What Is Fiduciary Duty?

It is the legal obligation of one party to act in the best interest of the other.

In a report titled "Advisor Title Trickery" (October 2016), the Small Investor Protection Association (SIPA) research stated that only 3% of registrants in the investment industry in Canada had fiduciary duty to their clients.

As a portfolio manager licensed with the Ontario, Alberta and B.C.  Securities Commissions, High Rock is legally bound to provide fiduciary duty to our clients.

The Canadian Securities Administrators (CSA)  is made up of each of the securities regulators from Canada's provinces and territories. In June of this year they announced a proposal to:

1) Address conflicts of interest in the best interest of the client

2) Put the client's interests first when making suitability determination

3) Provide clients with greater clarity on what they should expect from their registrants

Unfortunately, there is nothing in there about fiduciary duty. The current standard of care about investment suitability is only there to protect you at the moment of purchase. Beyond that you are (technically) on your own. A good advisor will, hopefully, monitor your investments and inform you when he/she believes that you may need to sell them if they are no longer suitable. However, they are not legally obligated to do so.

If they fail to tell you to sell them, they are not legally responsible because they do not have that fiduciary duty imposed on them.

As discretionary portfolio mangers, we, at High Rock, have the legal fiduciary duty to protect our clients capital and we do so by managing their risk across all the asset classes that we own in our collective portfolios.

Who would you rather have managing your family's wealth and future?

Perspective On The Bull Market for Stocks 

Often in conversations with clients and prospective clients the talk turns to the great "bull market in stocks", usually because the business news media is focused on the U.S. stock market and that becomes the perception.

However, if you have a globally diversified and balanced portfolio, depending on how it is allocated, the U.S. stock market may only account for 10-25% of your total portfolio.

As you can see from the chart above all the rest of global stock markets (EAFE = Europe, Australasia and the Far East), have pretty much gone sideways since 2011.

Clearly the best days for the global equity portion in a balanced portfolio were 2009 - 2014 when all indexes moved higher in tandem. Since then, however Canadian and non-North American indexes have virtually stalled. 2015 was a negative year for all stocks.

"Trumponomics" was born in late 2016 and has given a further boost to US stocks since, but the jury is still out on the final outcome of that (where do U.S. stocks go from here?). Clearly it has not been any where as close to as positive for the rest of the global stock market.

Don't forget that bonds are an important part of the balanced equation: The Canadian Bond Index ETF, XBB has provided a (low risk) 4% compound average annual return over the last 10 years:

The All Country World Index (ACWI) ETF (which has a little over 50% allocated to U.S. companies) suggests that a globally diversified equity portfolio should have produced a little over 6.5% compound average annual return over the last 10 years:

In which case a 60% globally diversified equity allocation combined with a 40% Canadian bond allocation should have had something close to a 5.5% combined compound average annual return over the last 10 years.

So yes, the U.S. bull market in stocks has contributed, but don't lose perspective on how a globally diversified and balanced portfolio should perform over a multi-year period.

This bull market cycle will end, when it ends. Likely with the end of the economic expansion cycle (or slightly before). Stock prices will correct, the bull market may end (technically a 20% correction) and there will be bargains to be had.

At High Rock we will be prepared to pick up some of those bargains (by holding an over-weight position in cash equivalents, which by the way, are paying about 1.6%, so not sitting idle), because that is how we invest for our own portfolios and in doing so, invest in the same manner for our private clients.

And as you all know, historical returns are in no way a guarantee of future performance, but at High Rock we work darn hard to  give our clients the best possible risk adjusted returns over a multi-year period.

We also do it with a real (not "lip-service") focus on our clients: excellent service at a very reasonable cost.

You won't find that at your bank or large financial institution.

Traditional  60/40 Portfolios Feeling Volatility In 2018

As I have mentioned in past blogs on a number of occasions, that the traditional 60% global equity and 40% fixed income portfolio may not be working as well it has historically.

The key reason is equity market volatility (as above) which has been significantly higher than it was in 2017.

Global equities, as measured by the All Country World Index ETF (ACWI), have returned less than 2% to date in 2018:

Meanwhile the Canadian Bond Index ETF (XBB) has returned a slightly negative return over this same period:

Combined, your traditional globally diversified and balanced 60/40 portfolio has returned approximately 1% thus far in 2018.

So once again, we can make the case for a less traditional asset class, which has so far this year outperformed most others: Canadian High Yield, which has returned +2.22% thus far in 2018:

High Rock's  founder Paul Tepsich is a specialist in Canadian High Yield (arguably one of the most knowledgeable in this particular asset class) and High Rock Clients, through our Fixed Income and Tactical models, are given some exposure to this asset class. The fund that High Rock manages for Scotiabank (AHY) returned almost 2.5% through June 30.

As well, unlike most passive 60/40 portfolio's, High Rock's tactical managerial style enables us to lower our portfolio risk factor by carrying higher levels of cash (cash equivalent assets, such as High Interest Savings Funds)  in periods when risk is high (as higher volatility levels tell us that we are in now) and deploy that cash when prices fall and values are significantly better. Over longer periods of time, this allows for smaller swings in portfolio value and better average compound annual returns for our clients.

The broader theme for investors has shifted in recent years to a more passive approach. I would suggest that this new era of volatility that we are entering into will demand a more tactical approach. High Rock's private clients are already there: Lower risk, stronger long-term returns and high returns per unit of risk taken. It is the way of the future.