Category: Client Perspective

The Times Are Changing

As the old ways melt away it is time to establish your place and thrive in the new world. Pretty much everything affecting the process of providing financial advice is changing: regulations, products, technologies and business models. Advisors should not ask themselves “how will I operate going forward?”, but “how can I position myself to excel in the future?” There is no way to have absolute clarity about how things will evolve, but there are several big picture items that advisors can begin to prepare to deal with.

Just Learn to Love Technology

Obviously technology is changing our world, but the tech revolution should not paralyze advisors. With new fintech firms popping up daily or the latest “shattering” announcement that yet more robo advisors are being unleashed on the country, the proper response is likely to let out another yawn. The hype seldom lives up to the promise.

Seldom does a new technology or app rock the world on day one, but over time and with gradual improvements and adoption, the future starts creeping into the now. So take a deep breath and accept that this part of your job going forward will be changing. This means the sooner advisors adapt, the sooner they will be able to differentiate themselves from their competition. If an advisor does not have the necessary skills to leap the divide, outsource to someone who does. With the fast pace of change in the industry, what were once core competencies may soon be reduced to run of-the-mill functions. Get in front of the curve, while the getting is still possible.

Invent a New Value Proposition

Truth be told there are a lot of advisors who can do what you do. In the past, it was all about selling products, now it is about portfolios and financial plans. Technology creep will continually intrude upon the service advisors offer, so much so that it will be the unique elements of human interaction that will allow advisors to shine.

Rudimentary onboarding processes are in need of a major upgrade. The softer side of the client interaction will have to dominate going forward by creating customized solutions for each client that extends well belong asset mix and fund selection. Client behavior is greatly influenced by the daily bombardment of news, opinions and whimsy, allowing fear and doubt to adversely affect their portfolios results. Given that most clients have limited understanding of the investment world, advisors are presented with a great opportunity to teach clients how to behave as good, long-term investors for years to come.

Refine the Client Experience

Many advisors are their own business and it is their technical strengths that allow them to prosper. When they add great customer service, clients feel pampered. But will this be enough going forward? Increased disclosure is upending the status quo, particularly with fees where compression and cannibalization are gouging profits.

So maybe it is time to evolve and incorporate alternative fee structures that respond to client preferences and rationalize the way advisors and wealth managers get paid for their services, such as “success” based fees i.e. fees directly tied to client results . Whether it be performance, tax savings or simply a shoulder to cry on (after all a lot of psychiatrists get paid quite a lot for doing little more), aligning fees to a specific service or outcome will set you apart. Clients want options and to feel connected. Advisors need to tailor their services to create a human connection that the “robots” and giant players cannot reproduce.

Not every client wants the same thing so having a suite of solutions that are different or tailored to deliver the most robust results is paramount. In many ways it will come down to evolve or perish. So take time from your busy day; turn off the computer and stare into the future. Change is coming for you!

The financial planning industry is coming under increasing scrutiny these days. On the regulatory front, the Ontario government has announced plans to develop legislation that would regulate financial planners in Ontario. Under the proposed framework financial planners would be required to meet specified proficiency requirements. Additionally, the government indicated that it will take steps to reduce consumer confusion created by the wide variety of titles used in the financial services industry by restricting the use of titles related to financial planning.

While a start, there are calls from some consumer groups to more clearly separate product sales from advice. What people really need to get from a planner is an answer to the question, am I on track? Planners should focus on getting to know their clients and helping them to simplify, declutter and remove their financial anxiety. Investment managers are qualified to keep clients up to date on portfolio returns but returns are only part of the picture. How many people, irrespective of income or net worth, genuinely know if they are on track to achieving their goals? This is where financial planning specialists can really help. Advising on products and investments is not financial planning. Investment advice should follow a properly developed financial plan. Financial planners should help clients to understand that financial products and investments are tools that only need to be used if required. Proper financial planners should only use products to help implement certain strategies. With that approach consumers will finally come to understand what proper financial planning really is and how they can benefit.

The investment industry’s main focus has traditionally been to gather assets and build assets under management (AUM). Historically financial advisers have been money managers. This model has been in place for decades although there has been a shift from transactional fees to fee based accounts. When advisers meet and swap notes, one of the first questions asked is, “how much do you have in AUM?”. There certainly is a client need for some basic services at low, and perhaps subsidized, prices but at the higher end, professionals should adhere to certain standards such as providing disclosures concerning their relationship with clients. If the consumer wants to be transactional in their relationship this should also be clear to them. The legal profession receives fees for service and they have nothing to sell other than advice. Could the financial planning industry survive without product? Until the value is seen as being for advice and strategy, advisers will continue to sell products.

Regardless of the business model, financial professionals of all types need to be clear on who their optimal client is, what their client experience will be, how they are structured to support this experience and how they manage to do it profitability. They need to answer the key strategic questions around why they exist in financial services, regardless of which regulatory structure they operate under. As the financial industry continues to evolve, more advisers are likely to view themselves as financial planning professionals and not product distribution outlets.

What clients should look for in a Financial Planner :

  • They have studied financial planning to a high level,
  • They are keeping current with the latest trends in the industry,
  • They will tell you what you need to hear, not what you want to hear,
  • They will not receive financial remuneration for any products they recommend and, most important of all,
  • They will act in your best interests at all times.


Enshrining the term ‘financial planner’ is a step in the right direction. In most jurisdictions these days anyone can call themselves a financial planner, whether they are licenced or not. In conjunction with the proposed Ontario legislation the media and public will need to be educated to understand that there are qualified and ethical financial planners, many of whom are CFPs, in the financial industry. There are many compelling reasons to seek financial planning advice, not only as a oneoff, but ongoing, however few people do. If the planning industry doesn’t change, then the interest of ordinary people utilizing the industry’s services won’t change either. People will handle life’s financial challenges the way they have always done it for the most part, without financial planners. There are many very good financial planners and there is great advice provided to clients but it needs to be complimented by a product sale or by building up assets to enable the adviser to be remunerated. Going forward, consumers need to be better educated about the need to stay on track with a plan and be willing to pay for it. There needs to be a clear separation of advice from product if the financial planning industry is to become a true profession. While it may be a long way off it seems likely that this overdue separation is coming.

The fiduciary standard is getting a lot of attention in the United States once again as the Department of Labour’s rule requiring advisors to act in the best interests of their clients was denied by an appeals court. The most interesting aspect of the debate on these standards is not whether a fiduciary standard will ever be applied, but the increase in public awareness for this issue. As more retail investors become aware of the different standards, it is important for you to be prepared to answer the inevitable question: Are you a fiduciary?

Many investors assume financial advisers have a duty to act in their best interests yet that is not necessarily true. The requirement in Ontario, for example, is to act “fairly, honestly and in good faith” which is known as the duty-of-care model.

The fiduciary standard is much stricter than the “suitability standard” that applies to brokers, insurance agents, and other financial professionals. The suitability standard only requires that as long as an investment objective meets a client’s needs and objectives, it is appropriate to recommend to clients. A Fiduciary duty is a commitment put the clients’ best interest first.

Canadian regulators have been reluctant to move to an industry-wide fiduciary standard partly because some of the new standards being proposed in other countries have been in place in Canada for some time. The existing duties and obligations imposed on investment professionals, together with the rules developed through the CRM project, provide investors with significant safeguards in their financial dealings with registered investment professionals. As it stands, the only Canadian financial professionals who are under fiduciary obligations to act in the best interests of clients are those registered as portfolio managers with discretionary authority over their clients’ accounts.

This lack of uniformity can create a fundamental misunderstanding between the expectations of investors regarding the duty that is owed to them by their financial advisors. If nothing else, the fiduciary duty debate has increased public awareness. Now, more than ever, prospects are questioning not only the qualifications of advisors, but also how they are compensated as well as their philosophy on how they run their practice. A prospect wants to know if you are truly serving their needs or are you pushing products.

Fiduciaries are different from other financial advisors structurally, philosophically and legally. Due to the extensive requirements it takes to become a Portfolio Manager (including qualifications and experience) it is unrealistic for most advisors to get registered as such. So the reality is that most advisors cannot say they are bound by fiduciary standards. Yet there is a way to address this which would give your clients peace of mind. Advisors who outsource portfolio management and compliance responsibilities to a discretionary Portfolio Manager like Provisus can assure their clients that they are being cared for by money managers with a fiduciary responsibility to act in their best intrest.


Canadian securities regulations place different standards of care upon financial advisors depending on how they act on behalf of their clients. Currently there is no single standard that applies to all advisors. Advisors fall under these two registration categories on the Canadian Securities Administrator’s national registry search:

  • Dealing Representative – This category includes virtually all InvestmentéFinancial Advisors. Regulations only require them to ensure that investments they recommend are suitable for their clients.
  • Advising Representative – Held to a fiduciary standard.


Established in 1979, the Beutel Goodman Private Client Group extends the concept of value-oriented investing to individuals, estates, trusts, private holding companies and foundations. Through active portfolio management, and by drawing upon the collective strengths and resources of the overall firm, it is uniquely positioned to achieve personal investment objectives. It has customized the value principles of the firm to meet the needs of its private clients, recognizing that each client has individual financial needs, investment parameters and service expectations. Today, the Beutel Goodman Private Client Group manages assets of $1.0 billion and benefits from being affiliated with one of Canada’s largest and most successful pension fund managers with over $35 billion in assets under management.

In terms of International equities, Beutel has noted that global equity markets rallied strongly in 2017 and reached multi-year highs across many countries. Surprisingly synchronized global economic growth was the key reason behind the strong market movements. While no major economies are expected to grow at a particularly fast speed, all of them continue to show positive signs of improving growth momentum. In the U.S., the much anticipated tax reform seems within reach and may further strengthen business and investment confidence.

Throughout 2017, valuations have moved up as markets climbed to new records. Beutel’s valuation discipline and investment process prompted them to trim or exit positions as they achieved strong returns and reached their upside potential. In the meantime, they are finding great opportunities and have added a good number of high quality businesses into the portfolio. 2017 certainly saw market enthusiasm in some new technology areas such as artificial intelligence, self-driving/electric vehicles and cryptocurrencies, to name a few. The frenzy in those areas also led to a market rotation out of some strong, wellestablished (but “boring”) businesses and offered opportunities to invest into those highly cashgenerative operations at unusually low valuations.


It is easy to understand why Segregated Funds are a favourite investment vehicle for many financial planners. They have a great market-ing gimmick, a rosy benefits story making them an easy sell, the payout to advisors is great, and currently they do not fall under transpar-ency rules like mutual funds with the Customer Relation-ship Model (CRM). Strate-gic Insight data shows that Seg Fund assets increased from $110.7 billion to $116.8 billion between June 2016 and June 2017. If we look at these products ob-jectively they do have some theoretically appealing fea-tures for certain clients, but many clients would be bet-ter served in other invest-ment vehicles. Now that the Canadian Council of Insur-ance Regulators (CCIR) is recommending greater transparency will Seg fund growth continue to be as robust as it has in the past?

This new disclosure frame-work seeks to ensure con-sumers are informed of not only the performance of their segregated funds, but also all of the details of what they cost. As well that disclosure provides a better understanding of this prod-uct. Are you ready for this discussion? Segregated funds are con-sidered to be like mutual funds with an insurance policy wrapper that give investors the following ben-efits:

  • Downside risk protec-tion. Guarantee of capi-tal after ten years and resetting privileges to lock in growth
  • Protection of assets from creditors
  • Guarantee of capital at death
  • Probate protection

All these benefits are priced into Seg funds and with a greater focus on costs through the pro-posed disclosure rules clients are going to want answers. The Manage-ment Expense Ratios (MERs) of Seg Funds tend to be higher than mutual funds to cover the cost of the insurance fea-tures. The fund filter on shows that the management ex-pense ratio for the 20 most widely available Canadian Equity Seg Funds range from 2.57 per cent to 3.25 per cent. MERs for the 20 largest Canadian equity mutual funds run from 2.05 per cent to 2.39 per cent. In order to deter-mine if the benefits are worth the extra cost let’s examine these features.The Canadian Council of Insurance Regulators recom-mends changes to Seg Fund disclosure rules to bring that information more closely in line with the information clients receive about their mutual fund investments. Specifically, the CCIR outlines a list of information that must be part of the Seg Fund investors’ annual statements, including:

  • all charges for the year, in dollar amounts, with the management expense ratio (MER) broken out to show management fees, distribution costs and insurance costs explicitly;
  • all remuneration paid during the year for the provision of services in connection with the contract; changes in the net asset value of the contract in dollar amount;
  • redemption value; and
  • total personal rate of return, net of charges, calculated using the money weighted method for the last year, three years, five years, ten years and since issue; among various other items.


Downside Risk Protection

Salespeople tell clients that Seg Funds are safer than mutual funds because they guarantee a certain amount of its principal to its investors, typically ranging between 75 and 100%, as long as they hold it for a determined period, usually ten years. If the fund value rises, some segregated funds also let you “reset” the guaranteed amount to this higher value (which also resets the length of time that you must hold the fund). This is an investment that has all the upside of mutual funds and no downside because your capital is guaranteed so why wouldn’t everyone buy these funds?

While they are appealing to an investor’s peace of mind, the first problem is that you have to lock your money in because if you cash out before the maturity date, the guarantee won’t apply.

The second issue is that since stock markets have historically risen over the long term, the likelihood of actually needing the guarantee to get your original capital back after 10 years is small. In fact, since 1900, the only two short-lived periods when the S&P 500 was negative over 10 years were the periods ending in the late 1930s following the Great Depression and those ending in 2009 at the lows of the subprime mortgage crisis. So 98% of the time, 10 year returns were positive for U.S. stocks. For Canadian stock markets, since 1960, more than 90% of the time the TSX has returned over 6% over 10 years. And in no 10-year period have TSX returns been negative. Consultants William M. Mercer found there’s a 2% likelihood of losing money in the stock market over ten years.

Protection of Assets From Creditors

Creditor protection is a key benefit for business owners in particular but has also served as a selling feature for individuals as well. The first issue with this is that there is a way to achieve creditor protection without paying a higher fee for your investments. Instead of structuring a business as a sole proprietor or a partnership, small business owners can incorporate or may already be incorporated. Seg funds are based on the market value of a portfolio and as it gets larger, the costs of managing a portfolio for a small corporation (which are mostly fixed), may be more cost effective than the additional cost within the Seg fund for this protection. If a business is big enough that it faces the chance of large losses, or if it is risky enough that there is concern with solvency, then incorporation may be more suitable.

Here is where the proposed disclosure requirements come into play. The more knowledgeable the consumer of Seg Funds is on this point, the more likely creditor protection will not be available. Seg Funds may not be able to provide creditor protection where it can be proved that the purchaser was in financial difficulty ahead of the purchase. Fraudulent conveyance, dependant relief claims, property claims in marriage breakdown as well as CRA claims are instances where creditor protection may be impacted so the feature is not as enticing as it is laid out to be.

Guarantee of Capital at Death
This is a benefit that makes a lot of sense for using Seg Funds…if you think you are about to die and you also think the markets are about to crash.

Probate Fees
Seg Funds have an addi-tional cost to the client of roughly 1% per year which they pay each year they are locked into the product. Probate fees charge a one-time fee of about 1-2%. As such, there is limited value in this feature.

What an investor ends up with in segregated funds is a portfolio with higher than normal fees, marginal per-formance and features they may not really need. There’s a cost for peace of mind but has that cost be-come too high for Seg Funds? As exchange-traded funds and Pay-for-Performance pooled funds gain ground, Segregated Funds must hold their own if they want to carve out a place among the solutions offered to increasingly cost-sensitive investors. Mar-ket trends in the coming years indicate money management costs will be a greater focus. If you currently sell Segregated Funds, it is time to pre-pare for the inevitable disclosure requirements. It may also be time to re-evaluate your options and entertain alternative solutions.

The new disclosure initiative has the potential to create a scenario where creditor protection may be lost and a court can rule that you had set up the Seg Fund to avoid your debts. There are circumstances where the creditor protection may not apply:

  • The Seg Fund must be purchased in good faith. The creditor protection feature could be challenged if the investor purchases the fund knowing that they may eventually face financial difficulties. This falls under fraudulent conveyances provincial legislation.
  • Seg Funds may not provide creditor protection from the Canada Revenue Agency if income tax liabilities are outstanding in a non-bankruptcy situation.
  • Claims under Family Law may take precedence over creditor protection in a court of law to provide for a dependent.

Playing it Safe is Risky

The law of unintended consequences is defined as the actions of people (especially governments) that will usually have an unanticipated impact. In fact, the harder we try to achieve something quite often the exact opposite occurs. In the investment world it is very hard to foresee outcomes beforehand, so the final results can sometimes be surprising.

Some of the greatest investing blunders of all time came from the consequences of unforeseen events. Since one of the primary objectives of investing is to grow your wealth, unintended outcomes are very dangerous to investors’ future wellbeing. While the traditional culprits for potential disaster are “get-rich-quick” schemes or penny stocks, a historically safe harbour is slowly entering the lexicon of potential problems for many investors; bonds.

Traditionally, bonds have been seen as safe, low risk investments and the principal means of preserving wealth. They are also viewed as being an excellent way to diversify your portfolio. While this is normally true over the long run, there are distinct periods where bonds have been simply ineffective at building wealth. Considering today’s very low yields and increasing interest rates, investors’ returns on bonds after inflation, fees and taxes, are minimal. So, unless investors are comfortable with only the safe harbour feature of bonds and unconcerned with the less than stellar return opportunities going forward (or you have more money than you need), the only realistic solution is to hold a higher weighting in equities.

For the vast majority of investors, a balanced approach to asset allocation is normal. Historically, as clients age and approach retirement, they become more conservative and seek safety. Traditionally, this has meant more bonds and fewer equities. This is exactly the wrong approach for efficient portfolio growth or to even maintain the purchasing power of assets given inflation. However, this way of thinking is completely opposite to most aging clients’ mindsets of protecting what they have achieved over their lifetime. So a battle is brewing between the markets and peace of mind and unfortunately the markets are always right.

Retirees or near-retirees are scared to death of losing the value of their assets so they have in the past shifted the majority of their assets into GICs and bonds for “safety”. Of course, for the first few years of retirement this works fine. However, with the steady onslaught of inflation, fees and taxes they are slowly dwindling their nest egg. With people living longer and spending more years in retirement the probability of running out of money increases. The decision to become safer has made them less safe and has created a whole new level of risk; running out of money.

There is no such thing as taking no risk. There is only the choice of which risks to take and when to take them. The risk from owning bonds shows up later in your investment life, while the risk of owning equities can show up earlier. Without assuming risk, meagre results are all that is left to investors. In fact, there is a famous quote from Benjamin Franklin that summarizes this nicely: “those who give up return for security deserve neither return nor security.”

While bonds in the near future are not likely to be wealth builders, they are however necessary. The question is: how much? They do dampen volatility during downturns and are an excellent source of liquidity. Also, since investing often comes down to an emotional decision rather than an analytical one, bonds can act as a form of insurance against panicking when things turn ugly in the markets.

With this situation bearing down on all investors, we have created an entirely new fixed income investment structure that benefits from the strengths of bonds (risk reduction) and the benefits of equities (potential for higher returns). The Provisus Multi-Strategy High Yield Fixed Income Fund is designed to target the risk of short term bonds, but generate greater performance. It attempts to provide an attractive cash yield and stable returns, while investing in a broad range of non-equity assets: corporate bonds, convertible bonds, preferred shares, income trusts, REITs, mortgages, secured real estate backed lending, infrastructure products and alternative investment strategies.

It keeps fees client-friendly using the Pay-for-Performance™ model with a fixed annual management fee of 0.25% (which is less than the pro-rata average MER for all the fixed income ETFs in Canada, 0.28%) plus a performance fee only if the fund outperforms a pre-set benchmark (50% FTSE Short Bond Index and 50% FTSE Mid Bond Index). This fee philosophy provides a very strong incentive for the fund to achieve positive results for clients. In this day and age, it may be one of the few solutions available that plays it safe but still generates meaningful returns.

Motivated to Perform

How do you motivate people? Countless studies have indicated the same basic fact: people are not usually motivated by money alone. Of course everyone needs money to sustain their lifestyle and plan for the future, but it is often other factors that compel employees to come in each day and do good work to help their organizations succeed and their clients prosper. Likewise, the sense of satisfaction that advisors receive when they help clients achieve their financials goals trumps the remuneration they receive. Any payment system where rewards are based on the quality of service is a good one.

On the other hand, sometimes a select few receive tremendous rewards regardless of results produced. We see examples of these situations all the time in the business section of the newspaper. In these cases incentives have little chance of producing any lasting positive effects. If clients are left paying and paying without seeing results then the problem is exacerbated. Incentives need to be aligned.

The truth is that many investments provide little added value and once people realize that the Emperor is not wearing any clothes, they will eventually become extinct.

There are myriad of financial products available. Mutual funds are the most convenient form of investing as investors can allocate among different asset classes based upon different qualitative and quantitative parameters, not just performance. To really understand the industry you have to understand how fund companies and their portfolio managers get paid and for what. The concept of “pay-forperformance” among mutual fund managers barely exists; in fact, if there is one thing fund managers are not paid for, as a general rule, it is performance.

A ground breaking new study, “Are Mutual Fund Managers Pa id for Investm e nt Skill?” (February 2017 Ibert, Kaniel, Van Nieuwerburgh and Vestman), used publicly available tax returns of 529 mutual fund managers in Sweden to show the interests of fund companies and their portfolio managers are very much aligned; but the connection between the mutual fund managers and investors is muddled.

In a nutshell, they discovered that there was a very weak relationship between pay and performance, but a very strong relationship between pay and the size of the mutual funds as measured by fee revenue. This makes sense because most mutual funds charge a flat fee on assets under management, so as assets grow the managers remuneration climbs along with it. Compensation was only weakly related to superior manager investment performance.

The study found no evidence that positive performance by a manager in a given year drove an upswing in funds under management in that year or the year after. However, fund managers were rewarded more for running additional funds or for taking over management of different funds with higher fees. The best performing fund managers are paid slightly better than the worst, but successful asset gathering was better rewarded. Consequently, closet indexing is becoming more rampant since performance and salaries are loosely connected. The real problem is while fund managers are protecting their own careers, clients are paying for active management to get indexlike results; minus the fees of course.

It is hard to blame investors who throw up their hands and just buy ETFs. Thankfully there is a true pay-forperformance model offered by Provisus Wealth Management for clients and their advisors on the Transcend platform that is set to revolutionize the investment landscape. Transcend’s novel spin on performance fees is to use them as way to present an attractively low base fee of 0.25% on equity funds to clients (lower than the fees charged by most equity ETFs in Canada). If the fund performs better than the benchmark, a performance fee equal to 20% of the fund’s performance above the benchmark will be charged. Operating on the philosophy that it will earn its fees when client portfolios outperform industry benchmarks, the firm is redefining the nature and delivery of financial services and directly aligning its interests with the clients. Pay-for-Performance™ will be a critical part of the compensation landscape going forward. Not because today’s investors need to be bribed to move their money into these types of vehicles. But, rather it will be because a static, inflexible, unchanging fixed fee strategy with no connection to the results achieved will be at distinct competitive disadvantage in a world as unpredictable and fast changing as ours.

Repel the Robo Horde

The investment industry continues to experience seismic shifts that do not appear to be abating any time soon. Besides the seemingly never-ending onslaught of compliance macerations, we have the evolving battle between active and passive investment management.   Also, advisors are increasingly competing with a new and emerging adversary – robo advisors, the “next” devourer of the advisory business. 

Smart advisors should not ignore this threat but instead move to either join the trend or beat the robos at their own game. First advisors need to understand what they are up against. Robo advisors are really just a low cost vehicle that promises to remove the human emotion from the investment process. As research has shown time and again, individual investors have been their own worst enemies, so automated assistance could appear very attractive. But the robos principal strengths (i.e. attractive interface and simplistic automation) are also their biggest flaw because they are inflexible. 

Clients don’t know what they don’t know. Wealth management is not their focus or expertise so they don’t know what questions to ask and robo advisors are generally not very helpful in this regard. They simply cannot offer the personal touch necessary (or if they can it is seldom from the same person each time; similar to your local bank branch).

Robo advisors are starting to sprawl across the world. They are multiplying with increasing speed as financial firms see the opportunity for easy pickings and the chance to get in on the ground floor of a new disruptive service. However, much like Lemmings seeking new pastures to inhabit, the robos’ journey, well-intentioned as it may be, could lead to a very unhappy ending for clients that join them on their pilgrimage.

While it is generally true that robos are “perceived” to be cheap and have simple processes, that is not the be-all and end-all. Something called “value for the money” plays an integral role in the satisfaction of a client’s experience. For many clients value is generated by the care and concern that come from human advisors. In fact, the value of human touch was supported by a 2016 Gallup survey, “Robo-Advice Still a Novelty for U.S. Investors”, where people were asked to rate which qualities were more applicable to robo advisors or human advisors. Unsurprisingly, human advisors outranked robos in nine out of 10 qualities as shown in the table at the bottom of this page. 

Robo advisors essentially try and use the same approach that investment professionals use to aid them in their investment decisions. The main difference lies in the manner in which a client’s money invested; robos merely utilize the algorithms to invest client’s assets. They lack the ability to assist customers with their tax, retirement, and estate planning needs. As well, the robo model has worked fairly well as long as the stock markets keep going up. But declining markets could adversely affect clients of the index-pegged robos. And like the Lemmings, robos could just lead their clients into even deeper water as they struggle to overcome bear market volatility. 

Traditionally, the size of an investment portfolio was directly proportional to the quality of the advice provided. The robos continue this tradition.  However, this reality has opened the door for new and superior services like the Transcend Pay-for-Performance™ platform that assist advisors with low cost, alpha generating strategies. In the long run, traditional advisors will likely co-exist with robo advisors; but too much machine and too little human touch will not ultimately win the day.

Human advisors vs. Robo advisors table

Strengthening Client Relationships With Technology

Many advisors are finding that robo advisors and internet technology are disrupting the investment industry but technology can also be used to strengthen client relationships and help make better decisions. It is important that traditional advisors know that robo advisors have their weaknesses and the appropriate use of existing technology can help with finding and retaining clients.

It is true that some robos offer a compelling client interface and lower costs thanks to efficient distribution channels and lower production costs compared to traditional advisors but they don’t have a competitive edge when it comes to portfolio construction so they often lag the performance of the market. Furthermore robos can’t solve behavioral issues that clients face when setting up their accounts and how investors tend to react in a falling market.

The investment underperformance of robo advisors relative to the market is dominated by two significant factors; costs that the market does not incur and client behavior. While costs are coming down, there are still transaction costs, management fees, distribution fees and other costs. On the behavioral side, clients may overly focus on minimizing risk as a primary objective when setting up their risk profile if they are not able to discuss the long term performance risk that entails with a qualified advisor. More importantly, while the robos’ rebalancing and cost average techniques are helping investors to apply some self-discipline, it remains to be seen if they would be able to hold investors back from overruling these techniques in times of turmoil when investors often have a tendency to sell and wait for an improving outlook.

Given that clients will often still want a human to help, another problem that technology brings to the table for both advisors and clients is dealing with an overwhelming deluge of information. This is where both advisors and clients would be helped by an effective online presence. A properly designed client oriented website should focus on key moments when potential clients have the greatest need for information and insight such as when they are making a significant Asset Allocation change decision. These key moments are incurred at various new life cycle stages such as starting a family, changing careers or retiring. Therefore an effective website should involve potential clients in answering these types of questions and provide information about how you and your investment process will solve the problems they are looking to solve.

The first step in initiating an effective online presence is to find a technology partner that understands your business and can help navigate the wide variety of options in order to make the right choices. An effective web presence then needs a well thought out plan which focuses on what clients need and then constructing the technology to meet those needs. It is important that it be designed for all clients and avoids the tendency to focus on the tech oriented millennials. Clients often prefer online access for news and insights into financial market and in this respect a website works best when it gives investors not more but better information which is valuable to them.

Keep in mind that it is not necessary to take on the whole project at once. An effective technology provider will understand that and help you build your tech presence at a pace that you can work with while managing your business.

At the end of the day, robo advisors are simply taking advantage of new technology to reduce costs by bypassing intermediaries and taking client facing advisors out of the equation but they still face client behavioral issues and utilize conventional portfolio construction so they end up providing essentially the same services as older, established players. They are simply an evolution but there is still a need for client facing advisors so advisors also need to embrace new technology as the investment industry evolves.

Are Investment Fees for Suckers?


No! Not if (and this is a big if) clients receive value for their money. Value in this instance is defined as “the cost of something” and the key word is “cost” because the fee paid to own investments is not the end of the story. It is actually the starting point. t is actually the starting point. It is interesting to see the history of investment costs in Canada and how they may evolve.

For centuries, if an ordinary person had any liquid wealth the best they could hope for was some meager interest on their cash. Then, as the concept of companies came into being, the notion of profiting from equity investment emerged and stock exchanges were established in seventeenth century Europe to trade equities. Canada eventually got into the act with the incorporation of the Toronto Stock Exchange in 1861.


Commission Based

Once upon a time, being a stockbroker was a comfortable, genteel and very lucrative profession. By providing investors with access to markets, brokers earned commissions and also received trading fee rebates from exchanges. Brokerage commissions were fixed and it often cost 2% or more per trade. This lasted until May 1975 when negotiated commission was introduced. The development of investment funds increased competition and led to a decrease in direct share ownership. Currently only 17% of the Canadian financial wallet is invested directly in stocks, down from 30% in 1990 when it was second in importance only to short term deposits. As is often the case, nothing lasts forever. There were two significant changes to the commissions landscape that put downward pressure on trading costs. First, increased competition drove down then then standard commissions per share from the 14-16 cents per share in the late 1970s to just under 2 cents per share for institutions today. The second impact was the creation of discount brokers who gave regular investors access to very reasonable commission schedules.


Fee Based

Traditional asset managers charged investors significant fees, ranging from 1.0% to 1.5% of assets under management for high net worth clients, a practice that is still common today. For less well-heeled investors, the first modern mutual fund was created in Canada in 1932. They were slow to catch on and grew very little between 1930 and 1970. However this was reversed in the 1970s following the oil crisis. Equity and bond fund ownership continued to expand in the early 1980s but growth did not explode until the early 1990s, with average annual growth of 20-30%. Today, these investment funds now represent more than 30% of all Canadian investable assets, up from 6% in 1990.

The cost of owning mutual funds is made up of three parts: acquisition costs such as front-
end load commissions; ongoing costs both embedded and negotiated; and disposition costs such as redemption fees. The cost of ownership, rather than the Management Expense Ratio (or MER, which often contains trailer fees representing the commission paid to brokers and mutual fund dealers for advising clients to purchase the funds) is the most effective way to measure total investment expenses. The typical maximum front end load for a Canadian open end fund is 5%, although by 2011 98% of mutual funds did not have upfront charges or disposition costs. The typical investor in a Canadian fixed income fund pays an MER of 1.25% to 1.5% and for Canadian equity funds they pay MERs of 2.0% to 2.5%. MERs generally decline as the amount of fund assets increase. Specialty funds have higher expense ratios than equity funds, which, in turn, have higher expense ratios than bond funds. International funds have higher expense ratios than comparable domestic funds.

Recent developments have provided retail investors with the opportunity to lower investment costs due to the proliferation of no load funds, online/discount brokerage firms, fee based accounts and Exchange Traded Funds (ETFs) which have dramatically altered the investment landscape.


Success Based

Now a new fee concept is coming to the market and it is one that is long overdue. It shifts power to investors by aligning fees to investment results relative to benchmarks. Clients pay a low 0.25% fee for the Provisus Corporate “O” Class Equity Funds which covers basic costs. Investors do not pay any more unless the performance of the Provisus funds exceeds specific benchmarks, in which case they pay 20% of the outperformance relative to the benchmark. The investment manager earns income only after they deliver superior returns. This is how Provisus’ Pay-forPerformance™ works and it is revolutionizing the investment landscape.

There is more scrutiny on fees than ever before. Studies have shown many investors either believe they do not pay anything or have no idea what they do pay (Hearts & Wallets: Wants & Pricing — What Investors Buy & Competitive Ratings — 2016). But everyone understands nothing in life is free. Clients should know what they pay and their three most important objectives should be: fees that are clear and understandable; fees that are unbiased and put the client’s interests first; and fees that are reasonable for the service provided.

Most people are not experts in matters related to investing. They need professional advice and luckily there are many options available. One of these options is to use a robo advisors also known as a digital advice solution, and they are proving to be increasingly popular and disruptive to traditional wealth advisors. Robo advisors are automated investment services that offer low cost solutions through web based and mobile applications. They are designed on the concept of providing the lowest cost approach by relying on cheap passive allocations. Normally there is nothing wrong with making purchases as affordable as possible and we are conditioned to search for the best deal. For things like gas, groceries or low cost passive funds, cheaper is better. But active investing is not about being low cost; it‘s about getting the best value.

What is considered good value is subjective and depends upon each individual’s needs. What may be a good deal for one person might not have the same value for another. Robo advisors might be appropriate for someone who has simplistic investing needs or is new to investing but for most investors it is important to understand what you’re getting.


The service isn’t personal

Robo advice is not tailored to you as an individual. They are low cost because they use a one-size-fits-all approach and there is very little personalized service provided. This is a problem because what computers cannot account for is human intuition. Robo technology uses computer algorithms and software to automatically allocate your wealth across different asset classes. They are cookie cutter solutions based on simple questions to get a basic understanding of your financial situation. With a person as your advisor you have more opportunities to share your concerns, goals and plans. People are not identical so it doesn’t make sense to provide wealth advice based on automated solutions. For example, as a family grows financial complexities usually follow suit. Some clients need to determine whether children from previous marriages should be treated the same as children from the current marriage, and whether arrangements should be made to provide financial gifts to grandchildren. A real relationship with open conversation is vital for developing a tailored portfolio.

The options are limited Unlike a human, robos lacks the ability to consider how all of a person’s assets, tax liabilities and other factors correlate with each other. Estate, retirement and tax planning are just some topics for which people need expert guidance yet robo advisors are not designed to provide advice on these important issues.


Investors need coaching

Many people are not honest with themselves when it comes to self appraisal. When answering an investor profile questionnaire, many will say they can handle risk if it gives them more potential for higher returns. Yet in reality some investors get preoccupied and can’t sleep when their $500,000 account drops $100 in a day. Many need guidance and reassurance in order to have peace of mind. Financial advisors need to set expectations and help their clients plan ahead, but they also need to be able to help them adjust to unforeseen life events. Job changes, marriage, children, divorce, moving, family members with special needs, illnesses, accidents and the need for long-term care are some life circumstances that can cause dramatic changes in a person’s financial needs; not to mention their psyche. Professional advice is about more than investments. Humans can also have deep conversations with clients about their goals and are able to help with the emotional side of financial planning.


Build relationships

A computerized advisor will not ask clients about their kids or treat them to lunch or chat about their favorite hobby. Conversations may not add to performance numbers directly, but they build relationships and relationships build trust. Clients who trust their advisors have peace of mind, even when markets are volatile. Investors are not rational as numerous studies show that they get out of the markets when they shouldn’t get out and get into the markets when they shouldn’t get in. An advisor who has built trust can help clients stick to their tailored plan rather than make decisions based on emotion.

It is important to consider these factors when deciding between using a low cost robo advisor and a real financial planner. Robo advisors may be appropriate for those with small accounts who have uncomplicated portfolios and can get by on basic advice, but for many investors a cookie cutter approach does not work. A true financial planner is going to get to know you, your family and will focus on your goals and objectives. The right advisor will assist you with, not only your investments, but also with your taxes, retirement, and just about any financial consideration you may have.

When it comes to protecting your future and that of your family, do not base your decision solely on cost. Instead, select what has the best value for your needs. While it is important to consider your costs, it is more important to determine what you are getting for those low fees. What would be the benefit of saving 1% on fees if you are losing 15 to 20% in poor tax planning? We must be careful not to be penny wise and pound foolish.

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-InRetirement-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 clientregistrant 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 clientregistrant relationship for clients.”

According to the financial press there is some apprehension among nonfiduciary 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 feebased 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 overarching best interest standard may not be workable and may exacerbate one of the investor protection issues identified, that being misplaced trust and overreliance 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.




Forget Robo-Advisors Think Bionic

Time waits for no one (or service). Change is inevitable for both people as well as business. The wealth management industry is striving for greater efficiency, while an explosion of regulatory adaptation is forcing change, and the wealth transfer from baby boomers to younger generations is about to become a tsunami across the land. The backbone for this transformation is technology, but digitalization will never entirely replace personal relationships.

While clients are evolving; migration to the extreme of complete communication through virtual channels is not really in the cards. A recent survey by Temenos (2016) of high net worth clients from around the world found that: 34% of clients want either digital only or a mix of digital and offline communication; 62% of clients say that the digitization of wealth management services is good overall, but they still want to meet often with an advisor; and 48% of client’s rate cyber risk and hacking as a top concern related to the use of technology, particularly for those older than fifty. Similarly, a new survey by a European firm, GfK (June 15, 2016) shows that just 10% of those surveyed said they would be willing to trust a computer algorithm more than a human to give them financial advice. So the central driver of recruiting or retaining clients will never completely revolve around technology.

At the same time the wealth management industry is starting to embrace technology with the goal of scaling up their own distinct offerings. While robo-advisors might be all the rage, their success is anything but assured. They have shone a light on current deficiencies and highlight the opportunities ahead. A recent report from Business Insider Intelligence (2016), illustrates that 49% of consumers are considering investing some of their assets using a robo-advisor, but less than 1% of the assets that could migrate to technology based platforms by 2020 are from people who currently don’t have any investments. So it is an advisor’s existing clients that are up for grabs, as they are just waiting for a clearly superior solution to motivate them to switch.

Robo-advisors burst onto the scene several years ago in the U.S., based on the premise that automated low fee investing would overtake and jettison traditional financial advisors. Canada joined the parade in 2014 with multiple emissaries joining the mix. After initial success, 2015 saw established financial service firms launch competing offering and more participants are on the way. As this technology arms race expanded, something not completely unexpected occurred, client recruiting has become more challenging, more expensive and slower. In the U.S. growth rates have fallen to just a third of their levels from a year ago. According to one U.K. study and Morningstar estimates, client acquisition costs range from $300 to $1,000 per person. Assuming an average account size of $40,000 with an average Canadian fee of 0.63%, robo-advisors produce revenue of just $252/year. This disconnect can only spell trouble.

So to grow and gain traction, robo-advisors are evolving: they jumped into traditional advertising channels (TV and bus stop signs); they sought out smaller accounts and younger investors; and now they are attempting to coax traditional investment advisors to offer the service to their clients. It is this last point that emphasises that the disruptors themselves are about to be assimilated. They may have just have been the catalyst for the financial advisor community to reinvest itself and infuse itself with new technology; ironically they could turn advisors into bionic men and women.

Established financial service firms are rapidly incorporating many of the enhancements launched by robo-advisors and using their existing brand power to leap frog their newer
competitors. While robo-advisors created a cost efficient solution, the potential cost of mass client acquisition is becoming a major challenge. And unfortunately for them, having too few clients to pay    the bills cannot be overcome by pretty graphics and gimmicks. If the cash is gone, the lights go out.

The long term winners will still be the ones with an innovative solution that attracts and keeps clients. Solving this challenge is more than just putting technology on a website and waiting for clients to roll in. Having an existing presence is vital. Many studies have shown that technology centric human advisors are outpacing their fellow advisors. While technology is never going to replace advisors it can benefit them or make them bionic, combining human advisors with technological enhancements (hopefully only figuratively). After all, the robo-advisors do have one thing right in that technology is the only way forward for wealth managers in a competitive financial landscape; it is just not the be-all and end-all.

Selecting Money Managers

Managing wealth has evolved beyond investment management. Advisors must provide greater value to their clients to justify their fees or else risk losing business to lower-cost competitors. For clients, the question becomes how do you choose money managers?

Four key principles for selecting money managers:

Portfolio: Does the manager have a philosophy that is entrenched in the portfolio over time? Is the level of risk appropriate? What is the asset allocation or investment objective?

Performance: Are the manager’s performance results consistent with the stated investment process? Does he or she consistently outperform the benchmark?

People: Does the manager have reliable experience and ability? Does he or she assess and operate on information wisely?

Process: Does the manager have a clearly stated investment process? Is it applied consistently?

Trust is the bedrock for who you select as your money manager. Clients can determine who they can trust by examining the four key principles for selecting money managers.

How Advisors Deliver Value

While improving, there is substantial evidence that Canadians on average tend to have low financial literacy. Many are struggling with creating sufficient wealth for a secure retirement. These struggles lead many to fear their financial outlook and suffer tremendous stress and anxiety in their lives. Financial advisers play an important role with helping individuals make better decisions to improve their financial situation. While the public is fixated on the cost of advice it is up to advisors to justify their fees by demonstrating their value and how they influence investors.

Let’s address a common argument against paying for advice. We have all read headlines such as, “Why pay fees when low cost passive investments outperform?” More than six years into a bull market, it is tempting to discount the value added by an adviser’s ability to help an investor optimize their behavior. Based solely on investment performance against a theoretically unattainable benchmark (how can you get that benchmark investment without incurring costs?) it would appear that having an advisor is unnecessary. However, let’s examine this argument further.

A study by Dalbar demonstrates that there is a wide gap between investment returns – the return of a benchmark index – and the much smaller returns that mutual fund investors actually captured. In 2014, the S&P 500 delivered returns of 13.69% but the average equity mutual fund investor brought home returns of just 5.5%. A study by Morningstar looked at a 10-year period and determined that the average mutual fund investor underperformed the average mutual fund investment by around 2.5% annually. This implies that investors sacrifice a substantial portion of their returns by incorrectly timing when to enter and exit investments.

The potential for self-directed investors to make mistakes due to lack of financial knowledge or behavioral biases is where advisors can really influence their clients. Behavioral bias is the main reason for poor investment decision making and underperformance. Dalbar defined nine of the irrational investment behavior biases as shown below:

Loss Aversion or panic selling -The fear of loss leads to a withdrawal of capital at the worst possible time.
Narrow Framing -Making decisions about a security or an area of the portfolio without considering the effects on the whole. This bias tempts clients to chase performance and take risks that are misaligned with theirobjectives. It is important to be the sort of adviserwho helps them focus on the big picture.
Lack of Diversification -Believing a portfolio is diversified when in fact it is a highly correlated pool of assets. Individuals tend to consider new investment opportunities in isolation, without considering the overall risk of their portfolio.
Anchoring -The process of focusing on previous experiences and not adapting to a changing market.
Mental Accounting -Separating performance of investments mentally to justify success and failure instead of looking at the big picture.
Herding-Following what everyone else is doing triggering a “buy high/sell low” strategy.
Media Response -The media has a bias to attract readership and also to sell products from advertisers. Advisors can protect clients from the fear-based media that is focused on the short-term and day to day movements.
Regret -Not performing a necessary action due to the regret of a previous failure.
Optimism -Overconfidence can lead to harmful decisions and cause excessive trading. Continued success during a bull market may tempt an individual to take too much risk. It only takes one overly risky decision to wipe out all the gains.

Clearly advisors can play a crucial role with helping clients optimize their investment performance. Investors can be their own worst enemies while advisors can be their best friend. While this in itself would be enough to justify fees, the reality is that the value of financial advice extends far beyond a focus on investment returns.

Individuals often mistake financial planning with investment management. Financial planning is much broader. It involves setting goals, taking action, implementing strategies, monitoring conditions and reacting accordingly. It’s comprehensive planning for lifestyle, budgeting, tax management, insurance planning, retirement planning, education funding, estate and legacy planning and more. It also involves crisis prevention and management.

As good as the investments of a do-it-yourself investor may perform, gains from investment management can be undone in a hurry with poor financial planning. An advisor using an Investment Policy Statement as a roadmap outlining their client’s investment philosophy, goals, guidelines and constraints instills structure and discipline for their clients. A good advisor can and will influence and even change their clients’ behavior. They act as financial counselors, coaches and mentors to help educate, motivate, and enable clients to live the lives of their dreams. That is why, irrespective of any active v. passive investing debate, good advisors are an absolute necessity. More than anything, a financial advisor provides peace of mind making the overall lives of individuals much more enjoyable.