Q&A: What do I need: Investment manager or Financial Planner/Adviser?

 Question (paraphrased):

While I use ETFs, my portfolio returns have not been great.

Should my husband outlive me, he will not be able to continue to manage our portfolio.

I found some pooled fund managers who charge 1.3-1.5% per year and have outperformed the market, so why not just invest our assets in their funds? Can you point to some resources to identify some good discretionary managers?

Answer:

What you need is not a pooled or discretionary asset manager, but more likely a financial planner/advisor who can generate and implement a financial plan meeting you and your husband’s ongoing needs.

First some comments (keeping in mind that I am unfamiliar with your specific situation):

-Your recent ETF based portfolio performance, if you were using low cost plain vanilla passive implementation of broad-market indexes, would be determined primarily by the specific asset allocation that you have chosen. The same is likely to be true for the pooled funds that you might be looking at, on the average their return will be the market return for their asset allocation less the higher expenses associated with the fund compared to the ETFs. Are you comparing apples to apples?

-I will not comment on the specific managers that you mentioned, but generally, while some active managers outperform “the market” or their benchmark in any one year, the majority fail to do so, and certainly few if any do so on a sustained basis; also one cannot determine in advance who will be next year on the minority/short list of outperforming managers. Broadly diversified low cost index funds mostly beat the average of such managers simply because they can implement the same asset allocation for 0.1-0.3% per year

-Pooled funds which might charge 1.3-1.5% do not usually come with financial advice

-Canadian mutual funds usually charge 2-3% per year, which includes embedded trailer fees of 0.5-1.0% for some unspecified and highly variable ‘advice’; the advice typically doesn’t include a financial plan and only rarely comes with an explicit commitment to a fiduciary (‘client best interest’) level of care

-So given that on the average active managers will underperform the market by an amount equivalent to fees, transaction costs and taxes, and only a small proportion of the active managers will beat the market, and it is unlikely that you’ll be able to identify future superior performers in advance, for most investors saving for retirement or already in retirement, I would rarely pay for asset management per se.

-However one will get value from a financial plan, which typically would include a formulation of your goals and objectives, an assessment of your risk tolerance, an asset allocation compatible with your risk tolerance and financial circumstances (assets, liabilities, legacy objectives, etc), as well as a corresponding portfolio implementation and a safe withdrawal strategy (i.e. one will get value from an Investment Policy Statement-IPS). With that information some might feel comfortable enough to execute the IPS recommendation themselves, while others might prefer to pay for ongoing portfolio rebalancing, withdrawal strategy fine tuning and other financial advice (e.g. insurance requirements). This might typically cost 0.7-1.0% of assets annually, if assets were of sufficient size. So your total annual ongoing cost might be say 1.0-1.3% (including underlying ETF costs) but the vast majority of the cost would be for specific individual financial advice (not asset management)

-I would also like to clarify the difference between discretionary and pooled asset manager. A discretionary manager is one to whom you grant complete authority to run your personal portfolio to achieve a pre-agreed to set of objectives consistent with your risk tolerance, whereas a pooled asset manager combines the assets of a number of individuals or pension funds to get the economies of scale necessary to reduce the fund management costs.

Bottom line:

While I am not familiar with your situation, but especially since you are concerned that your husband might not be able to manage your portfolio if you were not around, I would argue that what you need is not an investment manager, but a financial planner/adviser who will provide a financial plan (an IPS) and its ongoing implementation and maintenance to give you the peace of mind that if/when you are not able to manage things on behalf of your husband as well, the planner would continue to do so (perhaps with oversight provided by your husband and/or a trusted family member).

You could start with reading about choosing an advisor in my “Choosing an advisor” blog post, MoneySense has an extensive list of Canadian fee-only planners at “Where to find a true fee-only planner” and my blog post Articles on selecting an advisor has a list of articles on the subject.

Interestingly, in the last couple of weeks I’ve had a number of other exchanges with readers on acquiring a portfolio manager or continuing/becoming a do-it-yourselfer, when in fact the services of a financial planner might better serve their needs. This does not mean that an asset or portfolio manager is never appropriate, but the average investor’s needs typically might be better served by somebody with a planning rather than asset management focus. A fee-only financial planner/adviser, especially one who is prepared to work at a fiduciary level of care, is probably a good choice for the average investor (e.g. in the U.S. RIA, Registered Investment Advisors, work on a fee-only basis and are committed to a fiduciary level of care.)

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