Investors, you have enemies.
The Wall Street critic Daniel Solin is happy to list them for you, but he's not one of those investor advocates who only criticizes. Investors also have friends out there and Mr. Solin is again eager to name names. A quick guide to his world view: Low-cost index investing is good; high-cost mutual funds and boastful stock pickers are bad.
Mr. Solin, a money manager and author of multiple investing books, wrote a recent online column for his U.S. audience that offered a friends-and-enemies list for investors (read it here. I asked whether he could Canadianize it and he jumped all over the opportunity. "I know just enough about the Canadian market to be dangerous," he said in an interview this week while visiting Ottawa and Montreal to speak to clients of the advisory firm PWL Capital.
Here's Mr. Solin's enemies list:
1. The banks
Asked to name Public Enemy No. 1 for investors, Mr. Solin instantly mentioned the Big Six banks. "The obstacles to intelligent investing are even greater in Canada than in the United States because of the quasi-monopoly power of the Big Six banks," he said. "You have six banks that basically dominate the financial services world."
Investors are negatively affected by this dominance because it limits the amount of competition from independent firms, Mr. Solin said. But he's more concerned about the guidance provided by the banks through their investment arms. "I think the investing advice they give is fundamentally flawed."
Here, Mr. Solin's bias toward index investing comes into play. He believes investors are much better served by using low-cost index funds or exchange-traded funds than they are in having advisers at bank-owned firms or elsewhere pick stocks or traditional mutual funds. "That, to me, is just gambling, not investing."
2. The mutual fund industry
You have some of the highest mutual fund fees in the world in Canada and, of course, the higher the fees, the less likely it is that a fund will equal, much less beat, its benchmark," Mr. Solin said.
Mr. Solin isn't the only U.S. authority to criticize Canada's mutual fund fees. A recent study of the fund industry in 22 countries by the Chicago-based analysis firm Morningstar gave Canada an F grade on fees (read a summary report here.)
Funds do have some good points, Mr. Solin concedes. For example, they can often be bought with no sales commissions, dividends can be reinvested at no cost, and they're widely available.
3. Overconfident advisers
Mr. Solin said there are advisers and mutual fund managers who, in any given year, will deliver higher returns than the major stock and bond indexes. "But the majority of people won't beat the market, so the odds are very bad for investors. Also, there's no way to identify the funds that will beat the market."
This is the fundamental argument in favour of index investing – buy the market, pay a low fee and, if past experience is any guide, you'll make better returns than most mutual funds and stock-picking advisers. "The goal should be to capture market returns, not to beat the market," Mr. Solin said.
4. Celebrity stock pickers
Whether they're found in the Canadian or U.S. media, celebrity stock jocks have a following of investors hoping to have the best-performing investments revealed to them. But Mr. Solin said it's not possible to consistently pick winners. "I cannot find a single peer-reviewed article demonstrating that anyone has the expertise, as opposed to luck, to consistently pick stocks that will outperform the market. People who claim to be able to do this are usually confusing luck with skill."
Here's Mr. Solin's friends list:
1. Index portfolio fans
"The firms I would say are investors' friends are the ones that make no claims to be able to beat the market," Mr. Solin said. "Instead, they advise their clients to focus on their asset allocation and to invest solely in low-fee index funds or ETFs."
This sort of adviser typically works on a fee-based relationship, which means the client pays a set percentage of his or her account value. Mr. Solin said an investor-friendly firm would have fees in the range of 1 per cent or less.
2. Discount brokers
"Anything that reduces costs is good for investors," Mr. Solin said. Discount brokers charge as little as $1 to $4 for an online stock trade and $29 at the high end. Scotia iTrade and Qtrade Investor have a limited menu of ETFs that clients can buy or sell without commissions, while Questrade and Virtual Brokers offer no-cost purchases of ETFs (sell commissions apply).
The U.S. index investing giant Vanguard is a big player in ETFs in the U.S. market, and has steadily been building market share in Canada since arriving here in 2011. "I regard them as a friend because they have some of the lowest-cost ETFs in the world," Mr. Solin said. (Here's a recent column I wrote on Vanguard ETFs.
Mr. Solin thinks BlackRock's iShares ETFs, listed on both U.S. and Canadian exchanges – like Vanguard – are a friend to investors as well. The iShares lineup has vastly more variety, but the Vanguard ETFs can be cheaper to own.
4. Dimensional Fund Advisors
Dimensional is an Austin, Tex.-based company that runs low-cost mutual funds using a quasi-indexing strategy that puts an emphasis on smaller-sized companies and "value" stocks that are trading below their true worth. Mr. Solin said this approach offers the opportunity to generate higher returns without a proportionate increase in risk.
Investors can't buy the funds themselves because DFA deals only with approved advisers. "DFA funds are definitely attractive funds and Canadian investors would be well advised to seek advisers who have access to them," he said.
ABOUT DANIEL SOLIN
Lawyer: Represented investors ripped off by their advisers.
Money manager: Adviser to high-net-worth investors for U.S.-based Buckingham Asset Management.
Advocate: Director of investor advocacy for the BAM Alliance, a community of independent wealth management firms in the United States.
Author: His books include The Smartest Investment Book You'll Ever Read: The Proven Way to Beat the "Pros" and Take Control of Your Financial Future
Aspiring TV host: Here's a teaser for a proposed financial talk show called Trade Up.
Follow him on Twitter: @DanSolin
Quote: "I know how Wall Street separates you from your money."