It seems like nothing more than a tactic to make some commission off of you. Has he ever disclosed how much commission he would make with his proposal? If you really want to do it I would off him this deal- if he outperform the index then he can keep his commission, if he can’t then he has to return it to you. Now let’s see what his advice would be!

I would also point you seem to have a larger issue. You appear to be nothing but a number to your advisory firm (lots of turn-over, office closings, commission friendly advice). Are you really enjoying your relationship with your advisor?

I want to use this post for some guidance here. Long story short: A financial planning and sales firm with the letters E and J in the name has had a poor time keeping advisers in the office I choose to contribute too. I have only been saving for 2 years (Started 0ct 2006) and E and J closed down my local office after 2 advisers left and then consolidated the office into a more stable one. I stopped contributions after year one (jun 2007) and did my own contributions, registared and non registared, using TD E-SERIES index funds.

Well I met the new advisor (June 2008) who at least has stayed in his office for 7 years and he agreed with my asset mix and passiveness but reminded me of what we ALL know: Index funds cannot MATCH index returns because of the fees alone and the imperfections of attempting to match indexes plus taxes if they are required.

I am perfectly fine with underperforming indexes by 1/2% but the new advisor suggest a percentage of my contributions go towards active investing to “push” me over the hump and beat the indexes by 1/2% instead of trailing it.

After me complaining about sales fees and break-up fees and all that overhead those active managers require and me stubbornly refusing to participate in actively manged funds, he suggested that only a percentage of my forward contributions (not using any of my current investments or switching or cashing out any of them) should be postitioned to compensate my passive investment’s shortfall.

Anyone have a comment about his idea?

The counterargument most people use is that they’re an above average investors, I can hear it in your comments! But you don’t have to be just above average to outperform the market. You have to be able to outperform the market by your expenses just to break even, let alone make any additional money. Have a look at the histogram of stock market returns to see how few people/investments can actually do this. Your odds are terrible. And this doesn’t even include the additional risk your taking on. It’s a losers game.

The only real argument for active investing is the fun, and so we all keep a few active investments.

MDJ- I basically track the iShares family of ETF’s but the board based indexes and not specific countries or sectors. The whole point of purchasing an ETF to me is to get broad exposure so trying to limit myself to sectors or geographic locations is self-defeating to what a true passive investor is.

Preet and MDJ: I know you guys have blogged or discussed fundamental indexes but I would like to see some track record to see proof in the pudding. The fees on FI also worry me. Seems like the industry knows the mutual fund is a dying product and are trying to get their hands on other things now.

Anyways, to answer your question, I made the switch to incorporating passive investing about the time I switched from my last firm (who did not have the ability to offer them), which was about 2 years ago. Not only are they better off, I can focus on actual planning and service as the investing is on auto-pilot.

Mark Yamada (of PUR investing) put it best: planning is the true “alpha” an advisor can bring to the table.