Before I define it however, a bit of background. Investing has a variety of things called asset classes. These are ‘types’ of investments and cover such things as stocks, gold, money market funds (GIC’s and the like), real estate, even art.

Index funds are normally associated with stocks. Over time the popularity of stock index funds has grown wildly in the public consciousness and so other asset classes. So now you can find index fund looking investments in money markets, bonds, even real estate.

What is a stock?

A stock is representation of partial ownership in a company, and is often comingled with the term ‘share’. Lets say you own a company. Part of the incorporation process is setting up a number of shares, and determining who owns those shares.

As companies grow, eventually they want to raise money for growth purposes, and want to sell some of their company ownership or shares. If the company qualifies, they can sell their shares to the public through a stock exchange. This means the company has ‘gone public’. Generally when discussing index funds, we are referencing shares only of publicly traded companies shares.

Initial theory behind index funds

So, you’re going to invest in ‘stocks’ or shares, i.e. the ‘stock market’. Lets start with you buying shares from a single company.

Now, there’s two generally accepted factors used to evaluate such a share; the risk (often called the Beta), and the reward – the potential rate of return. The risk refers to the potential for not getting the return. You can think of it as the volatility – the return jumping up and down, maybe higher, but also maybe way lower.

So you choose a company with an expected rate of return of 15% because, hey, 15%. But that comes with a wild risk that maybe you earn -15% instead of +15%. We want to mitigate the risk, stop the wild possible swings in return.

So, what to do? We’re going to buy a second stock in something nice and stable, maybe a bank. For the bank stock maybe we expect 6%, but that return is fairly certain.

Now our overall investment is partly going to earn 15% with high volatility, and 6% with low volatility. Our total investment now earns say 10% with acceptable volatility.

Now lets optimize this process. We’re going to continue to add stocks with the intention of keeping our investment returns high, while lowering the possible volatility or swings from year to year.

Mathematically, it’s been shown that the blend of company shares that achieves the highest rate of return, at the lowest risk (over long periods of time) is ‘all companies’.

And that’s what an index fund is – it’s an investment where you’ve selected all companies on a stock market. Note that changing the balance of all companies (maybe you get rid of one or two) will result in likely having lower rates of return, or higher risk of not achieving your target rates of return. So mathematically, ‘all companies on the stock exchange’ is an index fund.

So mathematically, an index fund should be your best buy for investing in stocks. But there are other reasons why it’s a good investment. Since you’re not trading stocks, you’re not paying to trade stocks (obviously). Which keeps expenses on index funds low, and that contributes to higher returns. Fees on index funds are generally amongst the lowest available for any type of long term investment.

Variations on index funds

Investment firms have created variations on index funds. Some have large cap index funds, which would be all companies, but only of a certain size. Others have created industry specific index funds, maybe all tech firms, or all oil and gas firms. While not technically index funds, they’re often billed as such.

Investment firms have also created index funds that attempt to invest in companies internationally – i.e. US. or Europe, or Asia. If you’re getting into these, more research is required because changing these variables can be better, and they can be worse.

And as I mentioned earlier, investment companies have also created index funds in other asset classes, i.e. you can get a bond index which is an investment in a wide variety of bonds.

Index funds in Canada

It is possible to invest in a ‘raw’ index fund. Most of the Canadian banks have one available, you can set them up inside your RRSP or TFSA. Perhaps the most popular and oldest is the TD Bank TSX index fund, which covers all stocks on the Toronto Stock Exchange, but other banks have similiar offerings.

Index funds are also often combined with other asset classes inside a mutual fund, so you might have a mutual fund with 90% index fund, and 10% cash (some liquid cash is required to maintain the index fund).

Summary

So there you have it. An index fund is an investment with ‘all’ companies on a stock exchange. The intention is to get the highest possible rate of return, at the lowest risk possible, over a long period of time. They’re available at most investment companies and banks, and are often available inside mutual funds and inside RRSP’s and TFSA’s.

Savings before university

Both kids had to get summer jobs in high school. We’re pretty committed that we didn’t want them working while in school, but for the summer? Get to work for sure. We then drew up a budget for their summer income, an amount for spending for themselves, and an amount they had to save towards school. Our splitting amongst those things was somewhat arbitrary, we mostly wanted them to contribute something towards their university education rather than just counting on their parents.

Secondly, we contributed to an RESP (check my next article on RESP’s). This helped a lot. First off, saving a bit each month is a lot easier than coming up with all the money each year when they start school. Plus, the government grants that come with RESP’s really helped top things off. Between RESP’s and their savings, they had enough to get well started into their education.

During University

There’s two primary expenses when they go to university – tuition/books/school related costs, and living expenses. Our key was to minimize the second one.

Their RESP and savings handily paid their early tuition costs and gave them a monthly living allowance.

We also gave them the choice – they could live at home and attend a local university. Or they could go elsewhere and we’d help with living expenses. But, if they lived at home we’d get them into a beater car to drive back and forth to school. If they lived away, they got a bus pass lol.

Both kids chose to live at home during their undergrad. With tuition and books and a small allowance coming out of the savings, our costs were actually lowered when they went to school. Our ongoing costs; food, phones, etc, didn’t change, but we no longer had RESP contributions.

So their living expenses didn’t cost us any more than they were already. School related costs weren’t unbearable (because, Canada!), and were paid for by savings.

There was still a bit of a shortfall over the 4 years, but once again we expected them to work for their four months of summer. And once again, they were put on a budget, so much for living expenses, so much saved for their next year’s costs.

I think they may have also received a small amount of grants, I don’t recall for sure. If they did, it was minimal, and we didn’t have them take loans.

The end result? Both kids made it through their undergrad without any debt.

Post graduate expenses and savings

Both kids finished their undergrads/bachelors basically running on empty. Both wanted to get a masters degree (and both did get a masters degree). But, one took an out of country course based masters and the other did a research masters.

Masters, Child 1

Our oldest wanted to get into a specific area of science. Their chosen program only had about 4 (!) openings in Canada but there were a few larger programs in the U.S. So they ended up going to New York City for their masters. Because it was course based (i.e. they just attend classes), it was all fee based – we paid to go to school. And because it was an American program, costs were pretty damn excessive. Like $30k in tuition a year, plus living expenses.

In their case, we cosigned for a student line of credit. They then used the line of credit to fund their tuition and living expenses. Two years later, they had a degree, a great paying job, and are slowly paying off the loan. It was well worth it as they did land a six figure job, so they can afford to pay back the loan. Aside, if your children are going into a variety of masters programs, have a look at student lines of credit at the bank.

Because we cosigned for the loan, I didn’t want to be saddled with a six figure loan myself if they couldn’t complete their education. So we also made sure child 1 had life and critical illness insurance so in the worst case we had funds to pay off the debt. We couldn’t get long term disability insurance on them because they weren’t earning an income.

Masters Child 2

The second one did a research based masters. They were working in a lab, doing….I dunno, researchy type stuff I guess. They also continued to live at home, so that kept expenses low.

So with a research based masters, they did have to pay some tuition. But there’s no textbooks or any other real expenses. Plus, they get paid a nominal amount for doing the research. It’s poverty level, but hey, they’re students. So for this one, their funding from the research payed most of their expenses. In addition, they also worked each summer and again, we had them save from that income.

Child 2 graduated their masters with no debt.

Post Graduation

Child 1 got a six figure job almost right away and has carried on with their life. They’re paying off their student line of credit from their masters, but it’s quite manageable.

Child 2 is suffering from failure to launch. They moved into a PhD program while still living at home, but hated it so they quit school at that point. They now have a technical/stem masters, and have decided they don’t like the field they studied for. They’re still at home and have no debt. They’re working part time as a waiter and working substitute teaching whenever they can. That gives them a bit of income, but is hardly a career. So they’ve recently decided to go back to school and become a firefighter. OK, I guess, they’re too old for me to tell them much. But that’s another year of schooling that they’ll be starting in the fall. They’ll be funding that on their own through their savings (though we will help as necessary, we don’t want them stressed while in school). And firefighting is a decent paying job so hopefully that wraps up their career aspirations about a year and a half from now.

Summary of all this? For many Canadians, putting your kids through university is achievable. Get started on an RESP now! Make the kids work through the summers and contribute to their savings. Have them live at home so you’re not paying for two households, two utilities, two internet services, etc. And if necessary, have them take out some student loans that they can pay off post-graduation. Do all of that and you should find that it’s actually affordable, and your lifestyle won’t have to change.

And that’s pretty much what the state of the industry was. Financial planners and/or financial advisors (the terms were used interchangeably) could be a life insurance salesperson selling you life insurance and seggregated funds. Or they could be your clerk at the bank. Or they could be a mutual fund salesperson who just sold investments. Most/many of them didn’t do any planning they mostly did sales of whatever they were pushing.

Well, the sales part hasn’t change – you should be aware of how your financial person makes their money. Nobody’s providing you free advice without the expectation of making some money and since most (but not all) don’t charge for their advice, they’re making money when you purchase a product or service from them.

The good news is that the government regulators have stepped in recently to regulate the two terms ‘Financial Planner’ and ‘Financial Advisor’. There are now requirements for anyone to use those titles. My dog is now no longer a financial planner, and neither is the life insurance agent selling life insurance plus seggregated funds (or anyone else for that matter).

The new requirements still allow anyone to call themselves either Financial Planner or Financial Advisor – IF they meet some minimum educational requirements and expertise.

Financial Planners

Anyone using the title financial planner must be knowledgeable (both in breadth and depth) of a variety of areas including estate planning, taxes, retirement & investment planning, financial management and insurance/risk management.

Financial Advisors

Financial advisors need only have technical knowledge of a single investment product type such as mutual funds or stocks. Plus, they need to be able to develop suitable financial recommendations for consumers.

I don’t really understand why a financial advisor needs to be able to develop financial recommendations but only needs to be expert in a single type of investment product, but them’s the rules.

Actual Requirements to use Financial Planner or Financial Advisors Title

So, the government dictates you need to be knowledgeable, but they’re not going to define specifically what those requirements are. Instead, they’ve hoisted that responsibility off onto the industry, and in particular a variety of educational organizations that provide industry education and credentials. Basically, as long as you qualify for one of the designated credentials (which requires education) then you meet the government requirements and can then use the title Financial Advisor or Financial Planner.

In the past, as I mentioned earlier, even someone with a life insurance agent license could call themselves a financial planner. And the requirements to get licensed as a life insurance agent are a pretty low bar, you hardly even need to understand life insurance. But that’s changed – the new requirements for Financial Planner are not erroneous. They’re going to take some serious work for someone to qualify.

To use the term Financial Planner, you’ll now need to have a CFP, CLU, and a few other options. These credentials are not inconsequential, people can take a few years to gain the credentials, and they cover a pretty exhaustive list of educations topics. These credentials have long been the top tier credentials in the industry, and generally only obtained by long term senior advisors.

There are other routes available, but they all require substantial investment in education.For example, a 2 year diploma centered on the financial industry plus an exam will qualify you for the title of Financial Planner.

Long story short, the term financial planner is now going to require some serious credentials and education. I’d suggest that if you see someone using that credential, they’re likely well qualified.

Not so much with the term Financial Advisor. This credential/title can be obtained with much lower requirements, i.e about the same as the traditional requirements for a mutual fund dealer rep licensing.

So no longer does a simple license for life insurance or mutual funds allow you to use the term Financial Planner. People in the industry can likely obtain the title Financial Advisor without much work, but Financial Planner – that’s going to take some substantial work and experience. The title Financial Planner is now going to really set some advisors apart from the crowd.

Other financial terms

So that’s just financial advisor and financial planner. There are other terms and modifiers.

Fee based ‘financial planner/financial advisor’: These people charge a flat fee – generally a percent of your investments – for their services. i.e. a fee based financial planner might charge 1%/year. These people are generally advising on and handling your investments and savings.

Flat fee based ‘financial planner/financial advisor’: These people charge a flat dollar fee to provide advice – say $3000. This is intended to suggest that they’re unbiased, as they don’t make money on how big your account is, the performance, or any specific investment type. Again, these people are typically advising on investments.

Financial Coaches: When people think financial advisors or planners, this is likely to be what they’re actually thinking of. Financial coaches provide unbiased holistic overall advice, for a flat fee. i.e. they’ll take you through budgeting, investing strategies, retirement and tax planning, all sorts of stuff. And it’s done for a flat dollar fee. They don’t make commissions, often aren’t licensed to sell products and as a result often won’t advise on specific investments. i.e they might say ‘you should consider index funds for investments’, but they won’t say ‘you should consider TD index funds specifically’.

The term financial coaches remains unregulated. I suspect many financial coaches were previously using the terms financial planner or financial advisor, but they’ll be walking away from that. Ironically, financial coaches are often highly educated and experienced and many of them already meet the requirements to actually use the financial planner term – often you’ll see these folks with CFP’s and CLU’s.

There’s the vegetable soup of designations going forward, I hope I’ve cleared up some of your confusion.

I’m the new admin here on BTI. We’ve got a somewhat refreshed look, hopefully much cleaner. And we’re going to be pumping out new, high quality posts again, as often as we can.

To that end, I’ve copied most of the previous articles on the site and archived them under the pre-2013 category. The posts are there if you want to read them, but they’re all pretty old so no guarantee as to accuracy or relevance.

Going forward we’ll be moving from a focus on O&G to more of a Canadian personal finance blog orientation. Budgeting, investing, insurance, banking, savings, etc. will be the theme of the day here.

Thanks for visiting, and take a drive by once in while to see what’s new!