Unless being an investor is your full-time job, it’s difficult to do that job well. And even if you do have the required knowledge and time to take the reins of your investments, hiring an expert to do it for you still might make more sense.
Managing your own portfolio might be feasible if you have a solid understanding of financial markets, are familiar with concepts like diversification, rebalancing and asset allocation, and you have the discipline to stick to a plan. But even if you have the requisite skills to manage your own money, there are good reasons for outsourcing the job to a professional investment advisor.
If there’s one thing that tends to get in the way of good investing habits more than anything else, it’s human emotion. Many do-it-yourself investors become their own worst enemy. They might buy a stock when it’s already soared and sell in a panic near the bottom. These investors also tend to trade too often and attempt to time the market – tendencies which increase costs and reduce overall portfolio returns in the long run. The effects of these harmful behaviours can be dramatic. As the following graph from J.P. Morgan’s Guide to the Market illustrates, over a 20-year period, the average self-guided individual investor severely under-performed every single major investment class.
By contrast, a professional investment advisor can instill discipline in your portfolio, protecting you from your emotions. When markets become volatile, as they do from time to time, a manager is there to keep your eye on the long-term plan, reminding you of your financial goals.
Advisors also provide significant value through education. With so many investment products out there, it’s difficult for most people to make sense of them all. An advisor can explain what can be expected from various investment classes. They can also underscore the benefits of constructing a portfolio that maximizes returns while reducing volatility, and how to accomplish this in a tax-efficient manner.
Not all investment advice is equal. Here are some things to look for when selecting an advisor:
• Are they registered with a regulatory body? Any Canadian firm or individual offering to sell investments or provide investment advice must be registered with the securities regulator in their province or territory, unless they have an exemption. Check with your region’s Securities Commission to ensure the person or firm you’re dealing with is registered.
• Do they have additional credentials? Non-mandatory designations such as Chartered Financial Analyst (CFA®), Chartered Investment Manager (CIM®), Certified International Wealth Manager (CIWM), Estate and Trust Professional (MTI®) and Personal Financial Planner (PFP®) can be attained in addition to registration with a regulatory body. Attaining these designations is a sign that an advisor has specialized skills that may inform their portfolio strategies.
• How are they compensated? Fee-based, salaried or on commission? Depending on the compensation model, there may be an incentive for an investment advisor to act in ways that do not prioritize your financial well-being. Generally, fee-only advisors are perceived to offer the most conflict-free advice because their income does not come from selling you financial products.
• Is there an independent custodian? By placing your assets with an independent third-party custodian, you are creating a firewall between your money and your advisor. If an independent custodian suspects fraudulent activity of any kind, they will contact the account holder or report the advisor to the appropriate regulators. The custodian also sends quarterly statements directly to each client that detail all activity in their account, including deposits, withdrawals, trades, and any management fees that were deducted. This provides the investor with full transparency regarding their money, and an official record of their account.
Signs there may be a conflict of interest
Whether you already have an advisor or are in the market to hire one, it’s wise to be vigilant for signs that their advice might be in conflict with your best interests. These might include:
- Pushing in-house investment products that are not compatible with your objectives
- Frequent trading, resulting in increased commission fees
- Recommending ‘exempt’ investment products that are not suitable for you
- Using high-pressure sales tactics
- Claiming to have inside information about an investment
Just as there are some shady home renovation contractors, there are also investment advisors you’d probably rather not deal with. Asking the right questions up front and being attuned to signs of conflicts of interest can save you time, hassle and unnecessary financial loss.
Andrew Hepburn is a freelance financial writer and journalist based in Toronto. He’s written for the Globe and Mail, Maclean’s, and Morningstar, among other publications.
*Indexes used are as follows: REITS: NAREIT Equity REIT Index, EAFE: MSCI EAFE, Oil: WTI Index, Bonds: Barclays U.S. Aggregate Index, Homes: median sale price of existing single-family homes, Gold: USD/troy oz, Inflation: CPI. 60/40: A balanced portfolio with 60% invested in S&P 500 Index and 40% invested in high quality U.S. fixed income, represented by the Barclays U.S. Aggregate Index. The portfolio is rebalanced annually. Average asset allocation investor return is based on an analysis by Dalbar Inc., which utilizes the net of aggregate mutual fund sales, redemptions and exchanges each month as a measure of investor behavior. Returns are annualized (and total return where applicable) and represent the 20-year period ending 12/31/16 to match Dalbar’s most recent analysis.
This article was published in T.E. Wealth’s Strategies newsletter, December 2017 edition. Read the full edition here.
These articles are for general informational purposes only. Please obtain professional advice before taking any action based on this information. No endorsement or approval of any third parties or their advice, information, products or services should be implied by any references to third parties contained in any article. Trademarks cited in these articles are the respective properties of their owners.