Over the years we have had great discussions with people about financial decision-making. It is tough for most people to make decisions on something they do not feel informed about. And with investment decisions, there is so much news that impacts the investment landscape, changes in taxation, and different investment options to choose from.
Although the mechanism to do the actual trade is becoming easier, the ability to digest everything and manage risk is becoming harder.
For those who don’t want to wake up every day to stay current and manage their own finances, one option is to find a financial professional. The two main types are Wealth Advisor and Portfolio Manager.
Wealth Advisor
When you work with a Wealth Advisor, you have another person to discuss investment options with. The term Wealth Advisor is relatively new and used to be referred to as broker, investment advisor, investment executive, and other names (depending on the financial firm). For purposes of this article, we will refer to these financial professionals as Wealth Advisors.
A Wealth Advisor is not able to do trades for their clients without speaking with them first. A Wealth Advisor must present the client with the investment recommendation(s) or options. A Wealth Advisor has an obligation to explain each investment to you relative to your investment knowledge.
For example, if you have low investment knowledge, a Wealth Advisor must go into greater depth explaining the investment recommendation to ensure the client has an understanding and is making an informed decision.
A key part of this is that the client is making the decision on whether to proceed with the investment. After the Wealth Advisor has explained the investment recommendation, the client must make a decision with respect to either confirming the recommendation and saying “yes” or “no” amongst the options presented to them.
A Wealth Advisor can open both a transactional account where each trade has a commission, or a fee-based account where trades can be done with no commissions and the account is charged the negotiated fee.
Portfolio Manager
When the financial professional you are working with is also a Portfolio Manager, they can provide more options with respect to the types of accounts offered.
A Portfolio Manager can provide clients the option of having a managed account, sometimes referred to as a discretionary account. This is a fee-based account where the clients do not have to make investment decisions. The fee structure is negotiated and all trades have zero commissions.
When setting up the managed accounts, one of the required documents is an Investment Policy Statement (IPS). The IPS outlines the asset mix parameters in which the Portfolio Manager can use his or her discretion.
As an example, you could have in the IPS that you wish to have 10 per cent in Cash Equivalents, 20 per cent in Fixed Income, and 70 per cent in equities. The IPS also outlines the risk tolerance for each investment account.
For example, a client could state the risk tolerance for each account to be 20 per cent low risk, 80 per cent medium risk, and 0 per cent high risk. The client’s investment objectives for each account are listed in the IPS. For investment objectives, a client could state 40 per cent income, 60 per cent growth, and 0 per cent speculative/short-term trading.
Portfolio Managers are held to a higher duty of care, often referred to as a fiduciary responsibility. Portfolio Managers must spend 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. Any time you have a material change in your circumstances then the IPS should be updated. The IPS should be reviewed at least every five years, if not more frequently.
The nice part of having a managed account with an up-to-date IPS is that your Portfolio Manager is able to make the investment decisions on your behalf — but they must be within the parameters of the IPS. Clients can be free to travel, spend time on activities they love, and work without having to commit time to researching and managing investments.
We encourage our clients to spend their time doing the activities they enjoy. Many of our clients are intelligent people who are fully capable of doing the investments themselves but see the value in paying a small fee and working with a Portfolio Manager. The fee is tax deductible for non-registered accounts and all administrative matters for taxation, etc. are taken care of.
A good Portfolio Manager adds significantly more value than the fees they charge. This is especially true if you value your time.
Many aging couples have one additional factor to consider. In many cases one person has made all the financial decisions for the household. If that person passes away first, it can put a very stressful burden on the surviving spouse.
We’ve had couples come in to meet us primarily as a contingency plan. The one spouse that is independently handling the finances should provide the surviving spouse some direction of who to go see in the event of incapacity or death. In our opinion, the contingency plan should involve a Portfolio Manager that can provide guidance in making financial decisions.
In years past it was easier to deal with finances in retirement. Clients could simply put a greater percentage of their savings in bonds and GICs and obtain a sufficient income flow.
With lower interest rates and higher costs, generating a sufficient return is important during your lifetime and during retirement. 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 in retirement and require investments outside of GICs.
Nearly all the high-net-worth clients we work with are not interested in receiving phone calls with a question about specific trades. They are more interested in the bottom line (overall rate of return), minimizing taxation, and having a Total Wealth Plan that helps their family.
Comparing Wealth Advisors and Portfolio Managers
Let’s look first at a Wealth Advisor with several hundred clients and needing to do a trade. The Wealth Advisor must phone and verbally confirm each trade before it can be entered. In British Columbia, the stock markets (i.e. Toronto Stock Exchange, New York Stock Exchange) opens at 6:30 a.m. (9:30 a.m. ET) and close at 1 p.m. (4 p.m. ET). A Wealth Advisor typically books meetings with clients often weeks in advance.
On Tuesday morning, a Wealth Advisor wakes up and some bad news comes out about a stock that all clients own. That same Wealth Advisor has three meetings in the morning and has only a few small openings to make a few calls that day. A Wealth Advisor must call each client to explain the trade and get permission to enter the trade. The natural question arises: Which client do you call first? Do you call alphabetically? Do you start with calling the largest client?
Regardless of the methodology used, it is not fair for all clients. As the trades are done over a series of several days and weeks, every client is getting a different fill price on the trade. It is mandatory that after a Wealth Advisor confirms a trade, they must enter it immediately prior to calling another client. If the client has a transactional account, the Wealth Advisor must also do a pre-trade disclosure of the commissions that will be charged before the trade is entered.
In our experience, it can take a Wealth Advisor weeks to phone all clients assuming the clients are all home, answer the phone, and have time to talk. On a nice day, a Wealth Advisor is leaving lots of messages. Simply put, a client may be missing out on an opportunity because of the requirement for verbal permission if they are not able to answer their phone.
A Portfolio Manager can do in minutes what it takes a Wealth Advisor weeks to do. A Portfolio Manager can use discretion to do buy, sell, and switch trades.
Using the above example, a Portfolio Manager that has several hundred clients can make a single block trade (the sum of all clients’ shares in a company) and exit the position in minutes. Sometimes making quick decisions in the financial markets to take advantage of opportunities is necessary. Every client gets treated equally. The execution fill price for the trade is the same for every client.
As both a Wealth Advisor and Portfolio Manager, we may offer both types of service offerings. Nearly all our clients have a managed account where we are acting as a Portfolio Manager. A Wealth Advisor may not explain the benefits of working with a Portfolio Manager if they are not also a Portfolio Manager. If a financial professional does not have the licence to offer this option, it is often a discussion that is avoided.
In our experience if clients are aware of both options, the decision is pretty easy — hands down the client preference has been to have a managed account and work with a Portfolio Manager.
Kevin Greenard CPA CA FMA CFP CIM is a Senior Wealth Advisor and Portfolio Manager, Wealth Management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at timescolonist.com. Call 250.389.2138, email [email protected], or visit .
