Sunday, September 4, 2011

How to Simplify Your Investments and Save Money

A few years ago, we met a prospective client who came to our office because he wasn't happy with the service he was getting from his existing financial advisor. He wanted to know how we would be different than the people he was already dealing with. As is our normal practice, we explained that before we could describe our service offering or make any portfolio recommendations, we first needed to have a complete picture of his financial affairs.
As we held our discovery session and summarized his net worth information the answer to his concerns became quite obvious. He had created seven different financial advisory relationships with a portfolio that was worth, in total, about $600,000. As a result, each advisor was responsible for less than $100,000. He complained that he never heard from these advisors except when they wanted to promote a certain investment. He had concerns about estate planning, market volatility, and succession planning for managing his financial affairs upon his demise, as his wife had no interest in financial matters. However since none of his advisors paid much attention to him, he was concerned that he would never be able to find somebody he could trust. In fact, he had trouble trusting ANY company or advisor as he wanted to diversify to avoid losing money.
In our mind, the problem was obvious - his account size at each firm was well below their radar for optimal account minimums and so he was being ignored. What many investors don't realize is the security of their portfolio has less to do with the firm they work with than their specific portfolio allocation. All wealth management firms in Canada belong to CIPF, the Canadian Investor Protection Fund which provides up to $1 million insurance protection. In addition, some firms operate in 'client name format' whereby the firm simply acts as an 'agent' not as a 'principle' in carrying out trades. In that type of advisory relationship, the firm does not actually hold any of the assets and must have the clients written authorization for every transaction. These firms do not require insurance coverage since they don't hold client assets. Ultimately, the protection for an investor lies in the asset mixture and diversity of the actual securities themselves.
Consolidating accounts into one large portfolio will not only result in greater attention, it will also allow for economies of scale, that is the fee structure will be lower than regular retail accounts. Furthermore, by having one advisor instead of two, three or more, you have one unified direction for your financial strategy instead of competing recommendations from multiple advisors.