Archive for the ‘professional money management’ Category

There is currently a good deal of discussion about the speed at which the Canadian population is aging. This aging affect is expected to accelerate in the next 20 years (see chart below). As has been the case at every stage of their generational life, boomers are going to have a dramatic impact on Canadian society as they retire. In twenty years, fully a quarter of the population will be drawing CPP and OAS. For many people, government pensions won’t be enough to cover spending requirements.

Source: Statistics Canada. Estimates of Population, Canada, the Provinces and Territories (Persons). CANSIM Table no. 051-0001; and Statistics Canada. Population Projections for Canada, Provinces and Territories (2005-2031). CANSIM table no. 052-0004.

As a nation, we are challenged to provide a financially comfortable and healthy lifestyle after retirement. Public Pension funds, CPP and OAS are designed as a safety net, providing only a basic standard of living. Personal savings and private pension plans are expected to make a significant contribution.

Private Defined Benefit (DB) pension plans participation rates have been dropping. DBs are stressed by smaller contributions from a shrinking population of workers and recently by volatility in the investment markets. According to actuarial estimates by Mercer, by the end of 2008 more than 70% of DB plans had solvency ratios under 80%. This means the total assets of these pension plans offset only 80% of the liabilities.  An unfunded liability is ultimately backed by the earnings of sponsor companies. Fortunately, that recent underfunded status has been largely reversed by positive investment returns in 2009/10.

The volatility in plan assets is a concern for corporate Canada and there remains considerable incentive for companies to reduce exposure to pension risk by converting existing DB plant to Defined Contribution (DC) pension plans. In DC plans the investment risk is borne by the employee-retiree. For private company sponsored plans in 2008 alone the number of participants in DB plans declined by 7.8%. Given the incentives, it is reasonable to expect this trend to continue. It is worth noting that public DB plans are headed in the opposite direction, with an increase of 4% of participants during 2008.

The overall result is that most Canadians are responsible to provide for their own retirement. Investors bear both the risk of managing assets and benefit from the rewards to getting it right. To a significant extent, our current wealth management strategies define our future lifestyles.

Our Policies Support Your Goals

As a leading Private Family Office (PFO) we think we have a role to play in providing a platform for successfully discharging the demands of your family’s wealth management.

We are focused on getting wealth management to work for you. Our clients understand the challenge and like most investors, prefer to work with a professional advisor. They understand that the skill set required to grow wealth is often very different from the skills needed to preserve wealth and the purchasing power of that wealth.

While financial success comes with responsibility, enjoying your wealth is best experienced once those responsibilities are satisfied. Our purpose is to help clearly define your important goals and bring you considered strategies to achieve success. We use trusted relationships though our network of professionals who are experienced at tax, legal, insurance and estate issues. We would also be pleased to work with your current trusted advisors.

We typically work with a larger percentage of the assets of our clients so that our strategies and approach can make a difference in their financial lives. We think costs matter, taxes matter and current cash flow requirements are probably not diminished in retirement. We have the tools to define a family’s unique requirements and the evidence-based investment approach to confidently get it done. Our joint responsibility is your investment success; we have a proven approach tested through many market cycles.

The motto, “our policies support your goals” refers to both our unbiased investment approach as well as to the professional standards of care of the Chartered Financial Analyst (CFA) designation which defines our business practice. We enjoy what we do and would be pleased to discuss your requirements.

Patrick

The opinions expressed in these articles are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP or its affiliates.

As a follow-up to statements in recent blogs, here is my take on the discount brokerage (DB) model.

If lower trade costs result in better, more efficient portfolio’s then I am all for discount brokerage. There isn’t a large body of evidence aggregating results for investors in DB accounts since none of that data is released by the sponsoring companies. The data that does exist supports the position that investors should steer clear. In my opinion there is little incentive for DB firms to release data as it would be unflattering to their client base.

One notable exception was written by BRAD M. BARBER and TERRANCE ODEAN “Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors”, in the Journal of Finance, April 2000. The article considered position statements and trading activity for 78,000 households at a large discount brokerage firm over a six-year period ending in January 1997. As the title implies the results were not encouraging. There was strong evidence of under performance when compared to the broad market return. In addition, this under performance was enhanced (synonymous with lower returns) in the group of accounts that traded  most.

There are several implications.

Firstly, even though stock trading costs are lower in discount brokerage accounts somehow this advantage is not exploited for better client returns. The authors suggest over-confidence in trading strategies explains the drop in return. The correcting behavior recommended is lower cost transacting. When that doesn’t work, the individual  usually feels the need to try harder. More effort is made on understanding the research. More time is spent staring at the screen to find meaning in the trading patterns. This can and often leads to more trading. A virtuous circle is created, from the point of view of the DB.  A highly stressful and time consuming role is created for the investor-client (you).

Secondly, costs to DB clients are not lower for most asset classes, while the over-confidence factor presumably still operates. For example:  the biggest DB wire house doesn’t currently rebate clients the fees for advice that are embedded into mutual funds. Instead the fees are collected as revenue though no advice is given. In addition, in my opinion, spreads or commission on fixed income securities such as CDs and GICs are collected by the firm though they are intended as compensation for professional advisers. The same can be said of bonds and syndication revenue,  in which compensation for advice and distribution is simply absorbed into profits of DBs. As I said I’m for lower costs for investors. DB’s are simply not sharing the lower costs implied by their model with investors like you.

Thirdly, watch any ad for a discount brokerage firm and you will find that it exploits the view that lower transactions on stock trades equates to higher returns for investors. The clear parallel is drawn between superior trading strategies and their proprietary research resulting in confidence and better results. To me this is clearly a red herring. Most revenue streams, all of which are borne by their investors, are not disclosed. In addition, behaviors that reduce the likelihood of investor success are glamorized. Whereas behaviors that lead to better returns, like lower transaction counts and passive investment approaches are often discouraged through the introduction of additional fees. The overall result is that the incentives for DB and their clients are usually at odds.

Finally, DBs have institutional clients as well as retail clients (like you) who are often on the other side of aggregated small transactions. The research they provide is conflicted to the extent that DBs  are efficient in terms of their institutional clients if they can provide liquidity. While no advice is provided to individual clients, advice is aggregated and released to many in the form of independent research.  While no direct relationship exists, the overall effect is the same if it results in large numbers of small clients transferring one large position to a big institution.

My bias is clear. Advisors provide the best source of independent, professional advice specifically tailored to the best interest of the client. DBs may appear to present a cheaper option, but they are driven by profit motives and are generally profit centers for larger concerns. If your assets are important to you I advise you to choose a professional not a profit center, for your source of investment advice.