Month: May 2017

The Business Decision Tree – Where Do You Belong?

The investment industry has become a maze of choices that advisors must navigate in order to discover how to best build and manage a business. The various combinations of technologies, investment services, operations and regulations are fairly well defined in Canada. However, sometimes new third party solutions present themselves and offer a chance to change your business model. In these instances it becomes more difficult to determine which business model is best for you.  Should you stick with the current system or explore the other alternatives? Or should you simply join another firm that offers a change of venue and a slightly higher level of satisfaction and rewards?

 

The affiliation questions are fairly straightforward. You should be able to easily determine where you will find the best combination of resources, economics and business philosophy and, therefore where you belong. The decision comes down to four questions in a very specific sequence and a fifth question that runs in tandem and holds more weight than all the others. The questions are:

 

  1. Are you more suited to being an employee or a business owner?
  2. Do you wish to outsource investment management?
  3. Do you see a strategic role for commission based business in your practice?
  4. How will you achieve scale to economically support your business?

 

These questions are a decision tree that should lead to a business model that allows you to achieve both your professional and personal goals. Each model represents a unique combination of risks and rewards and essentially trades varying degrees of control and independence for support and resources. At some point, you also have to ask this last and very important question:

 

  1. Where will you feel a sense of cultural belonging?

 

At any point in the process, this question can trump all others. If you feel that you belong in your current organization and that the people you respect are in that organization; if you currently have the freedom to manage your clients robustly; and if you can realize your aspirations within the framework of your current organization, then it may be worthwhile to continue in your current environment. The opposite is also true. If you no longer feel that you culturally belong; if the people you respect are now elsewhere; if you do not have the freedom to manage your clients prudently; and if you cannot fulfill your career goals where you are, then you should consider changing your affiliation.

 

There are three general contractual models in the industry based on the level of independence and the responsibilities assumed by advisors and their firms – IIROC, MFDA and independent financial planners. The choice of model depends upon the relationship between you and your dealer, the ownership of the client relationship, your strategic decision making power, your product options, and the responsibility for operational infrastructure and ultimately the control of the business.

 

The Ownership Question

The single most prominent reason to be independent is to own and control your practice and to be fully responsible for its success or failure. This takes a level of risk tolerance and self reliance that not all advisors possess. Advisors who are not passionate about building a practice of their own should never try to be independent. Without passion, independence is just a long list of chores.

 

If you are stuck comparing the value of your deferred revenue plan to the equity valuation to an independent practice, you should probably not be independent. If you cannot bear the thought of your branch manager telling you that you need to add “this fund” and “that fund” to your client accounts then you probably are well on your way to independence.

 

Third Party Investment Management

Whether or not you decide to affiliate with a particular third party is often based on your past experience. Advisors who have had a bad experience will have a hard time believing that another party can actually have any constructive input into their investment management process. You have to consider the issues around the decision-making process before selecting a third party affiliation. Some advisors will never trust a third party and do not want anyone else influencing their decisions. Those who feel this way may forfeit the scale, flexibility and robust solutions required to successfully build their practice.

 

Commissions

Simply put, if you have a strategically important reason for requiring commissions in your business it makes sense to affiliate with a dealer. The key word is strategic. If the use of commissions is temporary or accidental then the decision to move to a fee based model is fairly easy. Becoming independent in almost all instances requires converting to a wholly fee based revenue stream.

 

The Economic Models

The economic models are surprisingly straightforward but they are also a common source of confusion and misunderstanding. The first task is to compare the differences in expenses between contractual models. Some of the expenses are very scalable and therefore their magnitude as a percent of the revenue of the practice will vary widely between the dealer and the independent model.

 

Essentially, in order to move from a dealer to an independent model, you will need to be able to pay for your own branding, office staff and physical infrastructure and technology. The total budget will vary depending on the size of the practice and its unique needs. Some advisors are able to function with a lower budget in a shared office where they peripheral staff and services are included in the lease. The hidden cost of independence is time. This cost is perhaps more significant than any other expense, so budgeting and seeking appropriate help is of paramount importance.

 

So Where Do You Belong?

It should be a relatively straightforward process for you to find the best combination of resources to achieve your professional and personal goals; however, the five decision tree questions can combine to produce many different outcomes. The factor that often gets overlooked but is one of the most important influencers is the cultural decision. The strongest social drive we have as human beings is the desire to belong. That sense of belonging can trump all the rational reasons but it can also be a powerful booster for the rational choices. What is often misunderstood is that the sense of belonging is present in all the models from independence to full time employment. It is not about the people you greet in the office in the morning but rather about the people with whom you feel you share the same values, ideals and goals. That defines where you belong much better than payouts and printouts.

Finding Income

It is very difficult for clients to earn a steady income these days while short-term interest rates hover near 60 year lows. Couple this with the fact that the average client has an aversion to investing in long term bonds because of the belief that higher interest rates are on the horizon, it becomes nearly impossible to earn much more than money market rates. So what are the options for those looking for good yields now while being able to take advantage of higher rates in the future?

With over $300 billion in assets, Guaranteed Investment Certificates (GICs) account for a huge share of fixed income sales in Canada. This is due to the advantages that many clients feel GICs offer over bonds: a predictable and guaranteed income stream, the principal value won’t decline and no fees. For these benefits clients are subject to returns that can be low or capped. Additionally, GICs must be held for a set period so you are locking in your money for these low returns. If ashed early, there can be early withdrawal penalties. Some institutions do offer redeemable or cashable GICs at lower rates but the difference compared to a locked product can be significant.

Bonds have very different characteristics but offer distinct advantages if managed correctly. Interest rate changes affect bond prices so that as rates fall the price of bonds increase and as rates rise prices fall. However, if held to maturity, then bonds repay the full principal. Another essential difference is liquidity. Bonds can be bought or sold at any time at a price determined by each bond’s individual characteristics
and current market conditions. While bond returns are impacted by the cost of
purchasing and managing the portfolio, this can be offset by the higher returns
bonds can achieve. It is this possibility of higher yields and capital gains that favours
bonds as an alternative.

A bond ladder is a straightforward strategy for conservative investors. Capital is allocated into equal portions and invested across various maturities up to a set period. Prices should not be at a significant premium over par and as each bond matures, the proceeds are reinvested in a longer maturity. The idea is to free up funds each year to capitalize on any increases in interest rates, while protecting from reinvesting a large portion of the portfolio amid falling rates.This strategy also smooths out reinvestment risk since capital is being reinvested incrementally throughout a full interest rate cycle.

Given the current low interest rate environment this may be a good time to consider this strategy. Current 5 year GIC rates (based upon the average rates of the Schedule A chartered banks) are 1.13%, the lowest in 37 years! Building a laddered bond portfolio with high grade corporate bonds and some provincial issues will significantly increase yields even with fees. As the chart illustrates, while the advantages today are not as obvious as they were during the economic turmoil of 2008, they are still substantial. At that time, the yield spread (the difference between Mid Term Corporate
bond yields and 5 year GICs yields) spiked to historic levels. Currently, clients are able to increase their portfolio yield by up to 1.50% over prevailing GIC rates. This may be just the average value added for this corporate bond strategy, but 133% more income makes a lot of sense.

It does not matter which way interest rates move going forward because a laddering strategy is able o generate consistent returns. Laddering bonds allows clients to balance the risk and return in their bond portfolio as shorter term bonds carry a high degree of stability and longer term bonds enhance overall yield. A further advantage is that clients can always use a maturing bond to fund a different investment type or sell bonds to cover unanticipated expenses.

MARKET DATA

 

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.

Finding Income

Finding Income

May 2017

chartmay17It is very difficult for clients to earn a steady income these days while short-term interest rates hover near 60-year lows. Couple this with the fact that the average client has an aversion to investing in long-term bonds because of the belief that higher interest rates are on the horizon, it becomes nearly impossible to earn much more than money market rates. So what are the options for those looking for good yields now while being able to take advantage of higher rates in the future?

With over $300 billion in assets, Guaranteed Investment Certificates (GICs) account for a huge share of fixed income sales in Canada. This is due to the advantages that many clients feel GICs offer over bonds: a predictable and guaranteed income stream, the principal value won’t decline and no fees. For these benefits clients are subject to returns that can be low or capped. Additionally, GICs must be held for a set period so you are locking in your money for these low returns. If ashed early, there can be early withdrawal penalties. Some institutions do offer redeemable or cashable GICs at lower rates but the difference compared to a locked product can be significant.

Bonds have very different characteristics but offer distinct advantages if managed correctly. Interest rate changes affect bond prices so that as rates fall the price of bonds increase and as rates rise prices fall. However, if held to maturity, then bonds repay the full principal. Another essential difference is liquidity. Bonds can be bought or sold at any time at a price determined by each bond’s individual characteristics and current market conditions. While bond returns are impacted by the cost of purchasing and managing the portfolio, this can be offset by the higher returns bonds can achieve. It is this possibility of higher yields and capital gains that favours bonds as an alternative.

A bond ladder is a straightforward strategy for conservative investors. Capital is allocated into equal portions and invested across various maturities up to a set period. Prices should not be at a significant premium over par and as each bond matures, the proceeds are reinvested in a longer maturity. The idea is to free up funds each year to capitalize on any increases in interest rates, while protecting from reinvesting a large portion of the portfolio amid falling rates.This strategy also smooths out reinvestment risk since capital is being reinvested incrementally throughout a full interest rate cycle.

graph17Given the current low-interest rate environment this may be a good time to consider this strategy. Current 5-year GIC rates (based upon the average rates of the Schedule A chartered banks) are 1.13%, the lowest in 37 years! Building a laddered bond portfolio with high-grade corporate bonds and some provincial issues will significantly increase yields even with fees. As the chart illustrates, while the advantages today are not as obvious as they were during the economic turmoil of 2008, they are still substantial. At that time, the yield spread (the difference between Mid-Term Corporate bond yields and 5-year GICs yields) spiked to historic levels. Currently, clients are able to increase their portfolio yield by up to 1.50% over prevailing GIC rates. This may be just the average value added for this corporate bond strategy, but 133% more income makes a lot of sense.

It does not matter which way interest rates move going forward because a laddering strategy is able o generate consistent returns. Laddering bonds allows clients to balance the risk and return in their bond portfolio as shorter term bonds carry a high degree of stability and longer term bonds enhance overall yield. A further advantage is that clients can always use a maturing bond to fund a different investment type or sell bonds to cover unanticipated expenses.

MARKET DATA

 

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.

Is Real Estate Worth The Investment?

house key

Real estate or stocks – which can make you richer?

Asking this is like asking whether a Bentley or Benz is a better option for you. There isn’t one correct answer, because it comes down to your personality, preference and style. But with Toronto’s electric housing market, this decision may be a cornerstone for many in upcoming years. The financial benefit depends entirely on a number of factors. What you can do is consider all angles:

REAL ESTATE

STOCKS

PROS

  • Great place to live and raise a family
  • Has appreciated in price over the last 5 years
  • Real estate is often a more comfortable invest for populations who grew up exposed to it from parents
  • Investing in real estate means investing in something tangible
  • Diversification in real estate requires a substantial amount of up-front money
  • Your ownership of partial businesses through stocks allows you to benefit from company results without putting in much work
  • High-quality stocks increase their profits and cash dividends year after year (this means that every year that passes, you’ll receive bigger checks in the mail as the company’s earnings grows)
  • It’s much easier to diversify when you invest in stocks than when you invest in real estate. With some mutual funds, you can invest as little as $100 per month
  • Stocks are much more liquid than real estate investments. During regular market hours, you can sell your entire position, many times, in a matter of seconds.
  • Borrowing against stocks is a much easier process than real estate. If you are approved for margin borrowing, it’s as simple as writing a check against your account

CONS

  • Property taxes, furnishings, maintenance, improvements, insurance and mortgage interest all affect how much money is being made
  • Compared to stocks, investing in real estate takes many more management hours and hands-on work
  • Real estate liquidity can be very difficult- you may have to list it for months before finding a buyer
  • Recency and familial bias make buying a house feel like the most ‘comfortable’ option for young investors
  • It’s unlikely that the housing market will maintain its momentum, meaning stocks could add to their advantage in the upcoming years
  • In order to avoid being defrauded, one must ensure they trust their management and auditors
  • Despite their long-term benefit, most investors are too emotional to benefit (i.e. folding or selling everything during a crash, instead of staying calm)
  • Your stock prices may experience extreme fluctuations in the short-term

 

Sources:

http://bit.ly/2lGAHni

https://tgam.ca/1Ocw00v