5th Annual Dollars and Sense: Managed money gains traction

(October 2006) It appears the popularity of outsourcing investment decisions has surged. In our 2005 Dollars & Sense Survey, 28% of respondents said they were selling or recommending managed products. This year, the number has climbed to 43%.

“I am a big proponent of asset management programs — 90% of my book is in them,” says Robert-Yves Mazerolle, CFP, CIM senior financial planning advisor, Assante Capital Management in Halifax. “It would be very difficult to have a financial planning practice and deliver holistic financial planning and try to be a fund picker or securities picker at the same time.”

By outsourcing portfolio management, Mazerolle says he can spend more time on service issues, as well as managing his practice.

“If I position myself as a financial planner who provides holistic financial planning, I can’t be a portfolio manager at the same time,” he says. “I would tell them that I hoped they didn’t hire me to pick funds for them. That’s not what I do. I’m a financial planner, not a fund picker.”

For most of his clients, the “bottom line” statements that come from a managed portfolio deliver exactly what they want: a simplified, personalized rate of return for the overall portfolio, without the distraction of individual fund performance data.

“They get to see what they put in, what it’s worth and their personal rate of return. That’s the very bottom line,” he says. “When I sit down with a client to conduct a review, we don’t spend a lot of time talking about the portfolio itself.”

He says streamlining the conversation on portfolio performance allows him to spend more time on the other aspects of financial planning, such as estate planning, insurance needs and family issues.

More 5th Annual Dollars&Sense:

• Prospecting your way to success • Conquering paperwork problems in your office • Client spending and saving for retirement • Survey tool: How do you compare? • More resources and tools to help with your biggest challenges

Back to 5th Annual Dollars&Sense mainpage

Not all advisors embrace managed money to the same extent of Mazerolle, but they still find a place for it in their practice.

Bert Hettinga, B.Sc., CFP, senior financial planner at Assante in Calgary, finds that while many clients appreciate the simplicity of a wrap account’s statement, others like to see the “nuts and bolts” of their portfolios.

“It doesn’t work for the very technically inclined client, because it tends to just gloss everything over,” Hettinga says. “[Managed portfolios are] poor from a marketing point of view for the nuts and bolts kind of clients because they are just too boring.”

For these clients, the bottom-line reporting associated with a wrap may smooth out the product’s performance too much. A hand-picked portfolio of funds may include some double-digit gainers, balanced out by some decliners. The overall return may only be 4%, but the visible highs and lows assure the client that the portfolio’s components are working as expected.

With managed money, however, the client may look at the same 4% return and wonder why they have bothered investing. But even for these investors, Hettinga has found a strategy to make the reports more palatable.

“Now, I do talk about the individual slices inside the wrap account, which is something I didn’t do originally,” he says. “If they see the plus-18 and the minus-8, and I can show them the 4%, they’re still happy because of the plus-18.”

When he first started presenting wraps to clients, Hettinga faced the question of what value he offered, if all the investment decisions were made by the wrap manager.

“I explained that when I’m advising on individual mutual funds, my role is to monitor the managers and the individual mutual funds,” he says. “When I’m using a managed account or a wrap account, my role is to monitor the manager of the overall program. You still want an independent advisor giving unbiased advice — or the closest thing we can.”

Of course, the flip side of 43% of advisors outsourcing their investment decisions is that the majority prefer to build the portfolio themselves. Critics point to “high” fees, “excessive” compensation, and predict that, in the long run, wraps will provide only mediocre returns.

“What our industry has is a lot of great sales people who aren’t perhaps up to speed on the technical investment side,” says Duncan Stewart, portfolio manager at Stewart Financial in Oakville, Ontario. “I think I can add greater value using the entire universe of available investment products as opposed to putting all the investments into a specific wrap which has a limited and biased investment universe.”

“Generally speaking, the fees are too high and the compensation is too high. There are certain wrap programs where the normal compensation is 125 or even 150 basis points,” Stewart says. “I would argue that the compensation should be less in a wrap program because you’re not really managing the individual assets. You might be providing some of the other services, but you aren’t really providing investment management.”

Mazerolle argues that the compensation is still justified, however, because the client benefits from his holistic planning approach.

“It doesn’t matter if you are using a fund-picking approach or an asset management program, because the compensation is the same. Where’s the value as an advisor? Is it in picking funds, or in providing holistic financial planning?” he asks. “My personal belief is that if I’m a client working with an advisor who prides themselves on picking funds and doesn’t do anything else, I think you have a losing proposition. I’m getting a commodity — the fund — but I’m not getting wealth management.”

More 5th Annual Dollars&Sense:

• Prospecting your way to success • Conquering paperwork problems in your office • Client spending and saving for retirement • Survey tool: How do you compare? • More resources and tools to help with your biggest challenges

Back to 5th Annual Dollars&Sense mainpage

Yet another advantage, he adds, is that outsourcing portfolio management minimizes the advisor’s risk of committing transaction errors, or miscalculating weightings while reallocating assets.

“By using asset management programs for the vast majority of clients, you’re eliminating a lot of administrative tasks and you’re eliminating the potential for mistakes, processing errors and things that fall through the cracks,” says Mazerolle. “When you do a lot of transactions, there are always going to be administrative errors at some point.”

The fifth Annual Dollars & Sense Survey was conducted among a representative sample of 1,183 of Canada’s financial advisors between June 20th and July 20th, 2006. The margin of error for a project this size is plus or minus 2.8%, 19 times out of 20. Please be advised that the margin of error is larger for further sub-groupings of this population.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(10/12/06)

Steven Lamb