By Dan Hallett on January 8, 2021
The rollercoaster that was 2020 has slipped into the rear view. So many of us are looking forward to a happier and healthier 2021 and beyond. The turn of the calendar is also a time of resolutions for many. Once the financial planning basics are addressed – i.e., proper insurance coverage (namely disability and life), elimination of non-productive debt, establishment of required short-term cash reserves, and updated wills and powers of attorney – there are many ways to improve your investment experience.
Deal with a fiduciary
According to the Ontario Securities Commission’s (OSC) Investor Experience Research Study (August 2020), more than ¾ of investors deal with a “financial advisor”. That majority should aim to engage a firm held (or otherwise committed) to a legal fiduciary standard. This is the highest legal standard of care and is most accessible for affluent families.
More options are emerging for other investors that do not meet the minimums of fiduciary advisory firms. In contrast, the vast majority of financial and investment advice providers are held to a “suitability standard”. See our FAQs for a short explanation of suitability vs fiduciary.
Make sure your advisor emphasizes planning
It is tempting to fast-forward to selecting investments. But the prudent, sustainable way of constructing investment portfolios is to not talk about investing at all in the beginning. Your investment portfolio should be designed in a way that aligns well with your goals. A robust wealth plan is required for most people to identify and quantify goals – out of which a target rate of return will emerge. Accordingly, investing your wealth before (or without) creating a wealth plan is akin to putting the cart before the horse.
Don’t let wealth plan and IPS gather dust
Creating a robust wealth plan is an important step, but it will be all for naught if nothing much happens after the ink dries. To maximize the value of documented advice, your wealth plan and investment policy statement (IPS) should be living documents that guide initial actions and ongoing management. Putting the initial plans into action should be paired with a review and update process to make sure your progress and portfolio stay on track and aligned. That creates accountability and maximizes your chances of achieving your goals.
Know your costs
The aforementioned OSC survey revealed that 53% of investors consider costs “very important”; with an additional 37% calling costs an “important” part of monitoring investments. Yet only 60% of these same investors said it was easy to find and understand cost information for their portfolios. The investment industry bears a lot of blame for this.
Accordingly, investors should resolve to require a clear and accurate cost disclosure from their financial advice providers. This is just as important before committing to an advisory relationship as after (i.e., through ongoing reporting). This blog post digs into questions to help get a full cost picture.
Demand transparent reporting
Clear cost disclosure is but one key component of transparent reporting. Others include detailed rates of return (including a breakdown of deposits, withdrawals, income, and changes in value), and benchmarking performance against personalized goals and market-based benchmarks. Moreover, the layout, format, and language should be designed with the portfolio report’s purpose in mind – i.e., to inform (not overwhelm) clients.
Each part of your portfolio should serve a specific purpose
The portfolio design weaknesses I began seeing in the late 1990s have largely persisted through to the present – and remain commonplace. As the saying goes, the more things change, they more they stay the same. These weaknesses – e.g., a long jumbled list of investment products or what we call diworsification – can be addressed by making sure that every product in a portfolio plays a specific role in pushing you closer to your goals. This test can be applied to existing investments and, importantly, to any potential new product prior to investing.
During my participation at the OSC’s 2017 roundtable discussion on banning embedded commissions, I stated that the broader financial advice industry too often fails to treat clients as they would want to be treated. Maintaining this perspective is key to a fiduciary mind-set, from which the other above practices should flow.
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