Category: Press

Will new disclosure rules lead advisers to finally abandon segregated funds?

It is easy to understand why segregated funds – investment products similar to a mutual fund with an insurance component that offers certain guarantees – are a favourite investment vehicle for many financial planners. They have a great marketing gimmick, a rosy benefits story that makes them an easy sell, the payout to advisers is great, and currently, they do not fall under transparency rules like mutual funds with the Customer Relationship Model (CRM).

Strategic Insight data show 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 objectively, they do have some theoretically appealing features for certain clients, but many clients would be better served in other investment vehicles. Now that the Canadian Council of Insurance Regulators (CCIR) is recommending greater transparency of industry, will seg fund growth continue to be as robust as it has been in the past?

The CCIR recommends 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 included on 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;
  • Total personal rate of return, net of charges, calculated using the money weighted method for the last year, three years, five years, 10 years and since issue;
  • Various other items.

This new disclosure framework seeks to ensure consumers 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 the product. Financial planners who sell seg funds need to be ready to have this discussion with their clients.

Segregated funds are considered to be like mutual funds with an insurance policy wrapper that give investors the following benefits:

  • Downside risk protection, that is, guarantee of capital after 10 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 proposed disclosure rules, clients are going to want answers. The MERs of seg funds tend to be higher than mutual funds to cover the cost of the insurance features. The fund filter on shows that the management expense 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 determine if the benefits are worth the extra cost, let’s examine these features.

Downside risk protection

Salespeople tell clients that seg funds are safer than mutual funds because they guarantee a certain amount of principal to their investors, typically ranging between 75 and 100 per cent, as long as they hold it for a determined period, usually 10 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 a vehicle that has all the upside of a mutual fund and no downside because your capital is guaranteed, so why wouldn’t everyone buy it?

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 per cent of the time, 10-year returns were positive for U.S. stocks.

For Canadian stock markets, since 1960, more than 90 per cent of the time the S&P/TSX composite has returned more than 6 per cent over 10 years. And in no 10-year period have TSX returns been negative.

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. 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. If a business is big enough that it faces the chance of large losses, or if it is risky enough that there is concern about solvency, then incorporation may be more suitable.

Also, 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 creditor protection feature could be challenged if the investor purchases the fund knowing that they may eventually face financial difficulties. In other words, the seg fund must be purchased in good faith. 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 dependant.

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 affected, 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 if you think you are about to die and you also think the markets are about to crash.

Probate fees

Seg funds fees are generally an additional charge to clients of roughly 1 per cent per year above a comparative mutual fund. This 1-per-cent additional charge is paid each year they are locked into the product. Probate fees, on the other hand, are a one-time charge of about 1 to 2 per cent. As such, there is limited value in using seg funds as a way to avoid probate fees, since clearly paying a fee once is better than recurring annual charges.


What an investor ends up with in segregated funds is a portfolio with higher-than-normal fees, marginal performance and features they may not really need. The peace of mind of seg funds comes with a cost, but has that cost become too high? 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. Market trends in the coming years indicate money management costs will be a greater focus. If you currently sell segregated funds, it is time to prepare for the inevitable disclosure requirements. It may also be time to re-evaluate your options and entertain alternative solutions.

Chris Ambridge is the president of Transcend, a pay-for-performance service delivering sophisticated investment management for a low cost.

Robo-advisor irony is “quite laughable”

Robo-advisors may appeal to the younger generation but most people still want the comfort of a human expert to lead them through the nuances of investing.

That’s the view of Chris Ambridge, president and chief investment officer at Provisus Wealth Management, who agrees it is an “awesome concept” but said firms in Canada face a struggle to make it profitable.

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The sheer size of the market south of the border gives the US a 10-fold advantage, said Ambridge, who claimed the Canadian market is yet to top $2 billion in assets, meaning the pressure is on to grow even faster or increase fees, something that is “counter to the robo psyche”.

He said: “You are seeing a migration in Canada to robo 2.0 where the robos that are in existence are trying to partner or develop referral arrangements with other channels so that the advisor community can refer to the robos, which if you think about it, the irony is quite laughable.

“When the robos came out they wanted to slaughter us and [people] said how terrible advisors are, and now they want to partner with them, realising that you can’t have a business without profits and you can’t have profits unless you get clients, and the only ones who have clients are advisors.”

A recent survey by Young and Thrifty, a website dedicated to personal finance for millennials, revealed that, of the about 400 people asked, 77% preferred robo-advisors to traditional banking, whereas only 3% prefer the latter.

It’s a sign of the allure technology has with younger people but Ambridge, speaking before the results of the survey were known, believes millennial accounts will not help a robo company turn a profit.

“We originally thought [robo] would be very meaningful [to our company] because they were promising the moon, the stars and the sky, but at the end of the day what they are getting is the younger population for the most part; very small accounts.

“As a result, as everyone knows, small accounts are difficult to turn a profit on and a start-up business that’s unprofitable to start with, getting unprofitable accounts can only lead one way, and that’s out of business.”

Ambridge said his firm’s pay-for-performance model represents the lowest fees in the country, including its ETFs, where its rates are below the traditional equity market. He believes robos will eventually be absorbed into other providers and says the majority of investors still prefer human guidance.

“Like most people who are not in the investment industry, they’ve chosen their life and what they want to do – they really don’t want to know everything there is to know about investments and how to make RRSP contributions. They want someone to help them.

“Investment and finance is not something that is easy to pick up or you want to spend a lot of time with, so people need that guidance and the robos simply have not provided it in great leaps and bounds.”

Seg funds targeted

Although insurance advisors may have a more difficult time selling segregated funds as regulators move to harmonize the disclosure regime of seg funds with that of mutual funds, investors will benefit from the shift toward greater transparency.

In December, the Canadian Council of Insurance Regulators (CCIR) published a position paper highlighting the regulators’ new expectations surrounding seg fund-related disclosure and sales practices. The regulatory body’s paper calls for several changes, including new annual disclosure requirements related to seg fund costs and performance, a standard of care for insurance advisors equivalent to the one facing mutual fund advisors, and requiring advisors to follow needs-based sales practices for seg funds.

The proposed framework stems from stakeholder feedback received following a May 2016 CCIR paper that outlined gaps between the regulatory requirements facing mutual funds and those facing seg funds.

“Seg funds have been a laggard in transparency and compliance,” says Chris Ambridge, president of Transcend Private Client Corp., a subsidiary of portfolio management firm Provisus Wealth Management Ltd. (Both firms are based in Toronto.)

The move toward greater transparency is “a good initiative and an improvement over what currently exists,” says Harold Geller, associate with MBC Law Professional Corp. in Ottawa. “Compliance in seg funds is largely non-existent.”

“The insurance industry is in full agreement with greater disclosure if it permits consumers to make informed decisions,” says Lyne Duhaime, president of the Quebec chapter of the Canadian Life and Health Insurance Association Inc.

Mutual funds and seg funds are similar in their investment objectives. But seg funds are sold as insurance contracts and include: a minimum guarantee, usually 75%-100% of invested capital at maturity of the contract, which is at least 10 years from the date of purchase; a guaranteed death benefit that’s not subject to probate; and creditor protection in cases such as bankruptcy and lawsuits.

However, these additional benefits come at a cost. Seg funds’ management expense ratios (MERs) typically are 50 to 150 basis points higher than those of an equivalent mutual fund, according to the CCIR report.

Ambridge contends that the additional benefits of seg funds “are illusionary and, to a large degree, more of a marketing gimmick.” He says the guarantees are not needed in a vast majority of cases because a decline in the value of the underlying investments over a 10-year period is rare.

However, says Raymond Yates, senior partner and financial advisor with Save Right Financial Inc., a managing general agency in Brampton, Ont.: “Most investors see the guarantees and added cost of seg funds as an investment in peace of mind.”

Despite seg funds’ similarities to mutual funds, the former are held to a lower standard of disclosure, the CCIR paper notes. That’s because of the second phase of the client relationship model (CRM2) – a comprehensive set of disclosure rules for compensation and investment returns that applies to mutual funds, but not to seg funds.

The CCIR’s paper recognizes that the differences between mutual funds and seg funds and their distribution models means CRM2 disclosure can’t be applied across the board to seg funds.

The CCIR’s paper recommends that seg funds must provide full cost disclosure annually, including: a breakdown in dollar amounts of the MER to state management fees; distribution costs, such as trailing, front-end and deferred commissions; administrative expenses; and insurance costs. The proposed changes also include requiring an explanation of the costs. These proposed disclosures are more onerous than those required for mutual funds, which are required to disclose distribution costs only.

The CCIR’s paper also recommends that seg funds provide investors annually with a personal total rate of return, net of charges, using a money-weighted method for periods of one year, three years, five years, 10 years and since contract inception.

As well, the paper recommends that seg funds provide seg fund investors with comprehensive details of their insurance contract, including guaranteed redemption amounts at different phases of the contract, any bonuses added to the protected value of the account and information on automatic resets of guarantees.

In addition to product-specific information, the CCIR paper states that the value of sales incentives, such as travel and accommodation paid for intermediaries to attend conferences, must be disclosed to clients.

The CCIR’s paper reiterates that insurers are legally responsible for oversight of their intermediaries, and that those intermediaries must follow needs-based sales practices. The latter process must be documented and copies of the needs analysis and product recommendation documentation must be provided to investors.

The CCIR’s paper states that although anecdotal statements indicate that regulatory arbitrage is taking place in the mutual fund and seg fund industries, no supporting evidence has been found. The paper notes that in order to protect consumers, the CCIR will seek “to proactively amend standards, where appropriate, to ensure that intermediaries have little incentive to prioritize their interests over those of their clients.”

The CCIR’s position paper also recommends that the standard of care for dealing in seg funds should be equivalent to that for mutual funds. Accordingly, the paper urges provincial insurance regulators to consider harmonization with the securities industry of “know your product” and due-diligence requirements for intermediaries.

Regarding the “know your client” (KYC) document required for mutual fund representatives, the CCIR paper concludes that a similar questionnaire is not necessary for insurance intermediaries because the principles of KYC are embodied in the needs-based sales practices required for seg funds.

Although greater disclosure might be good for investors, it will create new challenges for advisors, Yates says: “[This] definitely will have an impact on the sales process, especially if you have to justify your compensation. [It] would not be more difficult, but [would be] more onerous to explain the value you bring to the table.”IE

“Greater disclosure for seg funds definitely will have an impact on the sales process for insurance advisors”

Why advisors should brace themselves for CRM3

Advisors had better get used to CRM2 because CRM3 is in the pipeline, according to one industry insider.

The recent Mutual Fund Dealers Association (MFDA) CRM2 compliance report said that a “reasonable” number of its members adhered to the regulations but that there were concerns, including the bundling together of Deferred Sales Commissions and trailing fees, and ambiguous definitions provided to clients about DSCs.

Chris Ambridge, president and chief investment officer at Provisus Wealth Management, said that while, for many, the change has been painful, advisors must accept that this age of regulation is here to stay.

He said: “The industry got away with a lot 20-30 years ago, and I’m not saying they are getting their comeuppance, but they are just being forced to now be held to a world standard. At the same time, change is painful, it’s costly, [but] it’s necessary because there have been a lot of individual clients who have been hurt over the years.”

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Ambridge said that CRM2 was needed because digging up the fees your advisor was earning was difficult. And allowing clients to look under the bonnet at the fee breakdown led to some difficult questions.

Ambridge said: “It’s made it more transparent and it’s given clients the notion that for the first time, I am paying fees and I am paying that amount. Why am I paying my advisor when I see him never and talk to him once every two years and he’s earning this?”

While CRM1 fact sheets disclosed what fund manufacturers were earning and CRM2 laid bare what the advisor earned, Ambridge said CRM3 will bring the two aspects together.

He said: “For an average client out there, well, Jonny is earning this and Jonny’s company’s manufacturer is earning this; they have to dig that out. Why can’t it be in one spot so clients can see what they are truly earning? That’s going to be CRM3 and that’s going to affect seg funds, which are extremely overpaid in terms of fees.

“Now they are going to get the same treatment which I think is going to have a very large effect on a lot people as well.”

He added: “I would assume it’s in the regulatory pipeline that they will expand – there’s a lot things still to be worked out. The regulatory oversight of the robos has not been finalised; they are still held to the same standard as other portfolio managers and a lot of people think they should be held to a [standard] more suitable to an online platform. We’ll see what happens there.

“I don’t profess to know what it’ll end up being but if you don’t have a level playing field, someone else will want to get in there and cause some mischief.”

Lunch and learn sessions should be more than free pizza

President of Transcend, a pay-for-performance service.

A quick Google search of the words “lunch and learn” generates tens of thousands of responses and many of them offer advice on how to host the perfect lunch session in the workplace.

Too often, the same buzzwords are bandied around to describe what can be achieved in fewer than 60 minutes. They include transparency, understanding, building a community and other neat buzzwords. We have all attended these sessions – and munched through the quickly cooling pizza – during our careers. Some may have been helpful, but most likely you left the room with your appetite satisfied but feeling unfulfilled.

Let us step back for a minute and look at why these sessions are being held and, more importantly, how they are missing a great opportunity.

It seems many companies see them as an easy and quick way to reinforce their agenda and as a training tool. Wrong! These sessions work best when they are trying to generate creative thought and look at issues through a different prism. Sadly, too many have the opposite effect and appear to be more concerned with reinforcing the status quo.

Today, it is an undisputed fact that we have access to more information than we could have ever imagined just 20 years ago. However, instead of broadening our horizons, the opposite is happening.

In a successful workplace, it is the capacity to do something for the benefit of your employees in a meaningful way that will have the greatest impact, rather than just looking at how it directly benefits the company.

Want committed employees? Managers need to do more than talk to their team; they need to listen.

The overarching question should be: how do these sessions help the employees?

Wasting time talking about time

If you were to compile a list of the topics covered in lunch-and-learn sessions, it is likely “time management” would be near the top. While this is a very useful skill, it is, to put it mildly, uninspiring. As most of us know, these sessions rarely start on time, so perhaps for that reason alone it would be better to consider topics that spark an emotional reaction.

Time management is much better suited to being part of the ongoing cultural practice that is used throughout the company. To quote the legendary UCLA basketball coach John Wooden: “If you can’t be on time, be early.”

That means all meetings and conference calls should start on time and never be held up by a senior manager who needs to “grab a cup of coffee.” On a day-to-day basis, meetings should have a fixed duration and recognize that everyone’s time is valuable. That way, important issues have a greater chance of being resolved and it becomes part of the company DNA. It will also be noticed by clients and customers.

There is no such thing as a free lunch (TINSTAAFL)

If we accept the premise there is no such thing as a free lunch, we need to start asking ourselves: What could we achieve if we offer something different to employees in these sessions?

Lunch in most workplaces is “free time,” therefore, why not aim to make the lunch-and-learn session more enriching to the people attending? This will not only increase the chance of real engagement but also encourage employees to take a fresh look at the existing company culture.

One of the first steps to improving employee engagement is assisting in the work-home balance, so why not consider lunch-and-learn sessions that have no direct links to the job? Instead, look at what matters to people in their personal life.

Here are three ways to make your lunch-and-learn session better:

  • Select topics for different audiences in the workplace
  • Invite employees to submit life-related topics
  • Limit the number of sessions so they are seen as special events

Staff will soon begin to see your company as more than a necessary stop between sleeping and quality time. And it is clear that the bottom line benefits when employees are engaged.

As the success of the sessions take hold, you will start to see this percolate into other aspects of the workplace and encourage some employees to develop their outlier potential.

The pollination of ideas and expertise will strengthen the existing brand and, in these ever-changing times, lay the foundation for a more dynamic company.

Compression and Commoditization

Competition for new clients is increasing and advisory fees are shrinking in part because clients have access to greater information and expertise in the form of low cost platforms. In 2016 the average U.S. advisory fee for new accounts was 1.02%, down from 1.04% in the prior year and 1.21% in 2014, which is a 15.7% decline in two years. Canada appears to be experiencing a similar situation. Greater access to free or low cost information and expertise is making it hard for investors to appreciate the value good advisors bring to the table. When investors shop around for better fees they drive down prices. This means that to a certain degree, fee based advisory services are becoming commoditized.

Advisors can elect to cut expenses to offset the fee decline and maintain their income but only for so long. Advisors really have only three options: get bigger, specialize or outsource.

Increasing competition and more options for investment services leaves advisors with less pricing power which means advisors could consider getting bigger by adding clients to offset lost revenue. To do so advisors should think of actively marketing their practices, offering new products and services or enhancing existing services.

Advisors could also join a team through a formal business partnership to cover different areas of expertise and provide services that are beyond their skill set or capacity to offer. Alternatively they could choose to work with another advisor who has a complementary expertise. Another option is to merge with another firm but at the expense of giving up the autonomy of running their own practice.

One challenge of getting bigger is to ensure that the appropriate staff and infrastructure are in place. The top clients need to get great service and have access to the best advisors. A staffing option is to add a dedicated client service professional who is not an advisor but whose job is to make sure clients’ needs are met. On the infrastructure side advisors will need to consider technology to make sure they are equipped with the latest customer servicing options.

Advisors who do not want to get bigger or find that getting bigger is too much work could find a specialty and make sure they are known for it. Whatever the specialty having an area of expertise means that certain clients will not be inclined to shop around based simply on price. Advisors must build their brand by touting their expertise with the credentials to back it up so they will need to obtain any number of the numerous professional designations and certifications available. They will have to network with other professionals or organizations that share their niche and differentiate themselves from advisors who are generalists. They must be willing to meet with prospective clients themselves rather than delegating this important meeting to another advisor or member of their support staff. Specialist advisors will find they have an edge when marketing their expertise to prospective clients through websites, in publications or by speaking to groups interested in that advisor’s expertise.

Getting bigger or specializing often means that something has to give. This is where outsourcing comes into play. Outsourcing administrative tasks and investment management allows more time to be spent with clients. A study by Northern Trust in the U.S. found that 70% of advisors reported growing their practices significantly after outsourcing. Not only did they spend more time helping clients plan their lives, it also brought them more personal satisfaction.

Working with a third party provider to handle everything from portfolio construction and management to rebalancing, compliance, research and back office support has been a fast growing trend among advisors over the past decade. Before choosing an outsource supplier, consider the following:

  • Look for providers that share your investment philosophy
  • Determine all fees and costs
  • Confirm advisor and client account minimums
  • Find out who is the firm’s custodian
  • Ensure the technology is easy to use and integrates with your structure
  • Consider the ease of transitioning in and out of the plan
  • Evaluate the advisor and client logistics to change to the new business model

Some advisors fear clients will not respond well to the idea of outsourcing. Of course advisors will need to educate their clients about the benefits of this type of partnership. If handled correctly the client experience will be improved, as was confirmed by 92% of advisors surveyed who have outsourced since 2014. Ultimately advisors will have to make decisions that are going to change their practices as market forces reshape the world around them. The only real question is which path they will choose to take.

Prolong your practice

You’ve spent your entire career building your practice from the ground up and now you’re thinking of selling it. You have a book full of loyal clients who you enjoy servicing but the pressures placed on your time is starting to wear on you. While many advisors seem doomed to work long hours into their “would be” retirement years, perhaps you’re considering either selling your book or passing it on to a family member. There’s only one problem: You’re inextricably entwined in the business and you don’t really want to fully retire.

As a personal services business, your clients trust and have a rapport with you; they like the way you treat them and handle their business. While that can make for lifetime customers, it can also make it difficult to sell your business to someone else. There are no guarantees that your clients will stay with the new owner and therefore the value of your business to a potential buyer might be less than you expected. Most advisors who seek to sell their firms won’t get the price they’re after and deep down they don’t even really want to sell.

Another consideration when selling your business is finding an appropriate buyer. Many deals involve a price that’s payable over time, and is largely contingent on how many clients stick around, so you have to be sure that the buyer is someone you trust to do a great job. Do they share a similar investment philosophy? Do they value exceptional service and look after their clients properly? How comfortable are you passing on your life’s work to somebody else?

Another consideration is that once you sell your business, it’s no longer yours. There is no going back so unless you’re 100% certain you’re ready to move on, a better solution would be to look at alternatives. Rather than selling off your business consider an alternate strategy which will allow you to focus only on those parts of your business that you like the best.

For many advisors, the best strategy for their later years might be to slow down, rather than retire outright. Offloading responsibilities can help a planner enjoy staying in business longer than they imagined. Outsourcing the activities that you enjoy the least could save you from the burnout that many veteran advisors face.

Rather than making a decision to abandon your business, you can evolve your business. If advisors are doing everything themselves; conducting annual client meetings, managing money, performing mutual fund research, portfolio construction and monitoring, handling ongoing administration and back office functions, it’s no wonder that many feel burned out.

With that in mind, it’s worthwhile to consider outsourcing as a way to free up time and bring outside expertise into the practice. These considerations can range from the delegation of a portion of the investment management function for some clients, to delegating all facets of the investment and administrative roles for all clients.

Working with a third party provider to handle everything from portfolio construction and management to rebalancing, compliance, research and back office support has been a fast growing trend among advisors over the past decade. Before choosing an outsource supplier, consider the following:
Look for providers that share your investment philosophy
Determine all fees and costs
Confirm advisor and client account minimums
Find out who is the firm’s custodian
Ensure the technology is easy to use and integrates with your structure
Consider the ease of transitioning in and out of the plan
Evaluate the advisor and client logistics to change to the new business model

This is where Transcend can help out. We can free up your time so that you can focus on advancing your business to where you want it to be. We can be an extension of your office, handling your investment and administrative needs such as determining asset allocation, researching investments, selecting portfolio managers, and due diligence. On the administration side we take care of trading client accounts, managing client cash needs, managing fee based billing and reporting, as well as providing regular investment and performance updates to clients. Transcend will work with you to customize your service experience so you can work as efficiently as possible.

While the process of outsourcing can be a challenging one, the objective is to free up your time and energy so that you can focus on the activities you enjoy. By outsourcing these responsibilities, not only will you reduce your paperwork, but you’ll gain time for yourself, your family and the rest of your business.

How high investment fees can diminish Investment Returns

Special to the Financial Independence Hub

The objective for most investors is to earn value-added performance. Unfortunately there are fees and other costs that can diminish investment returns. The reality is that the costs associated with investing in these products can lead to underperformance when measured against industry standard benchmarks.

The above chart shows the average annual fees and their impact on investment performance for Equity Mutual Funds, Exchange Traded Funds (ETFs), robo-advisors and Transcend’s Pay-for-Performance™model. This is illustrated by comparing their returns against a benchmark. The benchmark is a universally accepted representation of a particular stock market that is used to measure the performance of a portfolio manager.  For example, a benchmark for Canadian equities is the S&P/TSX and a benchmark for U.S. equities is the S&P 500.

Ultimately, excessive fees reduce clients’ investment performance and hampers their ability to reach their financial goals.

While ETFs and robo-advisors are gaining in popularity, mutual funds are still the prevalent investment product for retail investors despite numerous studies that have confirmed the weak investment returns of equity mutual funds relative to their benchmarks. In Canada, a fairly new approach developed by S&P Dow Jones Indices called the SPIVA Canada Scorecard confirms performance failings. The latest result based upon five years of data ending December 2016 confirms that equity mutual funds have underperformed their benchmark, often because fees have such a negative impact on the overall portfolio results.

Mutual funds can charge management fees as well as administrative costs and custodial fees. They can also charge clients for trading, legal, audit and other operational expenses. In the chart above, these fees plus investment related underperformance add up to the average true cost (-2.37%) of investing during the last five years for equity mutual funds.

Even low-cost ETFs, which are designed to mirror a benchmark, tend to disappoint. The performance lag can be tied to the level of fees of 0.32%, plus trading and rebalancing costs as well as a potential cash balancing drag of up to 0.42%, based on 2015 data from the Management Reports of Fund Performance (MRFP) found on the website. This analysis does not include the negative impact of brokerage costs to buy and sell, and potential custodian or registration fees. With that in mind, the chart reveals that ETF investors underperform the market appropriate benchmark by -0.74%.

Robo-advisors to the rescue?

Another relatively new entrant to the low cost investment marketplace is the robo-advisor. Employing several common assumptions such as an average portfolio size of $50,000 and trading costs of 0.2% per year, it can be determined that the average robo-advisor fee in Canada is 0.63%.

This cost shows that it is more efficient than traditional wealth management fees, but still lags behind the Pay-for-Performance™ model. While everyone is talking about robo-advisors, the true question should be about getting value for your money and how much fees can impact actual outcomes.

For example, using the average fee on a $50,000 portfolio, the cost of an equity ETF is $367 per year, a robo-advisor would set you back at $682 and an equity mutual fund has a total average annual cost of $1,185.

These high costs are exactly why some investors are reconsidering and questioning traditional methods of investing. Lise Allin of Lise Allin Insurance and Estate Planning Services is an advisor we work with in Ontario and she recalled one case involving a senior, now her client, who in a 10 year time span with an investment bank saw his wealth at retirement go from $1,200,000 to $750,000. This person had worked for 40 years to accumulate his wealth and the decline of his capital was very worrisome, given that he is now a widower with children living far away.

“Many still want to be able to leave their kids an inheritance, but they have to be on the right investment path,” Allin says. Since that time, Allin has been working with us to stabilize her client’s investments around the $750,000 mark, while he is still able to withdraw the $40,000 he needs on a yearly basis. This is a clear illustration of how fees and poor investment choices can quickly erode capital and create a risky situation, especially for senior investors.

What’s new?

Find a firm that puts clients first and adheres to a set of prudent wealth management principles. The goal with your investments should be to build a portfolio that combines effective risk management techniques with superior investment returns.

Recognizing the impact of fees on performance, offers a revolutionary platform. A client-friendly fee structure that charges much less in fixed costs while manager compensation is based on merit, not asset size, when delivering returns that outperform the market.

Written by: Chris AmbridgeSource:


Financial firm rolls out new fund under performance-based fee model

Businessman and businesswoman discussing at office with laptop on desk.

Businessman and businesswoman discussing at office with laptop on desk.

Financial firm rolls out new fund under performance-based fee model Investors seeking for yield away from a bond or guaranteed investment contract (GIC) now have another option, thanks to Transcend Private Client’s new offering, the Multi-Strategy High Yield Fixed Income Fund.

The group’s new fixed-income fund will follow its recently launched Pay-for-Performance fee model, where clients pay a nominal amount unless performance results are above the industry benchmark.

Transcend CEO Chris Ambridge said the fund affords investors with a more secure avenue for alternative investments. Additionally, the new fixed-income fund is expected to spur better yields than what bonds and GICs can potentially make.

“We are offering Canadians a reliable fund with low risk, based on our company philosophy that you only pay if the results are better than the benchmark,” he stressed.

Aside from being Canadian-centric, the fund will also be diversified in terms of assets through active management. It will invest in corporate bonds, convertible bonds, preferred shares, income trusts, REITs, mortgages, secured real estate and infrastructure projects, as well as alternative investment strategies and hedge funds.

Ambridge said investors who subscribe to the fund will not incur additional costs above basic management expenses. This will be the case until the fund outperforms the benchmark, which is 50% of both the FTSE Short Bond Index and the FTSE Mid Bond Index.

“We have very open conversations with advisors and investors on our track-record, why our company fee model defies the norm and why our service beats the competition,” he said.

Transcend launches new fund under pay-for-performance fee model (P&T)

Clients who invest in Multi-Strategy High Yield Fixed Income pay a nominal amount unless the fund outperforms its benchmark

Toronto-based Transcend Private Client Corp., a subsidiary of Provisus Wealth Management Ltd., has launched a new fixed-income fund, Multi-Strategy High Yield Fixed
Income, which will follow the pay-for-performance fee model introduced to the Transcend platform in September 2016.

Under the pay-for-performance fee model, clients only pay a nominal amount unless performance results are above the industry benchmark.

“This fund offers investors a secure alternative investment that yields better results than a bond or GIC,” says Chris Ambridge, CEO of Transcend, in a statement. “We are offering Canadians a reliable fund with low risk, based on our company philosophy that you only pay if the results are better than the benchmark.”

The fund will be “Canadian-centric,” the firm says, and diversified in terms of assets through active management. The fund will be comprised of corporate bonds, convertible bonds, preferred shares, income trusts, real estate investment trusts, secured real estate and infrastructure projects, as well as alternative investment strategies and hedge funds.

The investment strategy will be focused on a short to mid-term structure, similar to a five-year GIC, the firm adds.

Investors using the fund will not be required to pay anything above basic management costs unless the fund outperforms the benchmark, which is 50% of the FTSE short bond index and 50% of the FTSE mid bond index.