Conversations With Clients

Every six months or so, Bianca (High Rock's Certified financial Planning Professional, CFP) and I sit down with our clients (not all at once, mind you) to catch up: lots of conversations around what's new in our respective lives (and our family's lives, as we do practice family wealth management), a review of the client's financial plan (at High Rock, we call it a Wealth Forecast) and we provide an update on their investment strategy and portfolio growth. Some of these folks visit in person, but a good number prefer the remote technology that our "Go To Meeting" platform allows, means that they don't have to come downtown, deal with the outrageous automotive /bicycle traffic and pay ridiculous $ for parking. In the case of our clients outside of Toronto, especially our western clients, it is an absolute must. 

Are we on target to achieve their long-term goals? If yes, it is an easy conversation. If not, it requires a more diligent review and perhaps a slightly more difficult conversation around the why's and wherefore's. 

Late August and September are usually pretty busy review times because so many seem to have anniversary start dates that coincide with getting to it (signing up), financially speaking, once summer vacation draws to a close.

Longer-term clients, who have been working with me for, in some cases, close to 20 years, tend to be a little more difficult to get in front of because they have seen at least one if not two significant stock market downturns and are somewhat more in-tune with the nature of long-term goal achievement and know well that time has been and will continue to be on their side: for every ten or so years of investing (historically), you may get a couple of "off" years (usually at or around the end of an economic cycle), but seven or eight years of somewhat above average growth that pull all the annual average return data to reach levels at or above their target (per their Wealth Forecast) growth.

More recent client additions may be a little more anxious, especially if they have come to work with us in the last couple of years. Global stock markets have not exactly been cooking since late 2017 (see my blog from Aug. 13: "Global Equities Are Basically Where They Were In 2017").

Important to our conversations is the asset allocation mix. In times of stalling capital growth (mostly in riskier assets like equities) in these slower growth time frames, we have an abundance of income generating assets (interest from bonds and dividends) that generate approximately a 3% stream of cash into the portfolio over the course of a year (for a fully invested 60/40, equity/ fixed income mix). Bonds that generate less tax friendly income, usually be held in tax deferred or tax sheltered accounts like RSP's and TFSA's for greater tax efficiency.  This cash flow becomes a little more important for our clients who are now depending on their investment portfolios to provide for their lifestyle needs. Our well-managed High Yield bonds (Paul being one of the top Canadian HY portfolio managers in the country), do that very well.

Often, the limited information in the required monthly statements does not reflect this, so for those who are anxious, this (annual income generated) does become a fairly important part of the conversation: If we are targeting a 5% annual average return and 3% is being earned in interest and dividends, then we only need to earn 2% in capital growth, which takes lots of pressure off of the need to hold riskier and more potentially volatile assets. At High Rock, we manage risk first. Why take more risk than is absolutely necessary?

Especially when risk assets are more vulnerable to the late stage of the cycle type swings in price that we have been experiencing since early 2018 (and have basically muted any capital growth since).

As one client so meekly put: "when the f#%& are we going to see some stock market growth?"!!

When all the geo-political (populist politics and trade / currency wars) and economic turmoil starts to lighten up, likely after a significant economic slowdown (or even recession) and we get into a new economic growth cycle. Guessing sometime in 2020 or 2021 (barring anything cataclysmic).

In the meantime, our portfolios are paying us (that 3% or so in income and dividends) to be patient. Sitting on a little extra cash (cash equivalent earning close to 2%), instead of equities (which we think it is prudent to be under-weight in your allocations for the moment) also gives us some eventual purchasing power if / when stock prices take a bit of a dive. Leave the timing to the professionals here though friends (because that is what you pay us for). 

And remember, past performance is never a guarantee of future returns, but at High Rock we do work darn hard to get our clients (and ourselves) the best possible risk-adjusted returns.

Client First? 

Regulators Leave Investors Wanting

It would appear that the latest on the Investment Industry Regulator's progress to protect investors from the investment industry advice channels conflicts of interest are going pretty much nowhere.

If you can, read Rob Carrick's  Globe And Mail article: "Relentless fighter for investor rights sees little progress yet in battle against financial industry" 

In a nutshell:

"It was about one year ago that provincial securities regulators let the industry off the hook on two key reforms - one that would require investment advisers to work on a standard of what's best for the client and the other that would stop the practice of hiding advice costs in the fees associated with investments, mainly mutual funds".

As the financial industry under IIROC "self-regulates", a complete conflict of interest, it is an enormous advantage to the advisors who can continue to sell those securities and funds that best pay them and the firms that they work for leaving many investors at their mercy (not all advisors are bad, they are just following the lead of the firms that they work for: see John De Goey's book: Standup To The Financial Services Industry) 

So the onus is put on the investor to protect themselves.

Unfortunately it is easy to be swayed by the salespeople at banks and financial institutions and the great marketing machines that promise to create wealth for you.

But, they are under no obligation to put your interests ahead of their own: Their interests? Gather Assets Under Administration (AUA) and generate revenue for themselves (commissions) and their firms and provide dividends (and capital growth) for the shareholders. 

I know this. I worked as a branch manager under this regime. It favours the advisors and shareholders over the clients. It is a sad state of reality in the financial industry.

In my time I witnessed advisors who's sole purpose was to bring in as many clients as possible and then sell the book of business (for a very large sum), cashing in without ever properly looking after the clients, just popping them into a "one size fits all" portfolio of ETF's or mutual funds for ease and simplicity, charging a fee, but failing to live up to the implied promise of helping them. Shame.

I do enjoy looking after our clients. So I helped create a place where I could do it better, with someone of a like-minded nature.  

Portfolio Managers (like High Rock), have a much higher standard. We have a fiduciary responsibility, which is not only a regulatory obligation, but also a legal obligation to put our client's interests first: we put it up front, on the home page of our website: 

So if you have not visited it or want to review it, click on the High Rock Code of Conduct button and ask your advisor if they can offer you this?

You are likely not going to be protected by the self-serving financial services regulators, so you have to protect yourselves by finding the folks who will serve you and protect you.

Global Equities Are Basically Where They Were In November 2017

If we use the All Country World Index (ACWI) ETF as our proxy (a little over 50% of this index are U.S. equities), we can draw a straight line back to November 2017 from yesterday's close where the price is the same.

There has been a huge swing in that price over this period: falling about 21% from the January 2018 highs to the December 2018 lows and back up to yesterdays close which is about another 16% swing higher. And, it is probably not the end of the volatility.

Suffice it to say, with an annual dividend yield of approximately 2% on this ETF, that would have been your passive portfolio gain since November 2017. You are definitely going to have to be rather patient if you want to see this ETF get back to historical average returns:

The total return on ACWI for the last 10 years (monthly data) has been about 9.25% average annual return. This is in $US terms, the weaker $C will have been a bonus for Canadian investors over this period, but for simplicity, lets just focus on the actual return here. If you had a fully-invested, balanced portfolio (60% equity / 40% fixed income) over the last 10 years, 60% of 9.25 = 5.55%, would be the approximate annual return of the equity allocation in your portfolio.

For the fixed income allocation: 

Let's use the proxy of the Canadian Bond Index ETF, XBB. 10 year total return is about 4.14%. 40% of 4.14% = 1.66%.

So the combined 60/40 portfolio would have an approximate average annual passive return of about 7.21% over 10 years. That can be a simple benchmark for comparison; If your passive portfolio has given you at least this return or better, then you are doing just fine.

If it has not, time to do a little homework: ETF MER's are included in the returns above. Time to assess what you are paying for returns that returned anything less. If you own mutual funds (why does anyone own these expensive investments?), in all likelihood, your return will be considerably less. 

For example, the (actively managed) RBC Balanced Fund has a 10 year average annual return (as of June 30, 2019) of 5.5%. The MER is 2.15%.

Simple future value formulas on a $100,000 investment for 10 years suggests a difference of close to $30,000 between the two options.

Most of the difference? The fee. The MER. And that cost is not tax deductible for your income tax returns.

If the passive portfolio is under-performing the averages at the moment, the MER's of the actively managed portfolio are going to likely be dragging performance into negative territory.

Unless, of course, the actively managed portfolio is able to take advantage of some of the volatile swings in the  global equity markets and add value. Or find ways to enhance bond returns above the average on XBB. Good portfolio management will do that. Perhaps that can be paid for, but you should always know the costs and ask the tough questions about what you are paying for.

1) Financial Planning (at High Rock we call it a Wealth Forecast)

2) Investment Strategy: Active or Passive (should be cheaper) and most importantly, re-balancing.

3) Personal Service (are you a human being or just a number?)

4) Regular monitoring, reviewing and updating of plans and strategy.

When portfolio growth is robust, usually in the earlier stages of the economic / investing cycle, we tend to put the management of our wealth down on the list of our priorities (we get fewer inbound calls at High Rock, probably the same for most in the financial advice world). When growth of returns slows and there is under-performance relative to the historical averages or risk asset markets start to head lower as they may at the end of an economic cycle, financial awareness sometimes starts to creep higher on people's priority lists (and we get more inbound calls, mostly from folks who are checking into our High Rock philosophy of disciplined investing).

Now, interestingly, with global equity markets little changed from almost 2 years ago, showing increasing volatility and behaving as risk markets might at the end of the cycle, it is the latter. 

If you find yourself reviewing your financial status and having a call with an advisor or portfolio and wealth manager (big difference, by the way), ask the tough questions (especially about fees and what you pay for) and make sure you get good answers, clear and concise and sensible (and that you fully understand them).

and that ... historical performance is not a guarantee of future returns!