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A 91-year-old is being urged by her adviser to sell her dividend stocks and switch to mutual funds.

It’s seemingly a win-lose proposition. The adviser wins by making more money off the client, while the client loses because fees go up with no obvious benefit.

This investor’s daughter recently e-mailed me to get a view on what her mom should do. The mom has had an investment account since forever where she pays only commissions on the buying and selling of securities. The charge, according to the daughter, is 2 per cent of the transaction cost or $150. “She has sold nothing in years,” the daughter notes.

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Recently, the mom’s account was assigned to a new adviser who “sells mutual funds and has nothing to do with stocks.” Should the mom switch to funds, or move her stocks to an online brokerage where the cost to buy and sell stocks would be roughly $10 or less per trade?

No specifics on the mom’s portfolio were supplied, so it’s certainly possible a mutual fund would provide superior diversification and investment management. But the cost would likely be in the 2-per-cent range, including a portion for the adviser to cover services and advice. Right now, the mom is paying virtually nothing because she’s not trading.

Here’s the adviser’s point of view on this: He has an account that requires at least a modest amount of oversight and generates virtually nothing in fees. It’s not a great business model, so he’s pushing for a move to funds with fees that will pay him and his firm up to 1 per cent annually (the other 1 per cent or so goes to the fund company).

Suggestion for this reader and her mom: Ask the adviser to explain how the jump in fees would be justified. Would returns from funds have a reasonable chance of outperforming the dividend stocks by enough to absorb the extra fee? What services would the adviser provide to earn that fee?

If satisfactory answers aren’t obtained, a move to an online broker makes sense as long as the mom and/or daughter are up for the challenge of managing the money effectively. As we’ve seen in the first five months of 2020, investing isn’t easy.

-- Rob Carrick

This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.

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The Rundown (for subscribers)

Low rates to drive new equity market bubble to rival the late 1990s: top strategist

The S&P 500 is trading at about 22 times forward earnings and this seems prohibitively expensive for investors. One strategist, however, believes current U.S. stock prices are not only justified, but set to move significantly higher after a period of consolidation. Andrew Garthwaite is the global equity strategist at Credit Suisse and has frequently earned the No. 1 ranking in his field in the annual Institutional Investor survey. His current forecasts, outlined in a 47-page report on Thursday, is for a correction in growth stocks in the short term followed by a significant ramp higher. Scott Barlow tells us why the strategist’s views are worth paying attention to.

Short sales on the TSX: What bearish investors are betting against

After the COVID-19 pandemic caused the Toronto Stock Exchange to crash earlier this year, the market has since rallied 25 per cent. Is a new bull market starting up? Short sellers don’t seem to think so. The short position in the iShares S&P/TSX 60 Index ETF remains historically high at 28.4 per cent of its float, according to data firm S3 Partners. Companies with lofty valuations are currently a top target of short sellers. On the list are Shopify Inc., Alpha Pro Tech Ltd. and gold stocks, such as Barrick Gold Corp. But short sellers have taken profits in several stocks that tumbled during the crash, notably Royal Bank of Canada and other bank stocks. Larry MacDonald gives us a complete breakdown of what the shorts are up to.

World’s largest asset managers seek overhaul of leveraged ETF sales rules

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Some of the world’s largest asset managers are proposing an overhaul in the way leveraged exchange traded funds are sold to retail clients, as advocates in Canada call for more investor protection at discount brokerages that sell these high-risk funds. After a month of shocking losses in a number of high-profile leveraged oil ETFs, six asset managers – including investment behemoths BlackRock Inc., Vanguard Group Inc. and Charles Schwab Investment Management Inc. – published a joint letter this week recommending stock exchanges and regulators narrow the definition of what can be called an exchange traded fund, or ETF. Clare O’Hara and Mark Rendell report

Others (for subscribers)

The week’s most oversold and overbought stocks on the TSX

Friday’s analyst upgrades and downgrades

Thursday’s analyst upgrades and downgrades

Buying the plunge: Individual investors remain optimistic

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Number Cruncher: Six streaming services that offer dividend opportunities

Number Cruncher: These 21 U.S. dividend stocks, with solid free cash flow, yield more than 4 per cent

Others (for everyone)

More oil price woes? World markets themes for the week ahead

Which metals will gain most from a green energy revolution?

Ask Globe Investor

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Question: When our bond fund, XBB, dropped 7 per cent on one day in March, my wife and I decided to liquidate our portfolio, ending up down 7.5 per cent year-to-date. Yes, I know the truism “don’t sell at a time like this," but I guess our risk tolerance has taken a big drop, considering our ages (me-78, her-68). We also think that market lows are still to come (how can they not?). So, what would you recommend we do with $1.65 million dollars in the meantime?

Answer: Clearly, you are extremely risk-averse so you’re probably best just to keep the money in cash. But make sure your cash is protected. The Canada Deposit Insurance Corporation covers deposits up to $100,000, but that is per person, per institution. Also, separate types of accounts have their own protection.

So, for example, in a single financial institution you can have protection up to $100,000 for each of your personal account, your wife’s account, a joint account, RRSP or RRIFs for each of you (provided the money is in cash), a $100,000 GIC for each of you, and more.

I suggest you arrange for a meeting with your banker to review the CDIC options and to readjust your investments to maximize your protection. Given the amount involved, you’ll probably have to use two or three banks to get full coverage.

--Gordon Pape

What’s up in the days ahead

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Rob Carrick this weekend takes a look at the risk of losing money in supposedly safe parking spots for cash in your investment account. We’ll return on Wednesday with our next Globe Investor newsletter. Have a great long weekend!

Click here to see the Globe Investor earnings and economic news calendar.

A note to readers

Globe Investor is pleased to now offer Wealthscope - a powerful and easy-to-use portfolio analytics tool. Wealthscope is free for our Portfolio users who are Globe Unlimited subscribers. The goal is to help Globe readers make better decisions, and holistically understand how they can expect their portfolio to perform in market conditions both good and bad. Read more about this new feature here.

More Globe Investor coverage

For more Globe Investor stories, follow us on Twitter @globeinvestor

Click here share your view of our newsletter and give us your suggestions.

You may also be interested in our Market Update or Carrick on Money newsletters. Explore them on our newsletter signup page.

Compiled by Globe Investor Staff

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