Set-and-forget investments

Young clients have long time horizons. So they’re prime candidates for a set-it-and-forget-it investment model.

Here’s an example of that in action. In 1986, one of my mother’s clients had a bit of extra money. So my mother advised her to buy 100 shares of a Canadian bank stock, and reinvest the dividend. As this client earned more, she added to her position and took advantage of warrants offered during stock splits. Her total investment: $7,000.

In 2011, she brought in the share certificates. The position was worth $123,000.

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I frequently share this story with young clients who need motivation to save, or who feel their investments are small potatoes. If someone has at least 30 years until retirement, the earlier she starts investing, the more the money will grow and compound. Sometimes, it really is that simple.

Both mutual funds and individual stock positions can offer great returns, but I prefer the latter for set-it-and-forget-it plans. In my experience, younger people want to own companies they like because they’re often customers themselves. For example, Canadians know Tim Hortons—they understand people buy coffee every day and therefore don’t perceive its stock as risky.

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Fees for young clients

If young people are worried about cost, work with them to make it fair for both parties. Let them know how much of your time they can expect, discuss what that base level of service will cost, and explain what they’ll be responsible for in that type of relationship.

Young clients can’t expect advisors to work for free; still, we shouldn’t leave them to fend for themselves. More importantly, your compliance department requires that you offer all clients a minimum level of service.

In my book, that usually includes:

• An introductory meeting;
• Basic investment policy statement;
• A model portfolio;
• Access to research;
• Online account access for the client;
• Monthly and annual statements;
• Taxation reconciliation and slips;
• Annual portfolio review;
• Annual KYC update; and
• Yearly review of income needs.

Meanwhile, mutual funds (or ETFs) are good choices for many reasons, including low fees; diversification, which mitigates risk tolerance issues; professional portfolio management; and access to specific markets or asset classes.

Larger investment firms have higher management and administration fees, but there are ways to get around them if you use tools like proprietary fund offerings. This lets you work within the system until younger clients get to a level where individual securities make more sense.

Costs

The costs to the client differ depending on what solution you’re using. If you’re fee-based, funds will work. But if you have a young client with $3,000 who’s just starting to build assets, a transactional account might make more sense. Our team is working toward a fee platform, but we take smaller clients on a transactional basis. As their assets rise to a certain level—say, $100,000—we move them to fees.

Read: How to frame fees

Investment models

Set-and-forget models are well suited for both RRSPs and TFSAs. In his latest book, The Wealthy Barber Returns, David Chilton explains if clients don’t invest their RRSP tax refunds, the TFSA actually has a larger benefit since they’ll never pay tax down the road.

So I often recommend TFSAs, depending on a young client’s tax bracket and level of saving discipline.

Caroline Hanna, Investment Advisor, BA, CIM, National Bank Financial Wealth Management.