Investment management fees have been stirring up controversy of late, but is the rise of robo-advisors rendering investment managers and advisors—and their fees—unnecessary? “No,” says Bruce Sansom, president, Global Wealth Builders Ltd., Investment Managers & Consultants. Sansom, who founded the first investment management firm in Edmonton in 1976 (Managed Investments Ltd.) before starting Global Wealth Builders Ltd. in 2003, has seen the industry’s share of changes, but he’s also seen the importance of what investment management can offer.
“A client hires a registered portfolio manager to contain risk, select investments, monitor the portfolio, report performance, and ensure each investment is appropriate for the client and consistent with client objectives,” Sansom explains. “It is not certain whether [the robo-advisor] approach will prosper through an entire market cycle. I think the methods are overly dependent upon historical data in the selection process. The process does not seem to be sufficiently forward looking. I suspect it is a process that is very reliant on bull (upward trending) market conditions to succeed—and that means the investor must be content with higher volatility.”
“Management fees are based on the market value of the client’s portfolio,” he adds. “They generally range between 1.00 per cent and 2.00 per cent annually, and are a tax-deductible expense from the portfolio’s income.
“The investment environment is cyclical, and there are periods during the upward cycle when management fees are questioned. During the down cycle, the same fees appear to be a bargain. Comparisons against the popular indices are not credible because the indices do not have any costs, and it is impossible to invest without cost. Consequently, I feel that argument is entirely bogus,” he laughs.
“Registered portfolio managers are highly qualified investment professionals that possess impressive training and high ethical standards,” Sansom stresses; however, he also understands that selecting a portfolio manager can seem daunting. His tip for choosing one? Find someone who is forward-looking. “Investors tend to attach too much importance to past performance, which is natural—but past performance may not be repeatable. It is important to determine whether performance is repeatable or just good luck. It is also important to gain an understanding of [the investment manager’s] investment disciplines and why they adhere to them.”
Jonathon A. L. Gold, B. Comm., CIM, FCSI, DMS, CFA, president & portfolio manager, Gold Investment Management Ltd., is quick to agree that there are clear advantages to opting for humans over robots when investing. “I am sure it will be perfected one day, but for today, there is no way a robot is going to advise on matters including, but not limited to, RRSP versus TFSA, RRSP contribution versus a lump sum mortgage payment, RDSP rules, RESP rules, converting an RRSP to a RRIF, etc. Investment managers are human beings. We can not only use computer algorithms to formulate a recommendation, but we also draw on experience and intuition. We have learned hard lessons through trial and error and can impart this knowledge to our clients.”
In response to the investment management fee controversy, Gold explains, “There is a wide range of investment management fees. At the very high end, guaranteed investment fund (GIF MERs) can easily top 3 per cent. Mutual funds are becoming more competitive, but can still be costly. Portfolio management firms will typically charge less than mutual funds and can offer a value-added, bespoke service (as a PM firm, we are naturally biased, but this service offers the best value, in our opinion). Finally, at the low end of the fee scale are the robos—but be warned, most are designed so you never speak with a human being.”
Gold’s tip for finding a good investment manager? Ask about their investment philosophy. “A good manager should have a well-articulated investment philosophy, style, and process. Ideally, a manager will have long-serving senior employees that hold designations such as CIM, FCSI, and CFA.”
Marshall McAlister, CFA, private wealth counsellor and principal, Pavilion Investment House, agrees that the human component of investment management is critical to its success, saying, “In my many years of service to investors, I have never had a client leave our firm and move to a robo-advisor. In fact, the growth of our firm as well as our Edmonton practice does not, in any way, show us that successful savers in Canada are looking to computers to deliver wealth management advice.”
Proper wealth management is about more than algorithms. “At Pavilion, we begin all of our relationships by conducting in-depth client interviews to discover and understand each client’s unique situation. Only then are we able to design a portfolio that truly seeks to address their entire financial picture. There are no ‘one-size fits all’ plans at Pavilion—especially with some of the complicated financial lives of some of our clients.”
McAlister credits Pavilion’s combination of scientific investment strategy, tailored portfolio construction, and long-term relationships, as well as their ability to connect wealth planning to the tax and legal advice of other professionals, for the success of the company—and their clients.
“While the majority of fees in the industry are charged based on specific investments made, we feel that the most valuable service provided to investors is advice that includes the planning and the structuring of their financial affairs, which should happen before any specific investments are recommended, as well as monitoring and oversight, which is ongoing. There is much more to financial advising than picking stocks, bonds, or funds. Items such as preparing a financial plan, constructing a proper asset allocation, ensuring that assets are properly allocated across accounts to maximize after-tax returns, monitoring and re-balancing investment portfolios, and reporting progress on a regular basis generate value for investors. Further to that, items that transcend investing, such as family risk management, estate planning, and philanthropic support, provide clients with financial as well as emotional value, and it is hard to place a dollar value on that piece of mind.”
McAlister’s advice for finding an investment manager? “Find an advisor that has committed to education; look for designations such as CFP or CFA, but also look for an advisor that actually provides financial advice, as opposed to just selecting investment products. Fund management is a tool that is used as part of an overall solution, but it should not necessarily be the sole service provided. When investment solutions are proposed in the absence of the full understanding of an individual’s circumstances, wants, and needs, they run the risk of not delivering the desired outcome for the investor.”
Russ Dyck, co-founder and financial planner at Finovo, explains how robo-advisors can actually be credited for founding a new way to look at financial planning.
Finovo is a new, fee-only, Alberta-based financial planning partnership that works with young professionals. “We are a virtual firm and have clients throughout Alberta, including Edmonton,” Dyck explains. “We meet with clients via video calls since our clients’ schedules are often filled with work and family responsibilities. Video calls give our clients the convenience of meeting us wherever they are and not wasting their time on travel.
“Our business is built around the opportunity created by robo-advisors. We are big believers in the passive investing model that is utilized by robo-advisors (since 90 per cent of actively managed funds underperform their benchmark over a 10-year period), so we don’t attempt to beat them. Instead, we focus our efforts on offering a truly comprehensive service and helping our clients improve their behaviors and habits around money. Those behavioral changes will ultimately improve their financial situation more than changes to their portfolio.
“The human element that a good financial planner offers is truly understanding your goals, emotions, behaviours, and habits around money. We believe that the relationship we form with our clients is key in that process and is not something a robot can do.”
On the other hand, the rise of robo- advisors, Dyck points out, points to an important shift in client needs. “In this day and age, unless you have a complex estate situation or have a seven figure or larger portfolio, we don’t believe investment managers are as important for young professionals who are just starting out.” But this doesn’t mean that robots are the answer. “A comprehensive financial planner is extremely important, but there is a big difference between the two. Unfortunately, too few people get this distinction, and that causes the majority of the public to over-value investment choices and under-value the larger impact everyday actions have on their overall financial situation.”
What’s Dyck’s tip for finding a good financial planner? “Avoid looking solely at past performance. Instead of trying to find a great fund manager, find a great, unbiased, and fee-only financial planner instead. Ask them about their compensation structure, qualifications, philosophy, and most importantly, their biases around helping people with money. If they will only ever talk about investments, you have a one-trick pony.”