Volatile market tests adviser-investor ties
Those seeking a new money manager should consider credentials and skills
Given the market volatility reflected in those recently-mailed-out January account statements, many investors are now asking themselves if they have the right person managing their portfolio.
It is a very challenging question to answer, especially considering the complexity of the Canadian investment industry, in which a variety of market participants face differing regulatory and educational requirements.
The scope of this diversity is rather astounding: There are discretionary money managers, exchange-traded fund providers, financial advisers, stockbrokers, mutual-fund sales professionals and financial planners, all billing themselves as investment experts.
Most troubling is that the majority of these investment professionals do not have a legal fiduciary duty to the client, as a lawyer or accountant does. In fact, it is quite easy to enter the industry with no business or financial background whatsoever other than the completion of a relatively straightforward course and exam.
As a result, the industry in Canada is dominated by those licensed and compensated to sell you financial products. This arrangement is not necessarily a bad thing, as long as the products being sold match your risk tolerances and the compensation being paid is fully transparent and at a fair price.
The bigger issue, in my opinion, arises when sales professionals market themselves on the same level to prospective clients despite having differing credentials and levels of expertise. As a result, many investors end up choosing an adviser based on gut feel instead of matching up to the actual type of service they require.
To help avoid this, here are three categories to consider and utilize when on the hunt for someone to help manage your money.
INVESTMENT ADVISERS
This category includes stockbrokers, financial advisers and mutual-fund salespeople.
This is a good option for those wishing to assume responsibility for the overall management of their portfolio but looking for some professional advice on which investments to own. Most advisers are bound by suitability obligations, meaning any investment products they recommend must be suitable for the investor.
Look for advisers who have a diverse range of investment products at their disposal and a fair and fully transparent fee structure. Although the performance of the investments lies with you and not the adviser, seek out those with a track record of offering consistent and sound advice.
ROBO- ADVISERS
This category is relatively new but is rapidly expanding given its low cost and ease of use. Essentially, it is an online financial tool that helps design and recommend an investment portfolio based on your risk tolerance and investment constraints.
While some financial firms are using robo-advisers to distribute their own financial products, they are at least offering these products at a fraction of the cost of existing investment adviser platforms, given there is no middleman taking a large sales fee.
That said, while they are a great tool for the hands-on investor, it’s unlikely robo-advisers will replace traditional advisers, especially not the ones who have helped prevent their clients from giving in to human emotion during market highs and lows.
PORTFOLIO MANAGERS
The other option for investors is the use of a registered portfolio manager or investment counsellor. This option is for those who don’t have the time and/or expertise to manage their portfolio themselves and would prefer to have a professional make the investment decisions on their behalf. This means the investment portfolio is managed on a discretionary basis, with all decisions being the responsibility of the portfolio manager, as governed by the investment policy statement.
Most portfolio managers are also required to have their Chartered Financial Analyst designation to be registered and are thereby bound by the CFA Institute’s code of ethics. Portfolio managers are also typically fee-based, meaning they charge a flat fee on the total size of your portfolio.
The good news in all of this is that there is no shortage of investment professionals out there willing to help manage your money in these rough markets. A great first step is to take the time to re-examine your own needs and try to match them to one of the three types of services being offered.