乌鸦传媒

The regulators require us to document the investment objectives for each client on an account by account basis.

If a client has a Registered Retirement Savings Plan (RRSP), Tax Free Savings Account (TFSA) and non-registered account, we must record the risk and investment objectives as a percentage for each account.

Investment objectives example

Below we use an example of a client who has $1,107,811 invested in three accounts as of the date we updated their Investment Policy Statement (IPS).

With every account, we are required to have a verbal discussion with the clients on many items, one of these are their investment objectives.

The three main investment objective categories are income, growth and speculative trading.

Below is an example of how the investment objectives may be outlined within an IPS.

Mindset was flexibility years ago

Industry regulators have focused on the IPS being a critical component of not only the initial account opening, but also the continuous review and updating of the investment objectives throughout the life of the account. It was previously common for Advisers to allocate 0 per cent to income, 0 per cent to growth, and 100 per cent to speculative trading. At the same time, accounts were often set up with 0 per cent low risk, 0 per cent medium risk, and 100 per cent high risk. Those discussions with the clients back then could have been to allow the accounts to have complete flexibility with these percentages.

Regulation improves disclosure

The Canadian Securities Administration (CSA) regulates both the Mutual Fund Dealers Association (MFDA) and the Investment Industry Regulatory Organization of 乌鸦传媒 (IIROC). The CSA has made it a requirement that both the MFDA and IIROC focus on disclosure and suitability. Enhanced suitability rules came into effect on September 26, 2012. IIROC significantly expanded suitability assessment standards to ensure investments are appropriate to each investor’s objectives.

Firms are required to confirm a client’s investment objectives directly on the client’s statements on a quarterly basis (March, June, September and December). This is a good way for clients to confirm whether or not their investment objectives allow for any speculative holdings and if they continue to be comfortable with the investment objective allocations of their accounts.

In addition to the existing suitability requirements for recommendations and trades placed, IIROC required that an account suitability review be performed whenever certain other “trigger” events occur (i.e. transfer or deposit of a security into an account, change of Wealth Adviser or Portfolio Manager responsible for the account, or material change in the client’s information, such as marriage or a change in employment).

The required suitability review must consider all positions in a client’s accounts. IIROC effectively moved from trade suitability to total account holdings suitability requirements. In other words, it imposed an ongoing responsibility on the Wealth Adviser or Portfolio Manager for the suitability of all account holdings, including those inherited from another Adviser, or initiated by the client and then transferred into an account. The client must be provided with appropriate advice in response to each suitability review.

This represented a fundamental change to a firm’s responsibilities and liabilities to clients in relation to non-discretionary accounts. This change elevated the standards for non-discretionary accounts, managed by Wealth Advisers, much closer to those applied to managed accounts operating on a discretionary basis by Portfolio Managers. However, unlike a managed account, a Wealth Adviser cannot unilaterally take action to address the situation and is limited to appropriately advising the client, subject to receiving direction from the client on how to proceed.

Change in terminology

Approximately 15 years ago, when we were opening accounts for clients, the terminology was slightly different than it is today. The terms for investment objectives were Income, Long-Term Capital Appreciation, and Short-Term Capital Appreciation. This type of terminology essentially conveyed that if a client wanted to purchase a stock with the intention of selling the stock within a short period of time, then they were speculating and trying to time the market.

Hitting a home run

Occasionally, we will have a client call us and ask about a speculative stock and whether they should purchase it. Often, they have just finished speaking to someone that is talking about how much money they recently made on a stock. Other times, it is something that they read about on the internet. What we explain to our clients is that speculative stocks are either the least talked about, or the most talked about. If someone has made a lot of money on a speculative stock, they are likely to tell their friends about their success. From our experience, those who have lost money on a speculative position are often very quiet, or completely silent, when they have lost money. Avoiding mistakes and focusing on growing wealth slowly are key components to financial success.

Age and net worth as it relates to speculation

Speculation, as it relates to age, is always an interesting discussion. Young people that have time to recoup losses could argue that now is the time to take risk. We would very much agree with this comment. The key component to highlight is to take the right type of risk. Purchasing speculative stocks, without appropriate research, is not, in my opinion, the correct investment path for young people. Focusing on good quality equity investments, to build up the initial base capital, results in long-term compounding of returns.

On the flip side, should a client who is older and has a significant net worth choose to speculate? Our approach to clients in these situations is to remind them that they do not need to take excessive risk to meet their long term financial goals. The only approach that could add unnecessary stress, and a negative outcome, is to take unnecessary risk with speculative investments.

Sectors and market capitalization

Speculative stocks, by nature, are those where some people may view a high return potential if certain outcomes unfold. Many stocks that are speculative are in sectors that are naturally higher risk, such as junior mining, small and mid-capitalized energy companies, alternative energy, biotechnology, etc. By simply avoiding certain sectors and types of market capitalization, we can eliminate speculative holdings. When we meet with new clients and they transfer in speculative holdings, we will have a discussion and recommend that their positions be sold and replaced with non-speculative holdings.

Market uncertainty and volatility

One of the most reassuring components of a well-structured portfolio is holding large profitable companies. When your portfolio is invested in the best quality companies from around the world, diversified by geography, you significantly improve the probability of long term financial success. When markets get volatile and have corrections, it is often a cleansing exercise for the markets, with speculative stocks, more times than not, being the hardest hit.

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 at timescolonist.com. Call 250-389-2138.