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By Tony Wanless
Excerpt from BC Business Magazine
March 2001 Issue, Money Talks
You probably tried the do-it-yourself route to
money management last year. Most people did. And
most were beaten badly when markets changed from
the heck-anybody-can-do-this heights to the hey-this-really-hurts
depths. Today, somewhat bruised, you might be
thinking about finding a pro to help manage your
carefully built stash.
Good luck. Like the markets, the money management
business has changed drastically in the past few
years. Ottawa notwithstanding, Canadians now have
a lot more to protect -close to a trillion dollars
of investable financial assets (i.e. relatively
liquid assets - a house and other 'real' assets
don't count). Consequently, there are more people
and firms competing fiercely to help them invest
that money. Fighting your way through this thicket
of advisors bearing an alphabet soup of official
designations (CFP, LLIF, CFA) can be daunting.
Here's one way to help cut the confusion: figure
out where you fit in this new marketplace. This
is usually determined by how much ready cash you're
bringing to the specific advisor, explains Adrian
Mastracci of Vancouver fee-only 'investment
counsel' firm KCM Wealth Management. KCM
is one of a breed of investment advisors that
doesn't sell financial products but will, for
a fee, advise you on what products to buy yourself.
All such companies will take on anyone as a client,
but since they often charge around $2,000 a year
for their services, clients tend toward the high
end, with portfolios of at least $200,000, where
that kind of yearly fee would be paid anyway.
When you're ready to enlist some financial advice,
you could start by looking through the Yellow
Pages under Investment Advisory Services, Financial
Planning Consultants or Mutual Funds & Brokers.
As well, ask for suggestions from people you trust,
then list potential advisors and interview them
to get a feel for how you might work together.
Because you'll both be working in tandem and with
your life savings, you must be in sync.
Generally, the money management market is segmented
as a kind of financial services 'ladder'; the
higher you climb the loftier the service.
The climb begins: Under $50,000
Welcome to the bottom-rung entry level. Despite
the fact that most Canadians fit this category
and probably need advice more than their more
wealthy countrymen, many money-management firms
treat them with some disdain, as frankly, this
business doesn't pay much. At this stage you're
still saving, rather than investing, so there
are few fees to be generated off you. However,
if you're in the higher end of this range, you
show potential, so most of the mass mutual fund
dealers and brokerage operations - especially
the discount brokers - will take you on. Just
don't expect much custom service.
Heading up: Under $100,000
You're starting to talk decent money, but sorry,
you're still in the pariah zone for many higher-end
companies because as a group you don't hold a
lot of money. Investor Economics Inc. of Toronto
figures that in 1999 11.8 million Canadian households
fit in this category, but they held a mere 15.7
per cent of the disposable wealth of the country.
Generally, the same mass-market brokers, financial
planners, mutual fund dealers and banking operations
that service the low end also work in this area.
At this stage you're now probably of interest
to a wider range of advisors, especially the 'boutique'
operations that don't chase the high-volume client
base.
With $100,000 to jingle, you can start putting
together a diversified portfolio and thus give
most advisors more with which to work. Which also
means it's even more important you first interview
potential advisors, because it's up to you to
determine if you like the advice you're getting.
Getting there: $100,000 to $300,000
The lines get fuzzy at this level but generally,
the more money you have, the more interesting
you become. (FYI: along with some 900,000 Canadian
households, you're also now firmly in the 'mid-market'
category.) If you're at the lower end, you're
probably still working with many of the aforementioned
advisors. You may also have access to rudimentary
money management through a brokerage's 'private
client' service. To wit, a specific broker with
a real name (as against some anonymous broker
assigned to a phone bank to take elementary trade
orders) is designated to handle all your stuff.
However, expect the level of service to reflect
your trading activity; brokers earn their living
through commissions on trades, not by holding
your hand as you meander slowly through the investment
landscape. If you like to trade a lot, take advantage
of most brokerages' 'wrap' services where, for
a two- to three-per-cent annual fee, the brokerage
will let you either do your own trading or do
it for you, commission-free.
En route to the top: $300,000 to $500,000
Congratulations. You're still in the mid-market
range, which accounts for about $426 billion,
but you're near the top, so you have access to
another level of money management that generally
prefers clients with at least $300,000 to work
with. Add a couple more hundred thousand and you're
a likely candidate for most of the private money
management firms. At the low end of this range,
many - but not all - private money managers put
clients into pooled funds, which are privately
managed mutual funds that carry lower fees than
the kind to which most people have access. At
the higher end, it could be a mixture of pooled
funds and customized investments and, in some
cases, completely customized portfolios. Annual
fees in this range usually hover around one to
1.5 per cent, about half what they'd be if your
stash is currently in run-of-the-mill mutual funds.
Most of the pooled funds' performances run pretty
close to market indexes, so you're not really
getting special money-management voodoo here.
But you are getting some personal service, particularly
a more hands-on formation of an investment plan.
Just about there: $500,000 to $1 million
Congrats, congrats. You've crossed the threshold
from bozo with a few bucks to upscale client with
access to a range of more customized money management
services. About 195,000 Canadians hold $235 billion
at this level. Usually the same private firms
that put you into pooled funds manage in this
area, but they'll now pay much more attention
to your pile, and the fees are lower. These guys
don't market much, but most say that clients in
this range can expect one-to-one money management,
with a manager tailoring a portfolio to personal
preferences and needs. In turn, these clients
have a fairly high level of sophistication and
recognize that pros usually outperform amateurs
and therefore should be left to do what they do
best. The only caveat is that many managers specialize
in specific styles - one might advocate extreme
conservatism while another may be of the go-for-it
school of adventurism. It's up to the client to
find a manager who suits his or her own style.
The loonie has landed: $1 million plus
For most of us, this is fantasyland. But for most
wealth managers, it's the Promised Land. In Canada
a mere 177,000 households control an astonishing
$836 billion at this level, so it's understandable
that most wealth management firms aim for this
quiet, dignified, easy and lucrative market -
everything the entry level isn't. All of the companies
mentioned above have millionaires among their
clientele but, c'mon, these clients get much better
service. When you're waving a mill or so in their
faces, private money managers - which include
the banks and big brokerages - snap to attention,
offering extreme customizing, more services, lower
fees and far more intensive hand-holding and nurturing.
Something to strive towards.
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