Putting The Family Into Family Wealth Management

I have spent the last 17 years working with families, with the intention of helping them manage their risks and meet their financial goals.

Most of those goals include creating enough wealth to live out a comfortable life when your income is going to be derived mostly from your savings (or pension plans).

The most successful of these folks, hands down, are the ones who started saving early. It's never too late to start saving, but you will have the easiest time of it if you get going when you are young and the compounding curve in front of you is long.

So we encourage our clients to involve their kids and grandkids as soon as they possibly can and include them in the "family plan". There is something that clicks when you see how putting away (and making a regular habit of it) a few thousand dollars can compound over time to get you into the many millions of dollars goal range.  It is really quite impactful for a conscientious "20 something" to see. I watch their eyes go wide when we show them the possibilities.

Get them started early and in all likelihood, they will achieve earlier independence as well ( a little less burden on your retirement plan).

We handle plenty of multi-generational families and have everything from newborn's RESP's to teenage "in trust for" accounts, which at age 18 become the property of the named child / grandchild and can be a staring point for TFSA contributions, arguably the greatest savings vehicle available because of the tax treatment (there is no tax) on the growth.

Importantly, this usually becomes "untouchable" money, not because we won't let them, but because they get the chance to see it grow, over time and get used to it and there is a psychological effect, wanting to let it continue.

Is it a little extra on our plates (smaller portfolios, additional Wealth Forecasts, less cost-effective for us)? Probably, but in the grand scheme, that is what we are about: the family and helping steward multi-generational families to financial success.

Thanks for all the great feedback...

Please keep it coming...

scott@highrockcapital.ca

Non-discretionary Financial Advice: It Could Leave You Hanging Out To Dry

Only 3% of advice givers in the financial services industry in Canada have fiduciary duty (client first at all times / no conflict of interest) because they have the legal responsibility of being discretionary portfolio managers (see the Small Investor Protection Association report: Advisor Title Trickery). 

That means that most advisors (in the 97%) only have the responsibility to make sure that when she / he puts a client into an investment or set of investments (portfolio), he / she only has to ensure that at that moment in time, they are suitable for that client (objectives, risk tolerance, time horizon).

If, at some point in the future, circumstances change: the investment is no longer suitable for the client or the client is no longer suitable for the investment, that is no longer the advisors legal responsibility, in fact it is left to the client to make that decision (or to take the initiative to ask the difficult question). Really. 

So, in fact, recommending that the client move out of that unsuitable investment is not an obligation for 97% of advisors. 

How comfortable does that make you feel?

In a nutshell that is the difference between non-discretionary advice and discretionary portfolio management. A discretionary portfolio manager (like High Rock) has a legal fiduciary responsibility to her / his client.

So the 97% continue to seek commission revenue, but are not required (legally) to provide anything beyond that initial sale (fee-based or transaction oriented).

It is not the first time I have written about this and likely won't be the last, because, basically it is not fair to the unsuspecting client who's portfolio drops significantly and not until sometime well down the road do they realize that the person they thought was looking out for their best interests is nowhere to be found.

Have you ever heard the line in a portfolio strategy meeting: "if things get ugly, we will get you out"? A non-discretionary advisor won't have the time to get you out (because she / he has to call you first). In a big (non-discretionary) advisory practice how many calls will be made in time? 

A discretionary portfolio manager hits the sell button and everybody is out, simultaneously and the managers own positions are the last out (and closing the door behind them), because fiduciary duty requires that clients are put first.

If you don't want to hear about this from me anymore, just please let me know, directly, I won't be offended (well maybe just a little, but I will get over it).

I don't write this stuff for any other reason than that I care and that I think there are so many vulnerable wealth management clients out there who's advisors are not in it for the client, but rather for their own monetary gain.

It is one of the main reasons that we started the High Rock Private Client Division in the first place: to be different and better. And we are: recognized by the Small Investor Protection Association (SIPA) in their June newsletter as a "new breed".

Send feedback, win a hat!
scott@highrockcapital.ca

Rain? Again?

It's been a cool, wet summer in the East, while the West is  breaking new high temperature records:

Wildfires in BC and Portuguese Man O' War (jellyfish) floating up on Halifax beaches. 

So what gives?

According to weather experts, it is the "result of bland Pacific Ocean temperatures": Unlike past years when an El Nino and then La Nina climate patter dominated the ocean and influenced global weather, the basin is in its neutral phase.

But don't give up hope Eastern folks, Environment Canada thinks that temperatures for August and September are headed higher:

(except perhaps for the very north-east). So if you have been patiently storing vacation days for August, hopefully you have not done so in vain.

If you are waiting for August (and you have a few minutes of a rainy day to spare), perhaps have a peak at our latest High Rock client weekly webinar and let us know what you think of our new format. We thought that a more dialogue / conversation oriented approach might be more engaging.

If you want to send us some feedback, we will put your name in for a draw for our brand new High Rock sports cap:

It will keep you dry in wet weather and keep the sun away in the good weather and breathe to keep you cool. We have 10 to give away.

Just click on my email address: scott@highrockcapital.ca and send me your thoughts. 

CPI, Interest Rates, C$ And The Bank Of Canada

On Friday, StatsCan released the June CPI data which showed a 1% increase from a year earlier. A big drop in gasoline prices (-1.4%) and clothing and footwear were responsible for a lower year over year reading from the 1.3% reported for the 12 months ending in May. If you live in Alberta the cost of living was up only 0.4% over the last year.

What does it all mean?

At the moment inflation remains well below the Bank of Canada's 2% target as do their various measures of core inflation:

Obviously it is their expectation that this will change in the future because they are responsible for price stability and a higher policy interest rate is intended to curtail future inflation, which their longer term forecasts must be reflecting.

Bank of Canada economic forecasting has been suspect in the past, having been overly optimistic (on economic growth) through the 2015-2017 period. Needless to say, questioning their overly optimistic outlook on future economic growth and inflation should be a consideration.

Nonetheless, they control the interest rate mechanism (for short-term interest rates), so that is their prerogative. 

Foreign exchange traders and speculators who all got caught on the wrong side of the $US/$C trade have been forced to scramble to cover their short C$ positions over the last few weeks and perhaps take on long C$ positions. If you have $US obligations (or are planning your winter travel to a warmer climate and require $US), this may be a time to think about making some $US purchases.

But don't do it through a bank! They will over-charge you by about 2% or more. We can do it at much better rates for our High Rock clients because we are an institutional portfolio management company (with a private client division) and we do not take spreads on transactions (as they might through the traditional advice institutions), but pass the cost savings directly to our clients.

We will talk about all this and more on our High Rock weekly client webinar tomorrow (we have a bit of a new format). The recorded version will be posted on our website at or about 5pm EDT. Feel free to tune in.

  

The Robo-Advisor Option

If you have a small amount of money and / or you are just beginning the investment path to grow your money, this may be a good option for you.

If you are a little more sophisticated and / or want a real financial plan and investment strategy and more importantly, if you want to be looked after (talk to a human being that actually cares and knows what they are doing / talking about) this is definitely not the place to look.

If you live your life "on-line", as is the case for most millennials (and a good number of boomers and  gen-xer's ), it is a tantalizing possibility: being able to avoid those old-school style sales pitches that may want to make your eyes roll because you are a relatively intelligent human being and they treat you as if you know very little. I have known a number of those in my time in this business. You know, the ones that say: "if you don't listen to me and do as I say, you are an idiot" (or something like that).

Remember, however, that you are going to get what you pay for: Money Sense did a pretty good survey a little over a year ago, you can do a little comparison shopping.

Paul and I did check out a few of the options by pretending to want to sign up and we found that the human element was completely missing / lacking and it took, in some cases, days to get responses to our questions.  Further, the portfolio managers had no bio's, so it was next to impossible to get a sense of who they were and what their experience was.

Interestingly, the fees (in most cases) turn out to me not so different (0 to .25%) from ours.

Think about it: would you pay a very little bit more for an excellent client experience : where you were able to get a full financial plan (Wealth Forecast), monitored, updated every 6 months or so and linked specifically to your portfolio strategy, regular (almost daily) blogs, a weekly client webinar outlining our / your strategy, quarterly reports (including an Independent Review Committee report) and open (24/7) email or telephone access directly with the portfolio managers?

You will not even get close to that with most full service Investment Advisors, let alone a Robo-Advisor.

It baffles me (and Paul too) why anyone might  choose otherwise.

If you like your Robo-Advisor, I would love to know what more you get from them. I would wager that they could not tell you what your return per unit of risk taken is. I would also bet that your old-school financial advisor would not be able to either.

It may not matter much to you now. When markets correct (and they will again), you are certainly going to care.

There is an alternative and we (High Rock) have been recognized by the Small Investors Protection Association (SIPA) as a "new breed" of financial advice and portfolio management that allows the legal protection of fiduciary responsibility and client first (not shareholders or commissions) wealth stewardship.

Small Investors Protection Association (SIPA) Recognizes High Rock As A "New Breed"

You may have to read through right to the very end of the June edition of the SIPA Sentinel (but it is worth the read to be certain):

"It appears that there are some in the investment industry that do support the need for a fiduciary responsibility. There is no doubt that most Canadians do need a Financial Adviser they can trust. There is no way that the average Canadian can learn enough about the complex array of financial products to be able to select the best approach for their situation."

"The new Paradigm will include fee only qualified Adviser with fiduciary responsibility and RoboAdvisors as well as more DIY investors. As Canadians become more aware they will shy away from mutual funds and segregated funds. They will also learn that the system of self-regulation does not protect the investor and they will be at less risk by depending on those who declare they will work with financial responsibility although there may not yet be any statute with this requirement."

"The following is an example of this new breed:"

http://familywealthmanager.blogspot.ca/2017/04/responsibility-to-clients-if-you-have.html

or

You can read the exact same blog here:

http://highrockcapital.ca/scotts-blog/responsibility-to-clients

And of course, it is the recognition of our Voluntary Code of Conduct for the Stewardship of Your Wealth

Nonetheless, it is wonderful to be recognized and there is good reason for it.

We are different and we are better and we are leading the way forward by providing an unparalleled client experience: low on cost, high on client service (which you won't find at a RoboAdvisor) and fiduciary responsibility (where we have to put our clients interests before our own) which you wont get from a traditional bank financial advisor. It is the future of family wealth management.

Join us!

Remember Risk?

It seems to me that US stock market investors (with the S&P 500 making more new highs) are having a grand old time. Everybody is happy when the market goes up.

Closer to home, it is definitely not happening for the SP/TSX. If you have too much "home country" bias in your portfolio, which according to the MSCI All Country World Index (ACWI) should only be about a 3% weighting of Canadian companies. This same index has a little over 50% weighting in US companies.

At the end of Q2, the I-shares ACWI ETF (total return) was up well over 18 1/2% since the same time last year. However, in spite of that performance, the 2 and 3 year annual average returns have remained well below average.

The other factor for a Canadian investor with a balanced portfolio is the fixed income side of the equation:

The Canadian bond index ETF (XBB) has struggled, putting in a mildly negative return over the last year and of course has pulled the total return of a balanced 60% equity / 40% fixed income portfolio to a level just under 10% (after adjusting for fees).

And of course the 2 and 3 year average annual returns have been well below the 5 year average annual returns.

If stock market's (in the US) are reaching their peak (and a good argument can be made for that, because US economic growth is struggling to get to 2%), the 1 year total returns (for fully invested 60 / 40 portfolios) are likely in jeopardy. 

What do you do to protect any of these gains?

Get tactical!

When you focus on the return per unit of risk taken, you can see that these 60 / 40 portfolios have ever increasing amounts of risk, which leaves them enormously vulnerable to any downside in the US stock market. Potentially taking away a good deal of the gains made over the previous year. And make no mistake, there are significantly elevated levels of risk out there at this time.

The risk level for the 60% ACWI /40% XBB portfolio over the last 4 years has been about 4.6. A more tactical approach as represented by the Actual HR PC portfolio is closer to risk at 3.

If you take the total return over the same time frame and divide by the risk factor, it is easy to see that the more tactical portfolio has a significantly better return for the unit of risk taken (3.01 vs. 1.60).

At High Rock, we manage risk first. Our first priority is to protect our and our clients capital.

Do you know the level of risk in your portfolio?

Higher Borrowing Costs = Big Risk For Bank of Canada

My friends at Capital Economics, not long ago, suggested that the BOC would have to cut rates in the fall as the housing market in Canada started to crumble. 

Yesterday after the BOC announced a rate increase of 1/4%, they suggested that this was a gamble that may come back to haunt them: "The Bank of Canada's decision to begin raising rates is a gamble that might have to be reversed before long. With the housing bubble already showing signs of bursting and household debt at extremely high levels, higher borrowing costs will dampen economic growth and pushing core inflation even further below target."

It is definitely a central bank play to further corral the housing market in Canada and from my experience (as a currency and bond trader) when a central bank senses that they can add more impact (housing market already showing signs of slowdown from other government initiatives) it is strategic.

However, it does take them away from their mandate of maintaining price stability (core inflation is at 1.3% and the target is at 2%), although they can talk their way around it with metaphors about pumping the brakes well in advance of the red light. 

The big risk is that the light ahead isn't red. So you are slowing down when it is not warranted.

The folks at Capital Economics suggest that central banks around the world are struggling with the inflation conundrum and that "we have some serious doubts about the Bank of Canada's forecast that inflation will rebound".

If heavily indebted households will be unable to absorb the increase in debt servicing costs, they will pare back their discretionary consumption and this will negatively impact the economy.

Declining home prices will too.

Time to check your Wealth Forecasts if you have cash flow concerns. If you don't have a Wealth Forecast best get on it. Everybody needs a plan.

Your Goals Are Unique

 Your Investment Strategy Should Be Too

We all have a reason for investing. We save some of our hard earned $$ and put them to work, trying to stay ahead of inflation. We all have goals as to what we intend for that money and when: home ownership, education, vacation, future income (when there is no longer enough employment income) and perhaps to pass on to our loved ones and / or charities when our time is up on this planet.

We may have some goals in common, we may not. Our consumption (lifestyle) costs, where we live and our timelines for those goals are likely to be quite different.

Which means that portfolio strategies need to consider all the aspects of each of our individual objectives.

The only way to determine the direction for a portfolio strategy is to first set up a road map that defines the path that this journey will take (at least at the start):

From our Voluntary Code of Conduct for the Stewardship of Your Wealth

We will always: 

• Build investment strategies in keeping with our client’s goals and objectives, risk tolerance, timelines and liquidity needs 

• Treat each individual client and / or client family independently of other clients in tailoring their investment strategy specifically to them 

We call this plan a Wealth Forecast. 

It accomplishes a couple of key things:

1) It allows us to set a benchmark for actual dollar amounts (semi annually / annually) to compare to your actual portfolio growth (and other asset growth that you may have). If we are ahead of target, so much the better. If we are behind target, we make the appropriate adjustments to get back on target.

2) It becomes a planning tool for you: if you decide to add a new goal, we can create a new scenario to visualize how this will impact your net worth into the future and prior to making any decisions, give you some idea as to whether or not it makes financial sense: a powerful decision making tool for you to utilize.

It is part of the client service package and comes with the fee that you pay.

In fact, for prospective clients, we prepare the initial forecast without any obligation from you at all. If you like how we structure your strategy as a result and we are a good mix, excellent!

The Wealth Forecast, however is not very useful once you have moved a few months into the future: life is dynamic and everything in the Wealth Forecast will change over time. It needs to be monitored, assessed and adjusted accordingly (and so perhaps will your investment strategy).

Want to try out the process? (click the link)

Employment Data, Interest Rates And Correlations

Monthly employment and unemployment data were released on both sides of the North American border this morning. It may be market moving in the very short-term, but these monthly data that financial market participants get so focused on are fraught with revisions and as you can see in the chart above, rather erratic from month to month (white line). So we focus on the longer term trends (pink line) and try to avoid the short-term noise.

However, it is data that the central bankers in both Canada and the US will monitor and leave all of us who try to make sense of the current economic and investing environment scrambling to anticipate their next moves on interest rates.

It seems that the consensus of opinion will have the Bank of Canada raising rates at their next meeting by a 1/4%, despite the fact that inflation remains well below their target (and this is their mandate, so they need to be pretty darn certain that future inflation will be trending higher). There is little wage growth to support the potential for a sustained increase in inflation (at this moment) and Household debt servicing is going to cost more, so the consumer is going to get hit on both sides of that equation. Is the Canadian economy going to be able to take that and the current housing market slowdown in stride? I am not that confident and the BOC's forecasting track record has not been bang on. 

On the US side, a bit of a similar story, no wage growth and inflation well below target, but a central bank that wants to continue to push interest rates higher (likely another 1/4% in September). As we also continue to point out regularly, the economic cycle has grown long in the tooth and the natural tendency for it to slow will be pushed along as the yield curve flattens (higher short-term rates and no inflation to drive longer term rates).

When unemployment levels (now at 4.4%) cross the 3 year moving average (now at 5.1%) as it has historically, a recession will follow. Unemployment in June stayed put at 4.4%, so that gap closed a little further.

In Canada, bond prices are tumbling and so have stock prices (see Paul's blog) so these correlations are not helping balanced portfolios that have an over-exposure to Canadian equities. Often a portfolio will have a "home country bias" where investors tend to put too much emphasis on owning companies domiciled in their own country (because of familiarity). The All Country World Equity Index (ACWI, which we use to benchmark our global equity performance) has only about 3% Canadian companies. Any more than that and you are overweight and over-exposed. Best to have a look. It is why we have a tactical model that allows us to be more flexible on our exposure to Canadian stocks.

In the US (which is over 50% of the ACWI) stocks have been rising, but the bulk of it is attributed to 5 companies in the Tech sector. NASDAQ volatility is rising, so even here there is something amiss. It wouldn't surprise us to see the correlations between the US stock and bond markets re-adjust (again).

Risk is high. We remain cautious.

Feedback

"What's Going On?" 

Market Price Fluctuations

When an investment portfolio is rising in value, I am not usually asked the "what's going on?" question. When the investment portfolio shows a decline in value (which may happen from day to day, week to week or month to month), I field significantly more of that question.

As I have often said in this blog, on our weekly webinar or in face to face conversations: in order to get better returns than the risk-free rate of return (i.e. where you are taking no risk with your investment), which would be a 90 day Government of Canada T-bill yielding about 1/2%, you have to take risk.

In order to grow your money at a rate better than the inflation which erodes your purchasing power in the future (currently about 2%, depending on where you live and what you consume), you have to take risk.

Risk can be mitigated, which is what Paul and I do for ourselves and our clients on a 24/7 schedule. Risk does not sleep.

However, part of taking risk (and depending on how that risk-taking is structured) means that not every investment that you may own goes straight up. There are no guarantees that it will even appreciate in value, but we work very hard to find investments that are likely to go up or at the least, pay us dividend or interest income while we wait for them to go up (remember, Paul and I invest in the exact same assets as our clients and we want our money growing too).

Prices for each and every asset that we own will fluctuate on a daily basis. At the end of the day, an independent third party determines where to mark the prices based on the final buying and selling transactions of that given day. At the very least, in less liquid securities, what the buyers were willing to pay (we call that the "bid" price).

What drives those prices is a myriad of factors: micro-economic (value), macro economic, technical, emotional, cash flow, algorythmic (computer generated) trading, geo-political, weather and so on. When something motivates a buyer, they are willing to pay the motivated seller and in all likelihood they are motivated for opposing reasons and points of view.

When there are more motivated buyers of a specific security than there are sellers, prices will rise. And, you guessed it, when the opposite happens, prices fall.

This goes on and on all day, every trading day, through the weeks, months and years.

Each security is re-priced each day based on the buying and selling, which we have no control over.

What we do have control over is the research required that determines the risk factors associated with each security that we purchase. That means we assess the risk and make our decision to buy and or when to sell.

Depending on the security, it may be a long-term decision or a shorter-term decision where we believe there is value (relative to the risk) in owning it at the moment, but once it reaches a certain point where value is neutral or expensive, we sell it.

As I said earlier, we have expectations of where the price will go, but it may not take a straight line getting their. Sometimes, other investors / traders will be more motivated sellers that pushes the price (temporarily, we believe) lower and at the end of any given day that price will be marked at that lower level.

That does not mean that the price will remain there the next day, week or month, it will depend on whether, on any given day or over any given time period the buyers or sellers are more motivated.

It is also why we believe in broad diversification: the more securities you have that are not necessarily correlated to each other, the less likelihood of large price fluctuations in the price of individual securities impacting the total portfolio.

Last week, as the central banks all announced (in a concerted manner) that perhaps the time for super easy monetary policy was drawing to a close, 10 year Government of Canada bonds (which we own) were sold off quite significantly (more motivated sellers than buyers). The prices were marked lower for these bonds and most other bonds that trade in a correlated nature. In a nutshell, bond prices across a broad spectrum were priced lower. It certainly had a negative impact on an overall balanced portfolio (if your portfolio is 40% bonds / fixed income, it had less impact than a portfolio that is 60% bonds / fixed income and so on).

Remember also, that bonds mature at their par value (as long as the bond issuer remains able to pay, but with quality bonds that is a lighter issue), in the interim their prices will fluctuate with inflation and interest rate expectations. However, their prices are marked on a daily basis. The lower prices on the day make their daily value lower, but until you actually sell them, their is no loss. If you bought them at their issue price ($100 per bond), they will mature at that price (regardless of daily pricing) and you will receive semi-annual interest payments until that time.

A motivated seller of those same bonds, on any given day, perceives that they might be able to buy them again at a lower price, or perhaps buy something else that they believe to have better value (whatever the motivating factor might have been).

Regardless of who is doing what, day to day, week to week, month to month price fluctuations and portfolio value fluctuations will occur.

What is crucial is that over time (multiple year periods) that a portfolio grow to offer returns that keep us well ahead of inflation for our purchasing power when we need to utilize that money. That is what we refer to as the stewardship of wealth.

It is a long-term proposition. All else is gambling.

Getting an appropriate long-term return, relative to the amount of risk we are taking is our goal. Short-term price fluctuations will occur, but over time a well-managed (risk-adjusted) portfolio will prosper. We manage risk first.