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strategy lab

Norman Rothery is the value investor for Globe Investor's Strategy Lab. Follow his contributions here and view his model portfolio here.

Indexing has taken the investment world by storm – and for good reason. For independent investors, it's an excellent way to achieve instant diversification at rock-bottom cost.

But what happens if you need advice on how to build and manage your portfolio? In that case, indexing may not be your best option.

To see why, it's important to understand the reasons indexing works.

Start with a very simple index-based portfolio composed of equal parts Vanguard Total World Stock ETF and iShares DEX Universe Bond Index Fund The annual cost of this balanced package of stocks and bonds is a dirt cheap 0.3 per cent of assets, plus a few commissions along the way.

In comparison, mutual fund portfolios recommended by many advisers cost more than 2 per cent of assets annually. The difference in fees is huge and it's the core reason why indexing can deliver superior returns compared to many managed portfolios.

Many investors, though, don't realize the primary virtue of indexing is low costs. They turn to advisers to build an index-based portfolio for them – but the fees charged by those advisers often eclipse any savings on the index funds they select.

To be sure, you can find cheaper advice if you know where to look. A promising venture was recently started by Dan Bortolotti, whom you might know from the Canadian Couch Potato blog, in association with advisers Justin Bender and Shannon Dalziel from PWL Capital.

They aim to help do-it-yourself investors construct and implement a simple balanced index portfolio at a discount broker. Their basic service costs $3,000. It helps to launch new indexers into the markets and then lets them go on their merry way. Clients who also want continued portfolio monitoring can get it for a fee of 0.625 per cent per year (assuming equal sized RRSP and non-RRSP accounts).

Their basic service is attractive to those who need portfolio construction advice, have large portfolios, and are likely to stick with it for a long time.

Consider an investor with a $400,000 portfolio who opts for the basic service and plans to hold the portfolio for a decade. The average annual total fee would amount to about 0.4 per cent per year. That includes roughly 0.3 per cent annually on the ETF portfolio itself, several rebalancing trades and the $3,000 upfront fee spread out evenly over the period.

However, the math changes for investors who also want ongoing advice. In this case, the all-in cost rises to about 1.1 per cent a year, including taxes and a few rebalancing trades.

At this point, alternate services may offer a better deal – especially since they're likely to involve less effort on the part of investors.

For instance, given the same scenario I've outlined above, Tom Bradley's Steadyhand Investment Funds Inc. would provide advice for an average of about 1.05 per cent annually, based on the cost of the Founders balanced fund. It's not an indexing option because the portfolio is actively managed. But many people prefer active management when it can be delivered at a lower price than indexing.

The option that best suits each investor depends on several factors. Experienced, self-directed investors benefit greatly by cutting costs to the bone and doing it themselves. But many other people aren't interested enough – or don't have enough time – to pull it off.

Those who need a little advice to get going and have reasonably large portfolios might consider Mr. Bortolotti's basic service. On the other hand, if ongoing service is required, then Mr. Bradley offers a good low-cost option.

No matter which way you go, be sure to add up all the fees. The cost of an expensive adviser can easily turn a good low-fee strategy into a mediocre, or even bad, one.