How to recover from bad financial advice

It’s not fair to pay for the services of someone who’s not helping you. Netanya* found out the hard way that even the ranks of financial advisors aren’t immune from underperformers.

She is now retired, but once owned a successful dry-cleaning business and, prior to 2008, had a portfolio worth $4 million. She’d intended to leave $1 million to her two children but, by 2009, the market downturn combined with her poorly-designed portfolio resulting in her portfolio value dropping by more than half.

Jason Vincent, president and chief operating officer at Matco Financial Inc. explains that when times are good you can get away with a less-than-well-designed portfolio. But when things turn sour, the cracks appear.

Several mistakes had been made in the handling of her portfolio:

• Her stocks were chosen with the firm’s interests in mind. Stock choices were riddled with conflicts of interest.
• She had a slew of unrated corporate bonds. “Once you get below ‘BBB,’ ” notes Vincent, “the big [ratings] agencies are saying, ‘investor beware.’ ”
• Netanya had about a dozen securities that were high risk and unsustainable.
• Her portfolio included highly speculative issues shy of penny-stock status.
• She was told half of her portfolio was low-risk investments when really only 30% of it could be considered as such.

Vincent notes Netanya’s former advisor wasn’t discretionary, so from a legal point of view she’s the one who made those bad decisions. “The broker would call her up and say, ‘You should buy this.’ And she would say, ‘Is it good?’ and he would say, ‘Yeah, it’s really good,’ ” so she agreed.

How he helped

Vincent had to trade out Netanya’s portfolio and rebuild from scratch. While ditching an entire portfolio can be tricky when it comes to taxes, in this case, the claimable capital losses more than balanced it out.

At 68, Netanya is concerned with the immediate future and isn’t looking for big risks.

Vincent says a suitable portfolio would generate approximately 4.2% annually, which meant about $80,000 in gross income without eating into principal. Netanya said that wasn’t enough: she wanted $120,000.

Vincent devised an alternative, producing the extra $40,000 from annual capital gains when market conditions permitted.

The benchmark asset mix is half equities, half fixed income, with about 10% manoeuvrability. Vincent says his market outlook justified bumping up the equity weighting the full 10%. But he doesn’t shift out any of the high-quality holdings the mix is built on; only the weightings that get modified.

On the equity side there are no micro-caps, and only a few mid caps with sustainable distributions. Income-biased large caps make up 45% to 50% and, of that, about 50% is Canadian. The rest is global, which includes the U.S.

The fixed-income allocation is built on corporate, municipal and provincial holdings. While Vincent says redesigning the portfolio wasn’t the hard part, difficulty came on the communication front. Vincent says he had to tell Netanya he couldn’t get her back to $4 million without taking on too much risk — a message that wasn’t easy to hear.

He stressed the high-risk investments made her predicament worse. “And I don’t view your baseline at $4 million; I see our starting point at under $2 million,” he said to her, adding that the level of risk she’d have to take to have the opportunity to get back to $4 million in a short period of time could mean dire losses in the event of another downturn.

Netanya took Vincent’s advice, but not before checking out the competition. He speculates her motive was to determine whether his methods were more conservative than necessary.

In the five years since, Vincent’s approach with Netanya has turned out well, with her portfolio now at 2.7 million, even as she takes $120,000 off the top each year. She has, though, had to modify her estate-planning goals. Instead of $1 million, she’ll now be leaving $500,000 to each of her children.

The key lesson here is that you should choose someone reputable and it should be reason, not blind faith, guiding your choice. If someone’s pitch sounds too good to be true, it probably is.

*Name has been changed