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Portfolio security: Asking simple questions is the first step

As our firm passes the two-year mark, we aren't able to generalize about where our clients are coming from or why they chose us, but we can make some observations about what their previous portfolios looked like, and more broadly, the state of the Canadian investor.

I'm referring to the clients for whom we manage a significant portion of their wealth, as opposed to those who have used Steadyhand funds to complement what they're doing elsewhere. Our sample is a biased one, because more often than not our new clients are unhappy with their old provider. My mother (no choice) and in-laws (loyalty) are exceptions.

I am generalizing when I say that we have met too many clients that don't know what they own, how much they're paying and most importantly, how they're doing. In many cases, the biggest part of what we do for them is pull together all of what they own and help them answer those three simple questions.

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When we sort out what they hold, it's invariably too much - too many providers, too many securities and too much confusion. One of my most popular columns was about a couple that owned 29 mutual funds between them. We've seen portfolios that surpassed that level a number of times.

This trend to overdiversification has multiple contributors. The clients have their money spread around in too many places, the advisers or dealers have them invested in too many overlapping products (a different one for every registered retirement savings plan season), and many of those products hold hundreds of securities in their own right.

The problem with being overdiversified is that clients don't remember why they own the securities and don't have a good reading on what their asset mix is, which is the most important part of the investing process.

They also end up with what amounts to a high-cost index fund, which leads to the fees question. Certainly, we found situations where clients were paying too much for services they weren't receiving, but that wasn't the biggest problem. With few exceptions, our new clients didn't know what they were paying previously, and it wasn't always easy to find out.

They weren't clear about what the fee arrangement was with their adviser - commission or asset-based - and they were often jolted to find out the magnitude of the deferred sales commissions when they went to move their account (otherwise known as the dreaded DSC).

Again, there is lots of blame to go around on the question of cost. The clients aren't asking the questions and the industry has gone out of its way to obscure the numbers.

On the "How have I done?" score, clearly everyone is unhappy these days. But again, the issue isn't only about returns. It's also about not knowing what the numbers are, and whether investors are doing well or poorly in the context of the market. They are left to guess based on their quarterly statements.

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These observations come in the face of a research piece recently published by Chicago-based Morningstar called Global Fund Investor Experience. The report analyzes the fund marketplace in a number of countries, highlighting the strengths and weaknesses of each. Canada ranked seventh out of 16. We received As and Bs in all categories except one. Under "Fees and Expenses," we took home a failing grade.

In the context of what we've observed, the F for fees is not a surprise, but the A for transparency certainly is. Canadian investors would not rate the industry that highly, although in fairness to Morningstar, the gap is likely due to how funds are sold here, not faulty analysis. The direct-to-client model is well established in the U.S. and elsewhere, but in Canada, mutual funds are overwhelmingly sold through third-party dealers - bank branches, investment dealers and financial planners. It is the use of these intermediaries, who are responsible for reporting to clients, that increases the potential for a cloudier transparency.

Watching our RRSPs go up used to be fun, but the markets of the past two years have changed that. For many, investing is now like insurance - a necessary evil. That's unfortunate because the responsibility for generating income in retirement is increasingly falling on their individual shoulders. Canadian investors need to become more engaged in their investing, not less. This doesn't necessarily mean they need to pick their own stocks and bonds, but they do need to be good consumers of financial services. That includes having a well-articulated plan, knowing what they own, what they're paying and how they're doing.

Tom Bradley is president of Steadyhand investment Funds Inc.

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About the Author
Tom Bradley

Tom Bradley is the President and founder of Steadyhand Investment Funds. His education includes a Bachelor of Commerce degree from the University of Manitoba (1979) and an MBA from the Richard Ivey School of Business (1983).Tom started his investment career in 1983 as an Equity Analyst at Richardson Greenshields. More

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