The type and amount of advice that an investor needs or wants is dependent on various factors, obviously including the investor’s degree of financial expertise; for more, see the section independent investor on our site. However, your general approach to investing will also make a big difference; in general, see the section Alternative ways of investing- in general on our site. Investors, sometimes without realizing or even intending it, fall into one of two main approaches to investing:

Active approach

One approach, called active investing, is based on individual stock picking. Why this approach? In some cases, an individual is simply not familiar with the alternative concept of index investing; see the section Index funds of our site. For him (or her), an active approach to investing is the only he knows; and without wanting to venture into a minefield, I will say that few financial advisors will, on their own, present the index approach to their clients for their consideration. And even for the individual who is familiar with the concept of index investing, it may be that he is convinced of his own ability to beat the market; see Beat the market? on our site. In this view, an index approach is for losers; see The investing paradox on our site.

The costs of an active approach varies depending on whether you use a discount broker or full service broker; see the table full service vs discount broker on our site. With a discount broker, commissions are modest since a discount broker gives no investment advice. With a full-service broker, buy and sell commissions (part of which is shared with the financial advisor) are much more important, in part because the broker must adhere to the know your client rule. In some cases, the broker / adviser is paid a fee calculated as a percentage of assets in the customer's account (called fee-based approach, not to be confused with the fee-only approach we discuss later), instead of commissions (in some cases it appears that these costs co-exist with commissions , a practice difficult for us to accept). The above costs can be an important long term negative on your investment returns; see the section Costs of investing on our site. Before paying for such costs, consider if you need the ongoing advice of a full-service broker.

Actively managed funds

A variation on this approach is to invest through actively managed mutual funds; see actively managed funds on our site. Again, the approach is based on individual stock picking, but it is the fund manager who has the burden of trying to beat the market; the odds of being successful are unfortunately not good; see disadvantages of actively managed funds on our site.

The costs of this approach are typically the buy and sell commissions paid to your broker and the management fees imposed on the fund by the fund manager. The commission level will vary depending on whether it is a discount or full service broker; see broker and funds on our site. If you buy funds through a broker, part of the management fees imposed on the fund by the fund manager are passed on to your broker in what are called trailer fees. The role of the investor here, with the help of his broker if he uses a full service broker, is to carefully choose good fund managers who he hopes can beat the market, to monitor and, if necessary, to sell his fund investments and to reinvest in funds managed by other fund managers. Unfortunately, legislation in Canada does not allow holders of units of a fund to replace an under-performing manager, even if 100% of the fund holders are of this opinion; your only alternative is to sell the units of your fund and reinvest elsewhere. Of course, doing so is likely to result in paying more commissions, and if your units have increased in value, you will have to pay taxes on any capital gains. It is a drawback to investing indirectly through actively, managed funds.