But are investors choosing brokerage firms for their costs, or for their broader value such as customer service, education and other tools?

Today, "you've got various notches of investment services that investors can fit themselves into," says Eric Kirzner, a professor of finance at the University of Toronto's Rotman School of Management.

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"You can go full service. You can go discount brokerage. You can go automated investing service, sometimes called robo-advisor. You can go online. You've got opportunities to do very low-cost trading with the online and discount brokerage, and you also have opportunities to buy products with low expenses, such as many of the exchange-traded funds," elaborates Prof. Kirzner, who is an advisor to Wealthsimple, an automated investing service in Canada.

Although the financial world has come a long way from the traditional fixed commission schedules set by stock exchanges several decades ago, investors can still avail themselves of the service of a traditional broker who will trade in stocks and bonds. But today's brokers face fierce competition from many sources.

Prof. Kirzner is especially bullish on exchange-traded funds, more commonly known by the acronym ETFs, which track market indices such as the Toronto Stock Exchange (TSX), New York Stock Exchange (NYSE), Standard & Poors 500 (S&P), or others around the world, and whose shares can be traded just like stocks.

He notes that ETFs are easier to trade, and that many of them have a relatively low management expense ratio (MER) – which are continuing to drop as ETFs become more popular – compared with mutual fund MERs.

"People don't want to pay high management expenses if they can avoid it – that's for sure," stresses Prof. Kirzner.

No-frills discount brokers started appearing in the 1980s and gained markedly in popularity. By the early 2000s online direct trading developed with the growth of the Internet. Both have proven to be formidable forces for change over the decades.

Today, generally, Canadian banks are offering cut-rate commission rates of $9.99 or less, with a discounted flat fee of $7 or less for accounts with more than 150 trades or more per quarter. In the United States, some brokerages are offering commissions for retail brokerage investors as low as $4.95.

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"The trading costs are so low, you really don't think about the commissions, you think about the quality of a trade," says Prof. Kirzner.

"I think the traditional retail stockbroker – someone who earns a living just trading stocks and bonds – is also finding it difficult to compete with a growing number of full-service financial advisors," says Sam Febbraro, executive vice-president of Investment Planning Counsel in Mississauga.

"These advisors will focus on goals-based financial planning, estate and tax planning, and inter-generational planning. And so while the financial advisor is focused on long-term relationships with their clients and their children, the traditional stock broker may run the risk of being as good as their last trade," he elaborates.

Mr. Febbraro lauds the efforts of the aging baby boomer generation as a catalyst behind this change to a return on life focus, by forcing financial advisors to involve themselves in family-related discussions and consider key client questions such as: "When should I downsize? Where should I live? What are my long-term care options and costs?"

This demand for more fulsome life financial planning has also contributed to the demand for products such as mutual funds, separately managed accounts and unified managed accounts. Many of these products will use individual stocks, bonds, ETFs, etc., as components in the portfolio, he notes.

They are becoming the choice of financial advisors, because they allow for outsourcing, oversight and monitoring of the entire portfolio to an objective manager, known as an overlay manager, says Mr. Febbraro.

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Counsel Portfolio Services Inc. (a subsidiary of Investment Planning Counsel) is an example of an overlay manager that hires well-known Canadian and international firms, such as Mackenzie Investments, Sionna Investment Managers, and Mawer Investment Management, who specialize in managing money in areas such as specific asset classes, geographic regions and investment styles, explains Mr. Febbraro.

"This is critical in a multi-manager, multi-asset approach. One investment firm cannot be the best in every category," he elaborates.

Mr. Febbraro also cites the increasingly sophisticated technology that has led to the much cheaper robo-advisor option as a factor in reduced commissions, although he believes that option can only go so far to replace human contact.

"I don't think machines make people obsolete – complacency does," he says.

Robo-advisors are only a threat to financial advisors who do not provide the advice that people need. If they are offering their clients goals-based financial planning, estate and tax planning, needs-based investment management, and empathy, then they are adapting to provide the value-added services, Mr. Febbraro contends.

"So when I think of typical investors, there are two types of investors. One is a delegator who will work with a trusted financial advisor, and validate that their investments are moving in the right direction based on goals, based on financial planning, and the value of the advice that the advisor is providing," he adds.

Then there are the do-it-yourself investors who are probably focused on price. They might not be in a stage of their lives where they require advice, and/or are not in a position yet where they will need to make life-altering decisions. For investors with simplistic goals, where all they want to do is just buy a product, and who are comfortable in a digital environment, then robo-services or a discount brokerage service may well be what they are looking for, says Mr. Febbraro.

"But as soon as they need some advice, or they require a decision, or some support on what to do with the family cottage, or saving for their retirement, or their children's education, that's when you need some basic financial planning, some structure and a framework for decision-making. And that's where things like face-to-face interaction are going to come into play," he adds.

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