How to work with small investors

Coreen Sol

Coreen Sol is vice-president, portfolio manager at CIBC Wood Gundy in Kelowna, B.C. She serves more than 400 clients. Her practice is based on four portfolio models for most clients, and she has a separate platform for smaller accounts.

The financial services industry is evolving. As advisors continue to adjust to CRM2 and best interest standards, they’re also aiming to gather more assets.

And Coreen Sol foresaw these changes. “When I received my CFA charter in 2003, it was already clear to me that a private-wealth advisor couldn’t add much value unless they were in complete control of all of the clients’ assets under management and every position on the books; something very difficult to do with 300+ clients and 1,000+ positions in a typical transactional practice at the time.”

So Sol, vice-president and portfolio manager at CIBC Wood Gundy in Kelowna, B.C., decided to get ahead of the game. She modified her process so she could serve all types of clients.

While she won’t say she’s competing with robos, she notes that’s where the industry is headed. That’s why advisors should be integrating some automation into their practices, she says.

So how does she serve those who have assets of less than $250,000 (which her firm considers “small accounts”), all the way up to those with more than $1 million? Through two platforms. One is based on four portfolio models, which she uses for most clients (most are above the “small category”); the other uses ETFs and a low-turnover group of investments for small clients.

Most clients

Clients who have at least $250,000 in assets are served through four core portfolios, which run through her firm’s global wealth platform. One trade lands proportionately in client accounts.

And she uses this homogenous approach for the majority of her clients. She manages roughly 30 positions in each portfolio, which can include equities and fixed income via ETFs and individual securities. While Sol prefers equities over the long term, she offers a variety of asset allocations to find suitability for clients. Generally, asset allocation for the four models is:

• advanced growth (100% equities);
• progressive growth (70% equities, 30% fixed income);
• balanced approach (50% equities, 50% fixed income); and
• smart income (30% equities, 70% fixed income).

When it comes to security selection, she uses a disciplined, quantitative approach. “It allows me to find the parameters I’m looking for in various market environments, including momentum, value and growth. We look at beta for volatility, income and sustainable growth.” Beta, she explains, indicates how much systematic risk a security has to the market. The volatility of the TSX is 1, for instance. Taking an extreme example, a beta of 1.5 means the security has an expected volatility of 1.5 times the TSX.

“I have a tendency to be lower than the systematic risk of the market,” she says. “So if the TSX is at 1, I’d generally be lower than that.”

Beta for the four portfolio models is arranged sequentially, so that the systematic risk of smart income would be lower than the balanced; balanced lower than progressive growth; and progressive lower than advanced.

Many stocks she includes in portfolios are from companies that have new innovations, and are technology-based. For instance, she’d prefer a company launching payment systems over banks; or transportation over real estate. She adds liquidity is the biggest issue she faces across all four models—selling out of illiquid preferred shares during volatile markets can be tricky. “Knowing how much to allocate is tough, because you can’t find the liquidity in a quick exit.”

Small accounts

Sol explains her small account threshold this way: “I wanted to open up my practice to the children and grandchildren related to my existing clients,” she says. “Statistically, small portfolios underperform larger portfolios, but I still wanted to make sure I was adding value for those clients.” The process is similar to those with more assets. Sol has a modeling system that is synchronized across these accounts. Again, if she makes one trade, it’s proportionately distributed to these clients.

Her model is split into two portfolios: equity and balanced. The equity/fixed-income split varies based on market conditions—the equity portfolio is never 100% equities because it’s actively managed; the balanced portfolio can range anywhere from 30% to 65% equities. “When I feel the market is overheated and valuations are out of line, I’d reduce the equity exposure,” she says. The values of the portfolios are smaller, so she uses more ETFs allocated to specific sectors, rather than picking 30 stocks. “We would have five ETFs, and one or two stocks with high conviction,” she says, which is across both portfolios.

What’s different is the type of stocks that would be in each—the balanced would have stocks with less risk. That’s how she’s able to help small clients who have a lower risk tolerance; using a balanced portfolio and holding fixed income to maturity helps satisfy their needs because it provides low- to moderate-risk growth.

Say a client’s risk tolerance is just 30% equities, but Sol’s balanced portfolio is at 50% due to market conditions. She’d put part of the client’s assets in the balanced portfolio, which is actively managed. The rest is put into a fixed-income position that matures. “We wouldn’t trade the fixed-income position,” she says.

Clients with TFSAs and RESPs get special treatment because “the U.S. doesn’t recognize the TFSA or RESP as a tax shelter. So you negate the benefit of that tax shelter if you had a dividend-paying U.S. security.” So Sol doesn’t include U.S.-listed securities in these clients’ portfolio.

Fee structure

Sol charges for portfolio management based on total family assets under management. Clients who have less than $250,000 pay 2%—the more assets, the lower the fee. And as a bonus, she offers basic financial planning at no charge (e.g., risk assessment, retirement income projections).

Next up for Sol is behavioural finance. She plans to develop a personality questionnaire to ask each new client, helping her determine which portfolio the client is best suited for.

As the industry changes, she will evolve. “I like to break down old barriers. My principles about accessibility to a qualified professional by all Canadian investors support the democratization of professional investment management to all investors, not just to the ultra-wealthy.”