In the 1990s, Peter worked for a “big insurance” company, designing financial plans for clients before financial planning was a buzz word. But, at the height of his career making good money, he decided to pack it in to start his own business.
His mission was to build long-term financial plans to meet client goals – something he didn’t feel he could fulfill under the umbrella of a big financial services firm. In 1996, he started his own company which has since grown through referrals and some smart business moves.
Peter wanted to spend more time with his clients creating custom financial plans. If he could save time on the portfolio management and administrative side of the business, Peter and his business partner knew that further growth would be achievable.
In 2014, they made the commitment to move all clients over with the Transcend service. He would routinely receive calls from other Portfolio Management companies, but felt their service was lacking. There’s a sense in the industry that “you need to diversify your client’s assets and you shouldn’t have all your eggs in one basket,” says Peter. “But with Transcend, you don’t need to worry about that, because they diversify for you. The service is unmatched.”
Most striking to Peter when he came across the Transcend service was the commitment to clients. He says, “We were able to do that much better by partnering with Transcend because of the cap on fees. The more fees our clients don’t pay, the more money they make. Our company shared the same value on low fees.”
Since partnering with Transcend, efficiency has increased tremendously. Last year, business was up by 15 per cent and further growth is expected this year. Peter and his company get more referrals because “they do such a great job.” According to Peter, two key benefits for his clients include:
- Consistent rate of return which outperforms the rate of market benchmark
- Reduction of fees – more money in their pocket
More time to do the work Peter loves is also a plus. Because of the increased efficiency, Peter spends the bulk of his time creating financial plans for clients. “It’s simple. Our clients are able to get a higher level of service and make more money. Because of this, referrals have increased and our business continues to grow.”
All investors want to have their cake and eat it too but you can’t have it both ways. It’s similar to clients who seek high returns with no risk. However, like unicorns, they do not really exist. It’s not an either/or, zero-sum situation, but more like a balancing scale.
A well diversified and structured portfolio more often than not will take care of the return side, especially when the markets are doing well, but it is the other side of the scale, risk, which demands more attention. Of course, everybody loves a bull market but what about when markets go down? Investors feel the sting of loss more deeply than the thrill of a gain.
Volatility is unavoidable. Market declines happen and they tend to happen more often than expected. In fact, the market pulls back 5% on average four times a year. As a result investors need to stay disciplined and stay invested because markets rise more frequently than they fall. This is why downside protection (not losing capital) is vital. Market timing is not the answer since it is generally impossible to do consistently.
Investors who stay invested for the long run are likely to be more successful than those who move in and out of the market. Of course, by limiting losses and allowing assets to grow over the long term, investors can enjoy the power of compounding. This is very important due to the asymmetrical nature of gains and losses. As the data to the left shows, if an investments declines, it would require a larger percentage gain in the ensuing period just to break even. The larger the loss, the more amplified the impact. The chart to the right shows the journey to recovery takes much longer in normal market conditions with bigger losses to recoup. Therefore, the more effectively an investor can limit losses during down markets, the better shape they will be in the recovery.
Investor behaviour is important when considering downside protection because investors have the bad habit of trying to time the markets and often buy and sell at the wrong time. A 2014 Dalbar report of investor returns showed that over the 20 year period ending in 2013, the typical equity fund investor gained only 1.5% annually, while the S&P/TSX Canadian stock index gained 8.3%, bonds returned 6.5% and even cash earned 3.3%. These returns emphasize the dramatic disparity between what average investors earned and what the markets earned. This market timing behaviour can decimate a portfolio, leaving little chance of recovery.
Many investors place great emphasis on predictability and peace of mind. So emphasising portfolio construction strategies to minimize unpleasant outcomes is imperative and not some fantastical beast. It is never perfectly clear when a market downturn will occur but there is certainty that it will happen. The onus should always be on mitigating the losses by structuring portfolios to balance the long term risk and reward. Downside protection matters, a lot.
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.
Chris Ambridge, president and Chief Investment Officer, Provisus Wealth Management. (Portrait by Erik Putz)
The mutual fund industry is on the brink of big change. Already losing business to low-fee exchange-traded funds and robo-advisers, it faces new fee disclosure rules in 2017. There’s even talk of a ban on trailer fees, an established way of compensating commissioned investment advisers. The days of fund managers charging you 2% or more of your account’s value per year, plus front- or back-end loads when you buy and sell, are probably numbered.
What’s not clear is what will replace that standard fee model. For investors content to match the returns of stock and bond indexes, there are ETF providers. But what about the majority, who still want active management? A few fund companies have reduced their fees or eliminated certain sales charges without meaningfully changing the format.
But Chris Ambridge and his partners at Provisus Wealth Management have. Earlier this year, the Toronto-based portfolio manager for high-net-worth clients made a series of funds available directly to mid-market investors. Known as Transcend, the web-based service uses a pay-for-performance model in which management fees are tied to how much the fund beats its benchmark index, providing active management at a modest cost.
Here’s how it works: Transcend charges a base management fee of 0.25% of your investment per year—in the same ballpark as ETFs and about a tenth of the typical equity mutual fund’s management expense ratio—which Ambridge says covers his company’s basic operating costs. Then performance is tracked every quarter. If your fund beats its pre-set benchmark—say, the S&P/TSX or S&P 500 total return index—then Transcend collects 20% of the amount above that benchmark. If the index gains 10%, for example, and you earn a 12% return on your investment, you pay Transcend 20% of the difference, or 40 basis points. If you don’t beat the benchmark, you pay no additional fees.
“Everything I do—everything we’ve done here—is to be different,” says Ambridge, a veteran portfolio manager and chartered financial analyst who formed Provisus with colleague Wayne Murphy in 2007, when the firm they were working for seemed poised to fold. “With traditional commission or fee-based approaches, we think clients are paying probably a little too much for what they’re getting in terms of results and support.” Indeed, it’s rare to see more than half of actively managed mutual funds beat their benchmarks in any given year. According to the 2016 mid-year SPIVA Canada Scorecard, only 26.4% of actively managed Canadian equity funds outperformed their benchmark over the previous 12 months.
Ambridge argues that it’s the steep charges that prevent clients from beating their benchmarks in the first place. Even ETFs and robo-advisers never quite match market returns after their fees—averaging 0.32% for the former and 0.63% for the latter—are subtracted, he points out. Another common criticism is that maximizing returns simply isn’t a priority for many mutual fund managers, who make money from the size, not the performance, of clients’ portfolios. When investors become privy to all the charges they’re paying, and for what, many are expected to switch to advisers with better transparency.
Transcend is able to charge such low fees, Ambridge says, because a large portion of its services are automated and web-based—from setting financial goals to selecting and monitoring portfolios—yet still rely on the decisions of active fund managers. While he says the impending regulatory changes provided the impetus to get Transcend live, the idea goes back to Provisus’s origins. When Ambridge and Murphy surveyed clients at their former firm to gauge what was and wasn’t working for them, the most common demands were for a fairer payment model and better fund management. Provisus addressed those concerns by creating a hub of money managers (along with advisers and custodians), all with different styles and areas of expertise. “We recognize that one money manager cannot be all things to all clients,” says Ambridge. The other unique element was the offer of low base fees for portfolio management that increase only if investments outperform their benchmark.
Clients have responded favourably to Provisus’s offering: Revenues have grown 223% over the past five years, landing the firm a spot on the Profit 500 list of Canada’s fastest growing companies for three consecutive years. It now manages $425 million worth of assets, including $60 million in the upstart Transcend funds.
The success of Provisus gave Ambridge confidence that a similar service would likewise be a hit with a wider clientele—middle-class investors who were interested in actively managed pooled funds. Transcend goes by the same overall investment philosophy as Provisus: what Ambridge calls “active indexation,” which eschews taking bets on sectors or increasing its cash position. “We want to match the risk characteristics of the underlying benchmark, not take undue risks, and add value through security selection.”
Long before Transcend came into being, Ambridge showed a knack for anticipating trends. As an investment counsellor in the 1990s, he was an early user of Big Data to help insurance companies compare their performance to their rivals. During the dot-com boom, he developed an online investment newsletter, Midridge.com, of a kind that is now ubiquitous.
Ambridge doesn’t expect the rest of the industry to start aping Transcend’s fee format. “There’s a lot of history to the way the business operates,” he says. “Tradition is very important in the investment and fund management world.” But with the rise of financial technology, the landscape is changing, and this is a platform he thinks can compete. “There’s a lot of people who are very knowledgeable and skilled,” Ambridge says. “In order to stand out, you’ve got to either shout a little louder or shine a little brighter. And we prefer to shine a little brighter.”
February 2nd, 2017
Written by: Catherine McIntyre
During this “Do It Yourself” era we’ve grown accustomed to working on professional-level tasks on our own, whether renovating our homes or fixing our electronics – what can’t you learn from a YouTube tutorial nowadays?
The truth is, not everything can be learned with a 5 minute video, and just because you’ve dipped your toe into something, does not mean you can master it overnight on your own. With more and more talk of robo and DIY investing, we sought out to track- and debunk- the most common myths about financial planning:
1. Only wealthy people need financial plans:
“Financial planning is for anyone who wants to organize their finances, set money goals, and make a plan to reach those goals” – Ann Arceo. The truth is, wealthy individuals come with their own set of issues and goals. Planning is for everyone, and benefits all ages and levels of income. There is a misconception that financial planners are in the same category as other professional service providers, such as attorneys, but excellent financial planning does not have to be unaffordable. Make sure to shop around, be honest about your budget, and look for an option that can promise performance for your fees.
2. I can do my own financial planning:
A huge misconception is that finances are simple and therefore no professional help is needed. You may not have many different assets to manage, but guaranteed your finances are more complex than you can even imagine. Without the years of study a CFP® goes through, it’s virtually impossible for the average person to foresee all the financial planning opportunities needed throughout life. For example, you know you need life insurance for your family, but what about budgeting for disability or extended auto insurance to cover for lost income in case of an accident?
A relationship with a financial advisor is like seeing a doctor over time for check-ups. The relationship you build helps you spot potential problems before it’s too late.
3. Financial planners are just for investment help
The right financial plan and planner will encompass all areas of your financial life, from budgeting and goal-setting to RRSPs and tax preparation. When you have a good financial planner, you should receive guidance on how one financial aspect of your life affects the others. For example, certain investment decisions can have effects on your tax deductions. Great investing will play a key role in building your wealth and portfolio, but if your financial planner doesn’t provide comprehensive advice you should look for a new one.
4. If I hire a financial planner, I won’t have to do anything
A good financial planner is like your professor, but they can’t force you to do the homework. The hardest part of developing a plan is recognizing that you need one and taking that first step to get there. After consulting with your planner, reaching your financial goals depends on the steps you take outside of the meeting. A good financial planner will want to collaborate with you and requires your input- remember, it’s your life goals in the works.
5. Financial planners are just interested in making money
The key to having trust in your advisor is to pay attention to credentials. There are many individuals practicing with no true certification (learn how to spot them), so make sure you are familiar with the letters after their name- CFP is the main one you need to know. It means the advisor is a Certified Financial Planner. If you opt for a fiduciary, you can rest assured these individuals practice under a legal fiduciary duty to always have clients’ best interest in mind.
6. I don’t need to pay anything for my investments
The number of Canadians that are unaware of the fees they pay is staggering. In a recent survey, 36 per cent of Canadians surveyed claimed (wrongly) that they paid no fees at all for their investments. These kind of stats explain why regulators have phased in policies such as CRM2, designed to bring more transparency and disclosure to the industry. Yes, fees are unavoidable, but you shouldn’t be losing too much money because of your fees. Compare your options– and then make an informed decision.