Useful LinkedIn Poll...

Steadyhand Investment Fund's Chris Stephenson recently concluded a poll on LinkedIn. The question:

What is your biggest challenge regarding your finances?

a) Cash Flow - Saving Vs. Spending

b) Managing Debt

c) Choosing the right product/service

d) Finding a trustworthy advisor

"Cash Flow - Saving Vs. Spending" won with 58% of the vote, although I thought it would be much higher. Regardless, I thought I would share my vote and subsequent comment on the page:

Saving Vs. Spending. Figuring out your balance goes as much as to figuring out you and who you are. What is your relationship with money? Everything else regarding personal finance can honestly be figured out. With this, Spending Vs. Saving becomes the age old question of "Who am I?" Are you that generous friend who picks up the check for dinner? Does that become your image and then you feel you always have to? Or are you that cheapskate who can only buy a birthday card on a loved one's birthday? Does saving involve sacrifice? Such a well-educated and hard working society, do we feel we deserve to sacrifice?

Or is out of the easiness of being able to take on so much debt that the blame should rest on the financial institutions or on our governments for allowing it to happen? Yes, one can legitimately make these points and pray they bail us out should we require it because how could they allow this to happen? That being said, if we can figure out ways to save, at the end of they day, we will come out on top.

Honestly, I think not only is it the greatest challenge regarding our finances but the greatest challenge for our age. As our world sees some of the biggest economic issues to erupt in a generation, it all comes down to the fact that the developed world has to save more, be less dependent on credit and spend less. And, yes, hopefully, the middle class will emerge in the emerging markets and pick up the slack...(not through racking up debt!)...

Veritat Advisors -- Worthy of Praise

Every once in a while I run into a financial services company that really impresses me. I feel it would be almost irresponsible to not be public about my praise. Based in the United States, Veritat Advisors was brought to my attention by the insightful Chris Stephenson of Steadyhand Investment Funds.

Veritat Advisors quite basically is a financial planning service offered online. Now, wait! Before I lose you, I'd like to recognize that it is an uncomfortable dynamic for a lot of folks. To take a professional service that is offered online seriously might be tough for some people.

That being said, Veritat Advisors set their company up in a manner in which a financial advisor can take on a client anywhere in the US, not just the city they’re a resident of. They have a virtual console in which a client can see their advisor on a webcam and be presented slides, presentations, etc. Their fees are low, and they offer the fee-only compensation arrangement charged monthly ranging from $25-$40/month after a $250 initial fee. Even their most basic service guarantees a financial plan, which they go over once every quarter. They say they are legal fiduciaries, which is amazing.

For financial advisors to become a fiduciary is something I’ve been really passionate about seeing in Canada. As it stands, Canadian financial advisors can’t legally just become a fiduciary, but many like to deputize themselves as such (do you ever hear “we hold ourselves to a fiduciary standard?”)…it is something, but we can do better.

This is just from what I can see. They say their financial plan is comprehensive, but I haven’t seen it myself. The FA whose profile I was able to look at is well educated (CFP and MBA) and certainly is qualified to write a comprehensive financial plan. They have an optional portfolio managementfee of 0.5%, which is low. It’s really amazing value, but they don’t give any suggestions on to what investment counselor they may be using (my guess it has to be a strong indexing approach as, although US has cheaper management fees than Canada, they aren’t that low).

That all being said, the service is based online and over the phone. If you feel face-to-face meetings are important, they would certainly be under par in that department. However, their online client console does seem like quite an able substitute.

It must be pointed out that I’ve never been a client of Veritat nor have I formally evaluated their service as I would an advisor for the Onus roster. My conclusions are based strictly on observations made in the manner in which they present themselves on their website. However, with a 14 day free trial and 30 day money back guarantee, they’re putting their money where their mouth is, as a client can walk after the financial plan is done for them. That’s quite a risk and illustrates confidence.

The bottomline is if these guys are as advertised, this is a pretty amazing service, and Canada would be well served to have a similar shop like this.

‘Z’

Now, Canada, there are better ways to seek retribution

A recent Reuters news segment shows a group of German pensioners appearing in court for kidnapping their financial advisor! Now, remember, folks, if you feel hard done by there are a number of ways to seek retribution. ;)

It's pretty funny. Check it out.

http://www.reuters.com/news/video/story?videoId=60847190&videoChannel=-9991

Industry Spotlight -- The Wholesaler (Part 2)

Last blog post, we introduced you to the wholesaler. It is a job in the financial services industry you never hear about but may play a significant role in the mutual fund you invest in. To review, in order to get financial advisors to carry their investment products, mutual fund firms employ “wholesalers,” whose job it is to persuade advisors to understand why their funds are better than the rest of the industry.

In this entry, we're going to further explore some dynamics in the wholesaler-financial advisor relationship.

Now, it would be a great to think that an advisor uses their analytical prowess to decipher the mutual fund that is going to beat the index year after year. However, such prowess, particularly for the larger funds and more prevalent asset classes (for example, a Canadian equity fund), is not significantly different from one mutual fund company to another. With this in mind, the advisor's assessment of giving a mutual fund firm his or her client's business shifts to more subjective traits. One of those traits is their relationship with their wholesaler [another can be the trailer fee, which we'll discuss another time].

In essence, the wholesaler-financial advisor relationship is much like the relationship between a financial advisor and their client. Like financial advisors, wholesalers earn a commission (8 to 12 basis points, we've been told, of the assets they are responsible for bringing under management), while earning a salary as well. Like financial advisors, wholesalers are responsible for recruiting their clients (in their case, the financial advisors) and nurturing them.

It is important to note that wholesalers are given what are called expense accounts (according to several sources, a typical expense account can range anywhere from $20,000 to $50,000 for a geographic area depending on the firm) to, among other things, entice advisors to carry their products. These incentives could be, for example, tickets to shows, sporting events or dining out. In the past, such incentives were out of control with all-expense paid trips and more lavish attempts to win a broker's loyalty. Fortunately, much of this has toned down in the last few years. That being said, a financial advisor's loyalty can still be won in such ways. In fact, in many cases, it is the advisor who has come to expect special treatment in return for them investing millions of their clients' money with a specific firm.

Now, yes, all is fair in love and war, but when you think about it, there can be about 20 wholesalers for the typical mutual fund company (maybe four wholesalers assigned to Ontario, for example). And these five figure expense accounts per wholesaler would be more beneficial to the Canadian client lowering the fund's MER. Of course persuading advisors to carry their products is important, but eliminate or reduce the expense accounts, I say. Let a financial advisor pick a mutual fund on the merits of the fund alone. Let the wholesaler's job be solely to preach the merits of their fund.

The feeling is, though, this is not the start of a groundbreaking movement.

Got to be...Are you underperforming or outperforming your relative benchmark?

Wow, so sorry fans, it has been ages, since I've written....The last couple of months have been incredibly intense, and while I've been tempted to write on several occasions, the dynamic at the office has been such that's it has been hard to tear myself away from the day-to-day. Very unwise, said the incredibly helpful SEO consultant, I met at an expo a couple weeks back.

"You got to be blogging at least 2 or 3 times a week," he said.
"But..."
"Got to be."
"But, the purpose of us having a corporate blog was to give Canadians insight regarding our thoughts in improving the retail investment industry, giving them a pulse for the way our company thinks and believes. We weren't really thinking about search engine results."
"Got to be."

Okay, with "Got to be" the theme for this blog entry, I will proceed. Obviously, writing a blog entry once every month is a little too infrequent. I acknowledge that.

Anyway, if you are a subscriber to this blog, you are fully aware of the state of the economy. Many of you have probably inundated yourselves with all sorts of commentary about what's going on. You can pretty much find a pundit point in every direction. Up...down....sideways.

As horrific as this loss of wealth has been for Canadians, for the first time since Onus was founded, people are engaged. They are conscious of what's going on. This concern, although it has come with a cost, should be cause for victory in the sense that many Canadians are no longer taking anything for granted and are asking the right questions.

Listen, people, there's no sugar coating it. A financial advisor that says that his clients are completely unscathed is either inaccurate or lying (for me to say which would be inappropriate, for I would have to qualify their intentions). If you have any exposure to the markets, your portfolio has suffered. The relevant question is: By how much? Was your asset allocation appropriate?

If you have questions regarding your current situation, allow me to outline an important one and give you the tools to answer it: How is your porfolio doing compared to your relative benchmark? A relative benchmark tells you the performance of your investment portfolio relative to a market index (for example, the Dow Jones Industrial Index). Money managers and investment analysts are evaluated by their ability to outperform their relative benchmark. As a client paying active management fees (assuming you're not employing indexing strategies), you're paying for your investments to be able to do better than the respective index. Otherwise, you could seriously reduce your fees by investing in index funds or ETFs while getting better returns then an active manager.

How do you calculate the return of your relative benchmark?

If your advisor and you have not predetermined the benchmark that will be used to evaluate your returns (material that should be in your Investment Policy Statement), visit www.showmethebenchmark.ca set up by my hero, Warren MacKenzie, and other fee-based financial advisors. Calculate your relative benchmark using the Benchmark Calculator and compare them to your returns. It is an excellent way of judging your financial advisor's (or, for that matter, your own) performance.

It's safe to say if you underperform your relative benchmark once over the last five years, it isn't grounds alone to conclude unsatisfactory financial advice. However, if year after year, you're underperforming your relative benchmark, you should take more than a moment to evaluate your current situation.

Do you know the answer to this question? Got to be.

Eenie.... Meenie..... Mynie.... Moe (How does an advisor pick their mutual fund firms).

The mutual fund industry is quite saturated with there being an array of different types of mutual funds, which might specialize in a specific sector, geographic location and/or asset class. Financial advisors, who choose to invest their clients in mutual funds, have a huge selection to choose from. As most mutual fund firms carry a wide selection of mutual funds, a financial advisor will typically only use the investment products of a few firms that he or she is comfortable with.


How do they choose which mutual fund firms to put their clients in? In order to get financial advisors to carry their investment products, mutual fund firms employ "wholesalers," whose job it is to persuade advisors to understand why their funds are better than the rest of the industry. Historically, "wholesalers" used what was called "soft dollars" to entice advisors to carry their products. These incentives could have been tickets to shows, games or even all-expense paid trips. As of late, these widespread "bribes" have gotten under control and have declined significantly over the years. However, they do still exist, but in a much toned down manner. Furthermore, a mutual fund firm can also offer higher trailer fees as an incentive to get advisors to carry their funds.


Looking at past performance does show a track record but do keep in mind that it is common place for mutual fund firms to merge bad funds with decent ones to make their history look better...Yes, this is permitted...and, yes, the next thing to wonder is how do we know how legitimate their posted returns are.

To hear or not to hear....Have you heard from your financial advisor?

With the credit crisis looming large on people's mind, economists and pundits, alike, are on the verge of screaming recession, if they haven't done so already. While a recession hasn't been officially declared yet, it's long time to wonder how prepared you are for the riskiness ahead....Has your financial advisor called to give you insight to the current state of the financial markets? Assuming you feel you should have heard from your advisor by now, there are several possible reasons you have not.

Of course, not that your financial advisor's attention right now is mandatory. You might be a hands-off investor and not wishing to hear from him or her at this moment. But, for a good many, insight and feedback during these turbulent times is a reason they hired an investment advisor in the first place. The education they can pick off by listening to clear and eloquent explanations will only help them in the future.

If your fiinancial advisor hasn't been quick to touch base, there can be several reasons for this. One, as mentioned, is the fact that the client specifically doesn't want to be bothered. The market goes up. The market goes down. This is pretty much the extent of the picture they want to get. They have enough stress in their daily lives to have to worry about how their portfolio is evolving.

Another reason for not hearing from your financial advisor is that you just are not a top client. It is taught frequently in training programs that a broker should pay 80% of his attention with the top 20% of his book (known to many as the 80-20 rule). Assuming this rule, it appears 80% of retail clients aren't prioritized...that is, if they are successful and doing their job right. Are you the top 20% of your broker's book? Are you a valued client?

A final obvious reason for not hearing from your broker is just a lack of proactiveness. A good many advisors spend a significant amount of time recruiting new clients to their practice. The more clients they have, the more money they make. While being a proactive advisor, will establish goodwill in your relationship, there isn't necessarily a clear cut return on his time. Whereas with recruiting new clients, it will mean added commissions to his practice. Seeing how important recruiting new clients is important to one broker over another.

What a financial advisor should do is try to ascertain how much attention you need as the client. Whether you want to meet quarterly, biannually or annually should be determined well in advance and will bring a greater deal of transparency into the relationship.

Lesson: A section called "Frequency of Contact" should be included in your Investment Policy Statement or Financial Plan. It will do a great deal for your relationship with him or her. The section should answer the following questions:

a) How often are the face-to-face reviews of your portfolio?

b) Will you have phone appointments ever so often? Or will you have to solicit them whenever you may have an inquiry?

c) When you call to make an inquiry, how long do you have to wait until you call is returned? Will your call be returned by your advisor for all your inquiries? What circumstances will your call be delegated to the support staff?

What inspired me to do what I do...

It is funny how I can personify the direction my life has taken into two seemingly mild comments. In retrospect, there's really no way to justify otherwise, which makes these comments rather life-changing epiphanies.

It was high school when I truly fell in love with the stock market. The concept of buying ownership in pieces of a large entity that went up and down in value. The adult version of baseball cards, I thought at the time. Never having a lot of money, I used to passionately research these companies and make mock portfolios. It was only for fun, really.

One day a peer of mine, noting my enthusiasm, approached me and told me that his parents had opened a brokerage account for him in order to "practice" investing for himself. Of course, he didn't know where to start, and he needed some suggestions. I let him know what I was doing and a couple things to keep in mind. As the months followed and the portfolio ballooned, that friend sat across from me in the library one afternoon and said, "Z, thank you." With a look of sheer admiration and respect in his eyes, my initial response to ask, "For what," quickly subsided, and it was that moment I realized what I wanted to do for the rest of my life...become an investment advisor. While doctors saved lives, advisors enabled their clients to enjoy their lives, helping them reach their goals and aspirations. That moment, that feeling at the library some years ago was a moment I wanted to feel for the rest of my life.

My notions of what, in fact, a stockbroker was during high school are frightfully different from what I believe it is today. Years later, working at a Bay Street brokerage, I was given the contact of a hard-working Canadian who had requested information about our firm. Calling him to answer any inquiries he might have, he said, "No, I simply wanted some ideas. You guys are all a bunch of crooks. I was cleaned out a few years ago...a bunch of crooks." There was no venom in his voice. He said it simply. He politely excused himself and that was it. To be hit with an assessment as such a matter of fact, felt like a blow and a direct rebuke of why I joined the business in the first place.

It was later that night that I began my draft of the business plan for the Onus Consulting Group, but it was not to say that I was completely blind sided by this man's revelation. It was just hearing those words so plainly ended any justifying I was doing of my aspiring profession. The fact of the matter was that the typical financial advisor's main ambition wasn't to make their clients money, as I originally had believed; it was to make themselves money. This isn't necessarily the fault of the advisor, who are being cultivated in an industry that stresses the bottom line (and by bottom line, I mean their total commissions) and not the success of their recommended investments.

Thus, began my search for the perfect financial advisor and my quest to educate retail clients as to the true politics of the retail investment industry. More on that later.

'Z'

ZAHID JAFRY, CIM is the founder and an Advisor Analyst at Onus Consulting Group. The company has carved a niche in the Toronto retail investment industry by matching Canadians with highly-proficient financial advisors recruited through the firm's Advisor Indexing Program, a research study examining fiduciary standards of full-service financial advisors. Prior to that, he worked in a marketing capacity at the private client services division of a Bay Street brokerage. He is a CSC graduate and a holder of the discretionary portfolio management designation, Canadian Investment Manager (CIM).