A new Morningstar Research survey finds 52 per cent of Canadian financial advisors say their clients expect a higher degree of service, and 40 per cent say clients are “demanding” higher levels of portfolio service.
It’s the first-time U.S.-based Morningstar has formally focused on Canadian advisors and it confirms how under-served Canadian retirement investors are.
Most start their investing lives in mutual funds through company pensions, registered retirement savings plans (RRSPs) and even tax-free savings accounts (TFSAs).
Mutual funds are the only practical investment vehicle for those with modest portfolios and a desire for diversification and professional management. The cost is most often well above two per cent of the total amount invested, each year, whether the fund makes money or not.
Hopefully, it makes money over time and the growing value of the portfolio warrants better management at a lower cost.
Is your advisor registered to sell more than mutual funds?
Canadians typically begin investing through the investment arm of their bank through an advisor, who helps match the client’s risk tolerance and return expectations with the right series of pre-packaged mutual funds.
The fee for ongoing advice from the advisor is typically one per cent of the total amount invested each year, which is baked into the mutual fund fee.
In many cases, the advisor is licensed to only sell mutual funds, which restricts their ability to offer better portfolio management at a lower cost.
Access to direct equity investments
As a portfolio grows, the best and cheapest way to diversify is by investing directly in equity markets. That requires an advisor who is licensed to trade individual stocks on Canadian and U.S. markets and index-linked exchange traded funds that track the major sectors and geographic regions.
As an example, the fee on a Canadian equity mutual fund can be avoided by investing directly in the few large cap stocks that trade on the TSX.
Some advisors are even licensed to trade options for more complicated risk management strategies that can generate income.
Access to fixed income
Diversification is key to balance steady growth with risk management. That balance is centered in the two basic asset classes; equities and fixed income.
A set portion of guaranteed investment certificates (GICs), and other fixed income products like investment-grade government and corporate bonds, act as a stabilizer to the more volatile equity portion of a portfolio.
Most pre-package mutual fund portfolios include fixed income or bond funds as alternatives, but they can not be considered fixed income.
Retirement investors will generally hold fixed income to maturity, unlike professional bond traders or bond funds, which seek gains by trading existing debt to take advantage of short-term fluctuations in interest rates. They sometimes lose money when bad calls are made.
Instead, qualified advisors with direct access to fixed income markets can initiate strategies for retirement investors to maximize returns by staggering maturities to take advantage of the best going yields as often as possible.
The personal touch
As retirement approaches, and the need for reliable income grows, that balance should tilt toward fixed income and low-risk equities.
An advisor with the right qualifications can help strike the right balance based on a client’s personal situation, and that requires a personal relationship.
That relationship could open the door to tax and estate planning, and any other special requirements.
How to determine an advisor’s qualifications
Any individual or firm selling any investment products must be registered with regulators in the provinces and territories where they do business.
They should be included in the National Registration Search database from the Canadian Securities Administrators (CSA), along with their qualifications.
While “advisor” is a broad term (and also spelled “adviser”), there is a long list of designations and titles.
Investment and Portfolio Managers who work with individual clients will often have Chartered Financial Analyst (CFA) or Chartered Investment Management (CIM) designations.
