some rigor please!

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GUEST BLOG. The more I talk to investors, the more I find that some advisors give advice that lacks rigor. My sample is probably biased because the investors who contact me may already be dissatisfied with the advice they receive and I have no doubt that most advisers offer good advice. However, examples are not lacking, here is one.

Selling based on historical performance

Recently, a client negotiating a mortgage with a major bank had to provide their investment statements to document their assets. To encourage the client to transfer their investments with this bank, the council created a comparative document “demonstrating” that it could offer a better solution by recommending a mutual with a better performance. In this case, the sales force was excessively biased. Here’s why.

First, for comparison purposes, this advisor aggregated the assets of several client accounts that had distinctly different profiles. In fact, this client had some of his assets managed more conservatively for short-term projects and also kept a managed cash account in order to defer taxes and minimize the long-term tax impact. Exit from these distinctions in the analysis of the banking board.

Thus, he offered a 100% equity fund, while this client has a balanced risk profile with a limited risk tolerance. After years of bull markets, it is easy to choose an equity-only fund, with an American predominance in addition, to distort a presentation. There are thousands of funds in Canada following a distribution of returns that resembles a normal distribution (a bell-shaped distribution). Every year, some funds excel while others suffer. From one year to another, the funds that have offered the best performance are the ones that will be most recommended. This is somewhat normal, because it is easier to sell a fund that has generated good returns recently from the reverse, but this is not necessarily to the advantage of the investor.

Thus, it will always be possible for an advisor to find a fund, a share, any product that has done better than your portfolio in the past to convince you that it offers you a better solution. However, this is not very relevant. Most investors and advisors know that past performance is no guarantee of the future. However, these same investors are too often obsessed with presenting historical returns and use it as the main element to evaluate an investment. This is an approach that risks making you buy an investment at the worst time.

Performance comparisons should be taken with a grain of salt, and more importantly, not be the most important decision-making element. It is better to understand the proposed investment and try to determine if it is a good choice for the coming years. This is not an easy exercise and that is why many investors and advisors unfortunately rely on past returns to make decisions or convince clients.

The importance of fees.

When he asked about the fees of more than 2% per year for this fund, the bank’s adviser dismissed the question, saying that it was not important, because the returns were higher. Another argument often used in the industry in an attempt to justify high fees. I guarantee that if the fees had been lower, the performance of this same fund would have been higher! But perhaps the advisory commission, for a cheaper product that would have provided exposure to similar markets, would have been lower…

The most important thing in an investment strategy is asset allocation, much more than stock selection. Since one can be exposed to most asset classes with exchange-traded funds (ETF), there are very few (probably none) reasons that can justify fees more than 2% (even 1%) for the management of a portfolio.

In short, if you doubt the quality of the advice you receive, you have everything to gain by validating everything with another professional. Most portfolio managers or financial advisors will be happy to give their point of view.

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