Month: November 2015

Adapt or be Cast Aside

As clients evolve, they are steadily becoming more financially literate and aware. At the same time they are becoming less trusting and more loathed to be left out of the financial decision making process. All of which will put more and more pressure on financial advisors to adapt and that is when the big challenges begin. Advisors will need to admit to themselves that they cannot continue to operate in the same old way.

The handwriting is clearly on the wall as study after study delivers the same hard truth: change is coming. A study conducted by AT Kearney showed that approximately 50% of the clients surveyed said that they had some interest in using robo-advisors to manage their accounts. A Cap Gemini survey indicated that 64% of affluent clients expect their future wealth management relationship to be digital. Additionally, 65% of these clients will leave their current advisor if an integrated digital experience is not offered. A recent Gallup poll indicated that nearly two of three investors preferred to get financial advice from both online/digital sources and from personal financial advisors. A report by Accenture shows that investment into financial technology tripled in 2014 to US$12.2 billion versus 63% growth in overall venture capital investment, catapulting the digital revolution into the financial services industry at an unprecedented rate.

If these scenarios do actually come true then advisors will need to adapt or become irrelevant. Advisors that fail to react will face severe challenges to their future profitability and growth because change is not optional. Competition will force advisors’ hands. To compete successfully advisors must differentiate themselves, otherwise they will have to compete in price to win or retain clients. So a unique identity will be imperative, to clearly define in the client’s mind a distinct value proposition that helps advisors stand out in a very crowded market.

Advisors need to focus on their core competencies and outsource non-essential processes by streamlining back office and portfolio management activities; and rationalizing services offered where they do not have the necessary skills to meet client expectations. Compliance is an absolute cornerstone of any advisor’s practice, so a sound business model and sound operational processes are non-negotiable. However, in the coming challenging regulatory environment, even this can largely be outsourced or structured to provide opportunities to enhance profitability and ensure growth.

No longer will the product push model lead to successful results. Advisors will need to focus more on solutions that deliver enhanced services. Solutions that meet a client’s personalized goals and objectives will be most highly regarded. Emphasis will have to be placed on delivering customized solutions. By shifting to a flexible service based practice, visionary advisors have an opportunity to benefit from new innovation and provide excellent client satisfaction.
At the end of the day, meaningful growth will only be achieved by embracing change. Advisors need to identify and efficiently exploit niches through specialization and differentiation. If advisors can deliver a unique service platform, successfully build a distinct brand and provide world class communication they can avoid becoming irrelevant. Advisors need to embrace change to win the battle because change is constant; and like sharks, if you are not moving forward then you are going to drown.

Misery Hates Company

Across the investment landscape there are countless philosophies, gauges and indicators that have attempted to elicit exploitable intelligence and generate superior performance. The last century has seen new paradigms, recycled theories and just plain hokum put forward as the answer to every investor’s dreams. In the end, solid fundamental and quantitative analysis tends to be the principal way to deliver value added results. Occasionally, however, a combination of old standby indicators can show surprisingly good insight.

One of the best indicators that most investors have likely never heard of has delivered excellent long term success at predicting where the market is headed. The so called “Misery Index” is calculated by adding together the Canadian unemployment rate and the inflation rate. Further insight is gained by adding in the S&P/TSX Price/Earnings (P/E) ratio. The historic analysis of this combination has produced very interesting results.

Looking back over the past 45 years (1970 to 2014) at the combined yearend figures for the three gauges shows a clear performance pattern for the Canadian stock market. The central value is 27.5 and the data was divided into four equally distributed subsets based on the standard deviation which works out to +/- 4.0. As the chart below and data on the left shows, the stock market’s historical performance has been far better on average when this indicator is low (less than 23.5) than when it is high (more than 31.5), as evidenced by the average returns of 18.4% per year versus 4.2% per year. This pattern of strength or mediocrity has been very consistent.

Traditionally, the most commonly used valuation metric is the trailing P/ E ratio. The S&P/TSX P/E ratio is currently trading at 16.1 trailing earnings, which is a 6% premium to its long term average of 15.2 dating back to 1970. By this metric stocks could be said to be overvalued. However, real overvaluation does not typically occur until the market trades at one standard deviation above its long term average of 20.1, which is well above the current level.

But P/E ratios should be interpreted within the context of current macroeconomic conditions. For example, a low P/E is not automatically bullish as was seen in the late 1970s when inflation and unemployment were very high. Conversely, a high P/E is not automatically negative if it is accompanied by low inflation and unemployment. However, some P/E levels are so high that even low rates of inflation and unemployment cannot justify them.

That is especially relevant right now. When viewed in isolation, the current S&P/TSX P/E suggests a slightly overvalued market. But in the context of the current low level of the Misery Index, the market’s current P/E does not appear to be out of line. In fact, the combined indicator currently stands at 24.1, which is below its historical average level. That puts the current market’s valuation in the quadrant that is historically associated with a 12.6% annualized gain for the S&P/TSX.

So in theory Canadian stocks have a long way to appreciate before they can be considered expensive, based on this measure. Still, stock market valuations alone are not enough to propel investment decisions, as stocks constantly gyrate and overshoot perceived targets. Looking at any one valuation tool alone does not deliver the complete picture, as most investors well know.


This report may contain forward looking statements. Forward looking statements are not guarantees of future performance as actual events and results could differ materially from those expressed or implied. The information in this publication does not constitute investment advice by Provisus Wealth Management Limited and is provided for informational purposes only and therefore is not an offer to buy or sell securities. Past performance may not be indicative of future results.

While every effort has been made to ensure the correctness of the numbers and data presented, Provisus Wealth Management does not warrant the accuracy of the data in this publication. This publication is for informational purposes only.