Downside protection can be more important than upside

Name:

James Waring

Occupation:

Financial planner, Vancouver Financial Planning Consultants Inc.

Location:

Vancouver

Age:

53

In the business since:

1994

AUM:

$25 million

Fee model:

Commission and fee-based

Typical clients:

Lawyers, pre-retirees, retired executives

This article is part of the Advisor’s Edge 20 Ways to Be a Better Advisor feature package, published in the June 2018 edition of AE. Click here for more tips and to learn about our 20th anniversary.

James Waring says it’s too easy to become an advisor. As a finance professor at Vancouver Island University, Waring has taught the mutual funds licensing course for the last 15 years.

He’s designed the curriculum so he teaches students more than enough to pass the exam. His course includes case studies, and requires students to research and rank actual mutual funds based on hypothetical client objectives. (Students have noted on RateMyProfessors.com that they appreciate Waring’s real-life experience.)

He marvels that there’s no degree or designation requirement to be able to sell financial products. “The mutual funds course or securities course, on its own, with a high school diploma, is not enough. Even with my teaching, there’s stuff that I’m coming across that I wasn’t aware of,” he says. “I have an accounting designation and the CFP, but there’s so much information and it’s always changing.”

He theorizes that much of the wrongdoing in the industry is not a result of nefarious intent but of incompetence, like a frontline staffer telling a prospect a mutual fund is free because they don’t understand that a no-load mutual fund still has fees. “They don’t know any better. Or they don’t want to make the effort.”

Waring—himself an MFDA advisor—would like the minimum requirement for mutual-fund licensing to be the CFP and an undergraduate business degree. “To be treated as a profession, you don’t just call it a profession,” he says. “You give it the respect and the competency it deserves.”

Understanding risk

In addition to teaching 10 hours a week, Waring serves a book of long-time clients. In his 24 years in the business, he’s made mistakes and draws upon them to warn the next generation of advisors.

A big misstep? Not being conservative enough.

When he started in the business, GICs were returning double digits and mutual funds could return close to 20%. “We used to do withdrawals of 8% for RRIFs, and all of the accounts would continue to grow,” he recalls. “You couldn’t lose, right up to the tech bubble. So I didn’t have any concept, as a new advisor, of what a bear market was.”

As such, when he created portfolios in the early days, he didn’t account for downturns. “I didn’t think there would be any. In a sense, I was overstating returns and understating the risk,” he says.

The 2001 tech crash chastened him. Now, when Waring chooses investments, he factors in downside protection. “That’s where a lot of the value that I get from active management is.”

He also explains risk more carefully, especially for people who haven’t experienced downturns themselves.

“If you don’t explain the difference between permanent losses and temporary losses, and what you’re doing to manage the downside and volatility, then people can create permanent losses by getting out of the market.”

When it comes to returns, “There’s no prize for overstating anything,” he warns students. “We used to do everything at 8%, 10% with our projections. Now it’s 4% and 6%.”

Entering the industry

Waring says many of his students want to work as independent advisors, so he tells them to look for established independents who are nearing retirement and willing to pay a salary. “Then, have an agreement to buy their business. It’s a win-win because you end up getting to know the business and there’s a good fit for the clients.”

The salary element is particularly important, he says. “I also tell them if they’re in a situation where they have lots of debt, like student loans, don’t put yourself in a situation where you’re in straight commission, because you’re going to be under pressure to oversell product.

“You need to be in a situation where you can just act in the best interest of the client.”

Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.