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By Jonathan Chevreau
National Post
Advisor Post Section
Monday, July 11, 2005 |
This is a new column for this section. Its branding may seem familiar to radio listeners but it seemed an apt label for what it plans to cover.
Adrian Mastracci, investment counsel at Vancouver’s ‘fee-only’ KCM Wealth Management, says, "I hope they're not saying the BMO Investment Advisors can't do it as well under the current systems.”
After all, who would want to be other than "well-advised," whether in our finances or any other aspect of our lives?
As consumers of health services we have a right to demand the best medical advice: Our very lives may be at stake.
So, too, with financial advice: Our financial lives may hang in the balance. The destruction that accompanies poor or self-serving advice is well-documented in John Lawrence Reynolds' book The Naked Investor.
One hopes such cases are rare. There are bad apples in every profession, including even journalism, quips Dan Richards, a marketing consultant to both the financial industry and advisors.
Over a lunch set up to brainstorm this column, we discussed the fact that, while our respective jobs might be consistent with being "do-it-yourself" investors, both of us have chosen to use independent advisors. I use a traditional commission-based advisor; Richards is in a fee-based account, paying 1% of assets on a portfolio almost 100% in equities.
The big trend underway is to move from the former to the latter. More on that in the second half of this column.
Either way, the issue for consumers is how much financial advice is worth and the extent to which it "adds value."
An advisory relationship is like any other partnership: the foundation is trust. A good advisor is worth her weight in gold; a bad or unscrupulous one is poison to be shunned.
"If you don't feel at the core you can trust your advisor in terms of the advice you're getting and it being aligned with your interests, do yourself and your advisor a favour and find another advisor," Richards says.
In the 1990s, investors enjoyed double-digit returns, so weren't overly critical of advisors. Since returns slumped in 2000, the pendulum has swung in the other direction. As Richards points out, a pendulum doesn't stop in the middle but swings to the other extreme.
That's the environment in which we launch this column -- one of profound consumer skepticism about the value and costs of financial advice. The minority of "black hat" advisors have made it harder for the majority of "white hats" to do their jobs.
Some of their most coveted customers have responded by trying to "do it yourself" (or do it to yourself in the case of those unequipped to do so).
Perhaps 5% of the investing public is emotionally and intellectually able or willing to go it alone. The majority need a dispassionate third party not as emotionally attached to their investments as the investors themselves.
Because of information overload, investors tend to filter out ideas that conflict with their core investing beliefs, Richards says.
Psychologists would call this "cognitive dissonance." A good advisor forces you to face facts and trends you might otherwise ignore. In my own case, my advisor tipped me to income trusts very early in the game. I'm glad he did.
More often, it's what an advisor talks you out of doing that proves to be of the most value. By keeping you to a long-term disciplined investing program, he or she may save you from yourself.
We'll return to this theme often and I invite both advisors and consumers to e-mail me their thoughts.
Moving to specific developments, BMO Nesbitt Burns has announced pilot studies in Ottawa and Toronto for a new fee-based advisory service it plans to roll out nationally in September. It's a Unified Managed Account program it dubs Architect.
According to Sarah Widmeyer, managing director of BMO's Managed Assets Group, Architect "combines the individual security ownership and customization benefits of traditional separately managed accounts with the diversification and operational efficiencies of a mutual fund wrap program."
In some respects, Architect resembles a traditional "open architecture" brokerage account: It can hold a multitude of investments, including mutual funds, stocks, ETFs, income trusts, hedge funds and even annuities.
The difference is it's fee-based rather than transaction-based. In order to prevent paying two sets of fees, the mutual funds sold within it must be F-class versions, which strip out trailer fees. BMO plans to make the same requirement of other investments held. Thus, the first hedge fund approved for inclusion -- a Chicago-based fund of funds called Thales -- is available in an F-class version.
UMAs have been around for two years in the U.S. with participation by such majors as Merrill Lynch. Widmeyer believes BMO has stolen a march on its Canadian rivals. "Other firms are madly working away on versions of it."
Rebalancing, cash management and tax optimization are performed by Dallas-based Placemark Investments, which BMO describes as Architect's "Overlay Portfolio Manager" or OPM.
Funny, I always thought OPM stood for Other People's Money. Clearly, Architect reflects the major trend underway in all the big banks -- away from commissions on transactions and toward levying larger overall fees on OPM.
Pinning BMO down on Architect's fees was difficult since the arrangement varies with asset allocation and the amounts invested. The minimum is $150,000 but fees taper down after the $1-million level.
Widmeyer describes the fees as "flexible," since advisor compensation may vary, depending on the mix of active and passive product incorporated into client portfolios.
Overall, fees appear comparable to portfolios of DSC funds or mutual fund wrap accounts (i.e. in the 2% to 2.75% range). Widmeyer says double dipping is impossible because accounts are "stringently monitored" and managed accounts are not permitted to hold new issues.
Still, consultant Kelly Rodgers is underwhelmed by Architect. She is skeptical about clients paying fees in order to do what their advisors should have been doing all along. "I don't really understand what's so new and spiffy except it's an open architecture model. Royal [Bank] has been working on that for some time."
Adrian Mastracci, president of Vancouver-based KCM Wealth Management, noted one of the benefits claimed by Architect is that advisor and client can "clearly track performance." To this, Mastracci quipped: "Gee, I hope they're not saying the BMO IAs [Investment Advisors] can't do it as well under the current systems."
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