Month: July 2016

Fiduciary Duty to Clients is Coming

The imposition of a fiduciary standard on financial advisors in Canada is looking more likely. Higher standards are already in effect in the U.K., where all registrants must act honestly, fairly and professionally in accordance with the best interest of their clients, and in Australia, which has a qualified statutory best interest standard 

More recently, a financial media firestorm erupted in the U.S. as their Department of Labor (DOL) released the final version of its Fiduciary Rule that will impose a best interest standard on those providing advice with respect to many retirement plans. Some have wondered why the Securities and Exchange Commission has been missing on this file. The reason is that the DOL oversees employee savings plans and they have been proactive in managing apparent conflicts of interest among brokers who were advising on the rollover of employer managed plans to broker-managed accounts. The equivalent in Canada would be an advisor advising on a Locked-In-Retirement-Account (LIRA) which had previously been managed by a portfolio manager. If and when the fiduciary rule survives several legal challenges, the small and midsize 401(k) plan market stands to be revolutionized in the U.S. 

The new regulations will likely accelerate a number of challenging trends that advisors are facing, not just in the U.S. but in Canada as well. Morningstar, a Chicago-based rating agency, has thoroughly studied the effect of these new DOL rules and concluded that they will drive three primary trends. Firstly, it will shift customers away from commission based arrangements to fee based ones; Secondly, robo-advisers will likely pick up a large percentage of the $600 billion in low-net-worth IRA balances in the U.S. that are now being managed by full service wealth managers; Lastly it could lead to a significant increase in the use of passive investment products.

In October of 2012, the Canadian Securities Administrators (CSA) published a number of reports beginning with a Consultation Paper, The Standard of Conduct for Advisers and Dealers: Exploring the Appropriateness of Introducing a Statutory Best Interest Duty When Advice is Provided to Retail Clients. The CSA has taken the view that the current Canadian registrant regulatory framework requires improvement and seeks to introduce a fiduciary standard in order to address issues they have identified in the client-registrant relationship, “including to better align the interests of registrants with the interests of their clients, to improve outcomes for clients, and to clarify the nature of the client-registrant relationship for clients.”

According to the financial press there is some apprehension among non-fiduciary advisors that their reputation may be tarnished if they are perceived as acting in their own interest.  The requirements may cause an unintended focus on fees, particularly as the media has demonized the practice of charging commissions and deferred sales charges (DSC). Although it isn’t the intention of the regulations, some advisors may find themselves forced into a fee-based compensation structure and a relatively limited product selection. Advisors are divided on the implications for investment management fee structures, as those who are already fee-based see the new rules as formalizing an inevitable market shift and some commission-based advisors are concerned that commoditizing their services puts them at risk of being undercut by cheaper automated advice services. The impact of technology, irrespective of what happens on the regulatory front, will continue to make it cheaper and easier for investors to get investment advice that’s not conflicted.  That is a trend that will have a big impact on the investment industry over time. 

The reforms under consideration also include amending rules to require firms and advisers to respond to identified material conflicts of interest in a manner that prioritizes the client’s interest, increases the requirement for an adviser to understand a client’s financial circumstances and risk profiles which may be extended to better quantify loss aversion, and limiting titles that can be used by advisers. Advisors are also concerned about the burden of internal scrutiny and compliance due to the increasing volume and scope of regulations which is leading to a feeling of being monitored rather than supported by their firms. At the end of the day, the burden of having to document all aspects of the advisory consultations could add an unintended toll on an advisors’ ability to work effectively on behalf of their clients. Both the proposed targeted reforms and proposed regulatory best interest standard, if introduced, would apply to all advisers, dealers and representatives, including those who are members of IIROC and the MFDA.

With so much at stake the CSA has sought further comments on the proposed regulatory action. They have confirmed that no final decision on the implementation of a best interest standard will be made without a thorough review of the comments received following their recent public consultation and discussion. The most recent comment period closed on August 26. Even within the CSA there have been concerns about the proposed legislation as the BCSC noted, “given the current regulatory and business environment, imposing an over-arching best interest standard may not be workable and may exacerbate one of the investor protection issues identified, that being misplaced trust and over reliance by clients on registrants. Further, the introduction of a regulatory best interest standard over and above the proposed targeted reforms is vague and unclear and will create uncertainty for registrants.”  This leaves open the possibility that some provinces, most notably Ontario and New Brunswick, may proceed with best interest standard legislation on their own.

Fees can be such a drag: Wealth president on needed reporting reform

Mutual funds, despite being the investment vehicle of choice for millions of Canadians, are regularly underperforming – and fees are the culprit, says a wealth management president.

Chris Ambridge of Provisus Wealth Management says that many low-fee options aren’t always what they seem, as reporting doesn’t take the drag from fees into account, and that greater clarity is needed for investors. “A lot of people look the simple costs that they have to report, like MER, but there are many costs that go beyond that and it’s difficult in the instances of mutual funds to see exactly what they are without a lot of research,” he says.  “The information is there, but you have to dig for it as an individual.”

In Provisus’ monthly insight report, he points to the new SPIVA Canada Scorecard approach developed by the S&P Dow Jones Indices, which reports on the performance of actively managed Canadian mutual funds, rather than that of their benchmarks. The takeaway, the report argues, is that “fees are often the difference between owning a yacht and dreaming about one.”

“The cost of owning investment vehicles, including many ‘low fee versions, needs to be understood in terms of investment returns because the underlying fees are also a drag on investment performance,” it states.

Ambridge adds that additional disclosure is important, especially as new CRM2 rules are to be implemented this week.

“Most clients are at a loss to say, ‘Well, how did I do over five years?’ or ‘How did I do compared to a benchmark?’- and that’s where clients are going to be seeing things in the six to nine months that will hopefully open their eyes and allow them to make a decision that it’s time, perhaps, to explore other options,” he says.

However, it’s up to advisors and portfolio managers to take a transparent approach, and educate investors on their options and the true impact fees are having on their returns.

“I would like to think so but Canadians are still reliant on their advisors, and that’s a good thing at this stage,” he says. “But it’s a matter of education, being aware of alternatives out there, the term we like to use is, you have to overcome inertia. Clients have to be convinced there’s a reason for change and then they go out and change it.”


by Penelope Graham 

13 Jul 2016


Link to article:

Wikipedia: Pay-for-Performance (Investment)

Pay-for-performance (Investment)
From Wikipedia, the free encyclopedia
A pay-for-performance fee structure, in relation to the investment industry, describes a fee that is paid to a financial advisor or investment manager when their performance returns exceed those of their designated benchmark. The performance fee is generally calculated as a percentage of the investment outperformance gained. The rationale for a pay-for-performance fee is that it provides a low-cost base solution for investors and aligns their interests with investment managers who only get compensated for outstanding performance.[1]

Typically, investors pay a base fee for investment management services and performance fees are paid dependent upon the investments’ performance over a given period in relation to the industry benchmark used.[2] With increasing attention on the cost of fees for investment services, the onset of alternative investment firms including performance-based investment management firms are increasingly on the rise. One Canadian pay-for-performance firm is structured to only receive a profit when their clients’ investments outperform the industry benchmark.[3]

A 2013 study[4] found that funds with performance fees offer better risk-adjusted returns. The introduction of a performance fee increases the funds’ ex post four-factor alpha by on average 83 basis points per quarter. The results hold also when using Sharpe ratio and the raw quarterly return as dependent variables. The use of performance fees does not increase funds’ volatility levels relative to funds without such fees. Furthermore, funds with performance fees, on average, offer lower management fees than funds without these fee structures.

An additional study by The Journal of Finance explains that one of the advantages to incentive, or performance-based, fees is that they align manager interest with investor interests. On this point, both groups do better when the investment does better. It is argued that management effort is generally higher for funds with performance fees. Since investors realize that funds with performance fees draw the best managers and elicit the most effort, investors may be willing to place more money in these funds.[5]

  1.  “What is a performance fee?”.
  2. “What is an incentive fee?”.
  3. “Transcend: pay-for-performance™”.
  4. “Anatomy of performance fees in Finnish mutual funds” (PDF).



How To Maximize Your Inheritance

By now, we’ve all heard that the biggest intergenerational wealth transfer in history is underway. A whopping $750B will be inherited by Canadian baby-boomers aged 50-75.

Inheriting a bunch of money at once can be a bit of a double-edged sword; you’re receiving a sum of money while also processing the loss of someone close. Ultimately, the best way for you to honour your inheritance and make it last is to use and save it – very wisely.

Here’s our top tips for making the best use of your newfound inheritance:

1)      Take a step back

The key to turning this lump sum into something really fruitful for your financial future: smart choices.  If you had a special relationship with the deceased, you’re likely struggling with the conflicting feelings of sorrow for your loss and also some excitement for the windfall of new money.  It’s understandable if you’re too emotional to be strategic.  Just stick the money in a money market fund for the next 90-120 days and don’t worry about it.  You’ll be able to make smart, sound decisions soon enough.

2)      Eliminate high-interest debt

The best thing about your inheritance is being able to buy yourself peace of mind. Those bills, credit card balances, personal line of credit and mortgage.  Now you can make one of the best contributions to your financial future and be rid of debt (pending inheritance amount and debt balance).  Prepaying your mortgage with just $10,000 on a $100,000 mortgage amortized for 25 years at 10%? You’ll save up to $52,223 in interest- not too bad!

3)      Grow your fortune

Investing your inheritance, or a portion of it, in the right vehicles can seriously amp up your retirement fund to help you move smoothly through life’s milestones.

If you’re behind in saving for retirement, the option of investing your inheritance needs to be seriously considered.  It’s hard to make up for lost time when your retirement savings have been insufficient, but a bump up from your inheritance can really help.

If your income is high and stable, you can invest some of your inheritance as well as pay down debts.  The trick is to invest the right way.

4)      Max out your RRSP

Find out how much RRSP contribution room you and your spouse have and start using it. Contribute a big chunk now, and then work with an accountant to determine when you should actually take the deduction to get the highest refund on your income tax.  This will help save you from blowing your inheritance and ensure you’re set up for a peaceful and enjoyable retirement down the road.

5)      Max out RESP contributions

Contribute to your kids’ education is a great option for your inheritance.  It will:

a)      Set them up for success
b)      Provide you with a guaranteed 20% return

Twenty per cent is the amount the government provides on your contributions.  Odds are you haven’t maxed out the $2,500 per child per year.  Now, you can open up a family RESP and figure out what amount to contribute that will work best with your inheritance and your family’s future.

6)      Set up an emergency fund

Buy yourself some peace of mind by setting aside the equivalent of about six month’s income for your new emergency fund.  Put it away in a TFSA for things in life that you can’t plan for, like job loss or a health issue.  You’ll feel more confident and peaceful knowing you’re financially protected for whatever life brings your way.

7)      Donate

Using your inheritance to help others can make great sense if your retirement savings and debt are both in decent shape.  Giving to charity also comes with some tax breaks, so you’ll get back some of those gifts in tax savings.

8)      Treat Yourself

Remember all those things you wanted to, but couldn’t do before?  You can do some of them   now!  We’re not going to tell you not to have any fun with your inheritance.  If your debt is   under control, your retirement savings are decent, and you’ve got sufficient and stable income, then there’s nothing wrong with spending some of that inheritance.   For example, those home renovations you’ve been wanting to do to your home isn’t a bad idea as it’s going to increase the value of your place.

Just be careful what you do with your new money.  Money tends to be absorbed into a spending plan as easily as water in a desert, so be sure to set some limits and save!

Mutually Assured Under Performance

There is an old story about a visitor to New York who is admiring the yachts belonging to the bankers and stock brokers and innocently asks ‘Where are the customers’ yachts?’ Apparently there were none since the clients could not afford them because of the high banking and stock brokerage fees they were paying, along with the often mediocre returns they were earning. While humorous, for a lot of investors it is not far from the truth. The cost of owning investment vehicles, including many “low fee” versions, needs to be understood in terms of investment returns because the underlying fees are also a drag on investment performance.

Even relatively low cost investment vehicles such as Exchange Traded Funds (ETFs) often under perform their underlying benchmark. The big question is by how much? This can easily be found on the website where mutual funds and ETFs are required to file Management Reports of Fund Performance (MRFP) twice a year. A performance lag is often tied to the level of fees; trading and rebalancing costs; and any potential cash balancing drag.

A relatively new entrant to the low cost investment market are robo-advisors which add their own costs beyond the cost of the underlying funds and ETFs. Employing several common assumptions such as an average portfolio size of $50,000 and trading costs of 0.2% per year, it can be determined that the average robo-advisor fee in Canada is 0.63%.

While ETFs and robo-advisors are gaining in popularity, mutual funds are still the granddaddy of investment products for retail investors. There have been countless studies concerning the weak investment returns of equity mutual funds in Canada relative to their benchmarks, however a new approach has been developed by S&P Dow Jones Indices. The SPIVA Canada Scorecard quantifies the mutual fund industry’s peccadilloes. In its own words, it “reports on the performance of actively managed Canadian mutual funds versus that of their benchmarks. The SPIVA Scorecards are the de facto scorekeepers…” The latest result based upon 5 years of data ending December 2015 confirms that equity mutual funds have under performed their benchmark, often because of fees.

The chart above shows the percentage cost (and resultant drag on performance) associated with investing in these investment vehicles. The table to the left shows the dollar cost clients pay, based on a $50,000 portfolio. The average cost of owning equity ETFs in total is 0.74% or $367 per year. Robo-advisors on average add 0.63% in fees so the total is 1.37% or $682 per year. For equity mutual funds the total average annual cost is 2.37% or $1,185.

For most investors the objective is to earn value added performance. Unfortunately there are fees. Fees and other costs sap returns. The reality is that the total cost of investing in many investment products leads to investment under performance when measured against the benchmark. The bottom line is that fees are often the difference between owning a yacht and dreaming about one.




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.