Many people do not feel they have the knowledge to best manage their own money. Some have the knowledge but they do not have the time.
Both portfolio managers and Wealth advisers can assist people with financial decision making. A wealth adviser must obtain consent from the client prior to any trades. Often this is done over a quick telephone call where the wealth adviser is recommending for you to either buy or sell an investment.
The client receiving the call is normally not as informed about the specific recommendations. Typical responses would normally be: “Whatever you think,” “You’re the expert, do whatever you think is best,” or “That is why I pay you for … to make those decisions.”
It is tough for most people to make decisions on something they do not feel informed about. With investment decisions it can still be challenging even when you are informed and trying to make decisions independently. There is so much contradictory information that it is hard for many to feel comfortable making decisions.
Over the years I have had great discussions with people about this process of financial decision making. When you work with a portfolio manager or wealth adviser, you have another person to discuss investment options with. With the traditional approach of working with a wealth adviser, you will be presented with some investment recommendations or options.
At this point you still have to make a decision with respect to either confirming the recommendation and saying “yes” or “no.” In other situations you must choose amongst the options presented to you.
As an example, an adviser may give you low, medium, and high risk options for new purchases. An adviser should provide recommendations that are suitable to your investment objective and risk tolerance.
Another option that clients have is to have a managed account, sometimes referred to as a discretionary account. Portfolio managers are able to offer the option of having a managed account. When setting up the managed accounts, one of the required documents is an Investment Policy Statement (IPS).
The IPS outlines the parameters in which you authorize the portfolio manager to use his or her discretion. The main items that are outlined initially are asset allocation, investment objectives, risk tolerance, unique preferences, and cash flow needs.
As an example, you could have in the IPS that you wish to have an optimal asset mix of 20 per cent in fixed income and 80 per cent in equities. Another client may wish to have 40 per cent in fixed income and 60 per cent in equities. The three investment objectives are Income, Growth, and Speculative Trading. Within an IPS you could state 40 per cent Income, 60 per cent Growth, and 0 per cent Speculative Trading. The three risk tolerances are low risk, medium risk, and high risk. A client could state 10 per cent low risk, 80 per cent medium risk , and 10 per cent high risk. Another client, could have 30 per cent low risk, 70 per cent medium risk, and 0 per cent high risk.
The IPS can also state specific investments that you do not wish to be purchased. If a client did not want any weapons/arms or tobacco/alcohol related companies then we could outline those as unique preferences. If they are outlined in the IPS then we are prohibited from purchasing those holdings.
The IPS also outlines the periodic cash flow needs that you have and where those cash flows are coming from. For example, the IPS may state that the annual Registered Retirement Income Fund payment will be paid to the non-registered account on December 15th annually with 20 per cent tax withheld. Another paragraph could state that every January we are to move funds from the non-registered account to top up the Tax Free Savings Account. Another typical paragraph is to outline the systematic withdrawal payments that are sent from the investment account(s) to the bank account.
Every two to three years we have a comprehensive meeting where we update the IPS. If a significant life event or withdrawal/deposit is made then the IPS is update at that time. We encourage clients to always communicate to us any material change in their circumstances so we can update the IPS. Clients make the decision with respect to the investment objective, risk tolerance, asset mix, unique preference, and cash flow needs. Once this is completed, clients do not have to make the specific decisions regarding the underlying investment holdings.
Portfolio managers are held to a higher duty of care, often referred to as a fiduciary responsibility. Portfolio managers have to spend a significant time to obtain an understanding of your specific needs and risk tolerance. These discussions should be consistent with how the IPS is set up.
The nice part of having a managed account with an up to date IPS is that your adviser is able to make the decisions on your behalf. You can be free to work hard and earn income without having to commit time to researching investments. You can spend time travelling and doing the activities you enjoy.
Many of my clients are intelligent people who are fully capable of doing the investments themselves but see the value in paying a small fee. The fee is tax deductible for non-registered accounts and all administrative matters for taxation, etc. are taken care of. A good adviser adds significantly more value than the fees they charge. This is especially true if you value your time.
For couples, it is pretty typical that one person in the household takes a great interest in the finances. In some cases one person has made all the financial decisions for the household. If that person who has independently managed everything passes away first it is often a very stressful burden that you are passing onto the surviving spouse.
I’ve had couples come in to meet me primarily as a contingency plan. The one spouse that is independently handling the finances should provide the surviving spouse with some direction of who to go see in the event of incapacity or death. In my opinion, the contingency plan should involve a portfolio manager that can use his or her discretion to make financial decisions.
In years past it was easier to deal with aging clients. Clients could simply put funds entirely in bonds and GICs and obtain a sufficient income flow. With near historic low interest rates, this income flow has largely dried up for seniors. When investors talk about income today, higher income options exist with many blue chip equities. Of course, dividend income is more tax efficient than interest income as well. A portfolio manager can add significant value for clients that are aging and require investments outside of GICs.
Try picturing a wealth adviser with a few hundred clients. A wealth adviser has to phone and verbally confirm each trade before it can be entered. The markets in British Columbia open at 6:30 a.m. and close at 1 p.m. Meetings with clients are often booked a week or more in advance.
On Tuesday morning a wealth adviser wakes up and some bad news comes out about a stock that all clients own. That same wealth adviser has four meetings in the morning and has only a few small openings to make calls that day. It can take days to phone all clients assuming they are all home, answer the phone call, and have time to talk.
A portfolio manager who can use his or her discretion can make one block trade (the sum of all the clients’ shares in a company) and exit the position in seconds. Sometimes making quick decisions in the financial markets to take advantage of opportunities is necessary. Hands down, a portfolio manager can react quicker than a wealth adviser who has to confirm each trade verbally with each client.
Kevin Greenard CPA CA FMA CFP CIM is a Portfolio Manager and Director, Wealth Management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week in the Times Colonsit. Call 250-389-2138.