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Advisers should stop whining about DIY investing

Do-it-yourself investors are naive, uninformed, overconfident and, above all, a danger to themselves.

These are facts. Just ask a financial adviser.

We've had some real insight into the thinking of some advisers over the past couple of weeks thanks to a controversy over whether self-directed investors should have access to low-cost mutual funds.

The background here is that the management expense ratios of most funds include a significant portion that goes to advisers and their firms for continuing customer service and advice. Self-directed investors don't need or want that help, so they should be able to buy lower-MER products known as F-class funds.

On-line broker E*Trade Canada announced last month that it would sell F-class funds and it even signed up two fund companies, AIM Funds Management and Elliott & Page. But both firms quickly bailed out, leading to speculation in the investing world that they bowed to pressure from advisers who were threatened by the availability of F-class funds.

The reasoning of these advisers seems to be that if investors find out that MERs on typical F-class equity funds are roughly a full percentage point lower than on regular funds, they'll all fire their advisers and open an on-line brokerage account.

Advisers say this would be calamitous for reasons that have come to light in the past couple of weeks through e-mails to this column and postings on on-line discussion forums.

One argument is that DIY investors tend to be day traders. This myth comes out of the boom in on-line stock trading that coincided with the technology bubble a few years ago. For some people, on-line investing and brainlessly speculating on stocks became synonymous.

Thing is, they're not. With on-line trading fanatics long gone from the market, on-line trading is now about economics. You trade on-line, you save money on stock trades, fund commissions and the various fees investors must pay.

In the adviser world, the incompetence of do-it-yourself investors goes well beyond their alleged propensity to day trade. Among their other sins is a tendency to emphasize stocks excessively and to buy the hot stocks and funds of the previous year rather than searching out consistent long-term performers.

It's true that self-directed investors make errors such as these and more. Few are the do-it-yourself investors who have not learned bitter lessons about what NOT to do.

And yet, somehow, they endure. Actually, they prosper in many cases. Industry figures show the amount of money in on-line brokerage accounts consistently held up better than full-service brokerage accounts in the past few years.

That's in part because there are many do-it-yourself investors who are perfectly capable of running their own show. They may not buy the same stocks, funds, and bonds as advisers would, but investing is not an exact science, anyway.

If self-directed investors do make errors, so do advisers.

Some are nothing more than hustlers selling investments, so this is to be expected. But there are conscientious, ethical advisers who also blunder. There's no way that every investor who was overexposed to tech stocks a few years ago was a do-it-yourselfer. Advisers routinely believe that investors are better off with their help and that's just fine. What's the point of getting into the advisory profession if you don't think you can make a difference in the average investor's life?

But while some advisers accept self-directed types as part of the landscape, others see them as a threat to their livelihood. It's these insecure ones who are spoiling things for do-it-yourselfers by whining to fund companies about making F-class funds available. How pathetic is it that fund companies allow these advisers to dictate policy? Very, but let's ignore that just now and instead ask the question of why advisers who feel threatened are trying to sabotage do-it-yourselfers instead of making a better case for using an adviser.

Sample sales pitch for an adviser: If I look after your finances, I'll build you a sound portfolio that will address your near- and long-term financial needs, I'll catch up with you a few times a year, I'll help you with tax and estate planning matters, I'll set up registered education savings plans for your children and help them get started in investing over time.

Advisers who offer a package like this don't have to be skittish about the availability of low-cost mutual funds for self-directed investors. In fact, this sort of adviser might just find he or she has something to offer the do-it-yourselfer. Maybe it's big-picture financial planning, or just a consultation on specific matters such as adapting a portfolio to emphasize income over capital gains.

The adviser argument against do-it-yourselfers sounds protectionist more than anything else, and that begs the question of what's being protected. If it's just the income of advisers, then it's easy to see the do-it-yourself ranks growing.

© 2007 The Globe and Mail. All rights reserved.

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