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managing your wealth

With the markets rising and falling, security selection is one of least controllable roles for a financial planner, an expert says.Cathy Yeulet

Given the heavy focus that the investment industry (and investment writers) put on selecting the latest and greatest fund or rising asset class, it should be no surprise that investors, too, spend a lot of time worrying about what to put in their portfolios.

But is it that important? When it comes to hiring a financial advisor or portfolio manager to manage your money, is picking the right investments to stuff in your holdings the main reason you hired outside help?

It really isn't. At least according to people who do it for a living.

The investment industry has long placed a high value on what to buy and far less on guidance on all the other decisions that make up the financial services offering.

Because markets rise and fall and sectors go in and out of favour, often unexpectedly, security selection "is the part you have the least control over," explains Dan Hallett, a vice-president and principal with HighView Financial Group of Oakville, Ont.

Advisors bring a lot more value to the table in areas such as needs assessment and risk allocation. "If you do it the other way around, like many do, you just end up chasing product without any overriding strategy or plan," Mr. Hallett says.

His firm has created a portfolio construction chart that places security selection as last in order of value. Of more importance, it says, are services such as asset allocation, asset location and revisiting the objectives of the portfolio.

Sterling Rempel, of Future Values Estate & Financial Planning in Calgary, agrees that there is a lot more to his service offering than stock picking.

"What I do best is put together a plan that is in accordance with their values and is ultimately going to get them toward their goals," the wealth and estate planning specialist says. "Sure, investments are a tool along that but they are not the end objective.

"The end objective is their sustainable income in retirement and making sure that their family is okay no matter what."

In the Calgary adviser's practice, his offering comes with the realization that sometimes what is best for a client on paper is not always what is best in practice. He gives the example of a client who is very security-focused and wants to know whether paying down the mortgage before investing makes sense.

Investing may make more sense, "but if they want to have their house paid off no matter what, that is a more emotional, gut-based decision."

Advisors say the real value they bring to a client's portfolio comes not in times when markets are frothy and everything looks rosy, but rather when times are tough and people are stampeding for the exits.

Wanting to get out when times are bleak is natural, but it is also deadly for portfolio returns. Mr. Rempel advises his clients against selling into down markets and will counsel them to buy, adding to their positions.

It's counterintuitive and unpopular advice to give clients, particularly when times are darkest, such as in the 2008-09 market crash. "We see that human behaviour when we look at cash flow into investments. Money flows into investments as they are on the rise up and flows out when they are dropping in value.

"Our job as advisors is to help them to not stop, not pull out or crystallize their losses and that behaviour is the difference between investors who earn 3 per cent when the index has earned 8 per cent."

If stock and fund selection is the glory work for advisors, the real value comes from the grunt work, says John DeGoey, a portfolio manager with Industrial Alliance Securities Inc.

His list includes asset rebalancing, keeping costs and taxes down by keeping turnover of assets low, and "constructive behaviour modification."

At the top of the list is to resist the buy-high, sell-low tendency.

That includes warning investors against buying stock market darlings at the top of the market and encouraging them to sell those favourite securities after a good run.

"Some people say, 'I don't want to sell when it goes up because I don't want to pay the tax.' I say sell; pay your tax instead of running it all the way back down again."

A classic case would be former stock market star Nortel Inc., which rose to unimaginable heights before a horrific plunge. "Yes, you don't have to pay any tax but you also don't have any money," says Mr. DeGoey, summing up the folly of the hold-firm stock strategy.

Good advisors also earn lasting clients and referrals from the more mundane chores such as income splitting, integrating pensions, topping up registered retirement savings plans and tax-free savings accounts, estate planning and insurance needs – or as Mr. DeGoey calls them, "all those sorts of other things which don't show up expressly on a return statement but nonetheless have real value."

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