Bad Advisors Coast To Coast

If you like juicy tales of  the bad element getting caught in their "cheatin' ways", try scrolling through the Investment Industry Regulatory Organization of Canada (IIROC) disciplinary cases for your entertainment pleasure. Here is one that caught my attention, just with the sheer number of allegations and the time period through four, count em', four different financial institutions: Wellington West, National Bank, Industrial Alliance and Aligned Capital and their respective compliance departments over a 7 year period. 22 pages of riveting tales of not knowing the clients, making unsuitable and unauthorized trades and losses in the vicinity of $1,000,000. All with clients  born before 1950 (i.e. older than 70 now).

Or for more harrowing tales, you can visit the Mutual Fund Dealer's Association of Canada Enforcement page and have a look at the bad things that some of those folks have been getting up to.

Do you know the one thing that each of the institutions under the self-regulating bodies have in common? They are not under any fiduciary obligation to the client. That means good luck getting any part of your losses returned to you in any kind of reasonable time frame. Even if the bad advisors are sanctioned and fined, the record of payment is dismal.

In an April 2019 press release, the Small Investors Protection Association (SIPA) stated: " Canadians are losing their savings due to systemic fraud and wrongdoing by a financial services industry that does not put clients' best interests first, disregarding laws or rules and regulations. It has been possible to defraud tens of thousands of clients for up to a decade as indicated by recent No Contest Settlements by paying fines to avoid admitting responsibility and litigation."

The Canadian Foundation for Advancement of Investor Right's (FAIR), "strongly believes that a statutory best interest standard is necessary, desirable and feasible, with respect to securities advisers, dealers and individual registrants in their conduct towards retail investors." but that current proposed amendments by the Canadian Securities Administrators (CSA)

"will not achieve the profound shift necessary to ensure Canadians receive the objective, professional financial advice that is needed and rightfully expected".

The CSA has their own enforcement division if you are interested in more investigative reading.

The point is, that unless your wealth management team is a discretionary portfolio manager (as we are at High Rock), you are going to be vulnerable and must pay extremely close attention to the advice that you are being given. Even if it is suitable at the purchase point, once past that, your advisor only need take a "standard of care", which does not legally bind him or her to ensure continuing guidance. In other words, once you buy it, you as the investor are now liable for whatever happens next. Losses are on you, not your advisor (unless of course the investment was unsuitable in the beginning).  Even if it was unsuitable, it could be years, if ever you are able to recover.

 What happens to your retirement then?

We know that our High Rock client readers understand this and hold us to our code of conduct. For all of you other friends that take the time to check in on my perspective (ranting, drivel, whining, etc.), give it some thought. The potential implications are huge.

It Is The Destination, Not The Journey

5 Years ago I made a change. I wanted to build a wealth management company that created a client experience that was a different and better alternative to the standard and antiquated bank and financial services industry.

I purchased a half interest in a Portfolio Management  company called High Rock Capital Management with the goal of creating a Private Client Division that would do just that. My business partner, the original founder of High Rock, Paul Tepsich and I had a very similar philosophy: We would invest our money in a way that we were comfortable with, that would see us to our end goals. Then we would invite those who wished to join us on our journey to come on board. A group of my clients chose to take this same path with us and as we approach our 5th year anniversary, we are thrilled to have grown our private client business by about four times its original size. We still have some room for those who have the desire for something different and better.

Our philosophy is simple: each client and client family have very specific and distinct goals, therefore their investment portfolios should reflect this. While our mandate is to invest for our clients in the exact same assets as we would own for ourselves, the percent weightings may differ to reflect the individual nature of each client strategy. This strategy is determined after an in-depth analysis of their financial circumstances and their long-term goals and is presented in a Wealth Forecast prepared by our Certified Financial Planning professional (Bianca Tomenson).

Most importantly we (at High Rock) have signed off on and adhere to the highest levels of integrity available to the investing public with our Voluntary Code Of Conduct For The 

Stewardship Of Your Wealth.

Friends, this is not exciting stuff. As I suggest on my Twitter profile (https://twitter.com/JSTomenson) : "Wealth and portfolio management is not about shooting the lights out. It is about slow, methodical planning to reach long-term goals". So if you want instant gratification and excitement, as the advisor and media cheerleaders offer, we are likely not for you. Paul, Bianca and I do not like to take risk outside of the parameters for achieving our goals and unless our clients express the desire for taking greater amounts of risk, specifically, our tendency will be to manage the risk first and let performance be determined as a function of the risk that we take. 

When stock markets are strong, as they were in 2016, 2017, 2019, we will under-perform them (because we run balanced portfolios). When they are weak, as they were in 2015 and 2018 we will out-perform, thereby protecting our clients from volatility and the more difficult to catch-up periods following significant down-side moves to asset prices. However, as per the chart above, we will out-perform over longer periods of time on a return per unit of risk taken basis (red circle). Oh and by the way, despite all the hoopla about stock markets in calendar year 2019, markets are up considerably less from September of 2018, just a few months earlier (but whatever, just a very small part of the much longer journey):

If you want to focus on the stewardship of your wealth which will take you to your destination, give it some thought. Personally, I would rather the journey be comfortable (you can sleep at night) rather than exciting, with a greater chance (less risk) that I will get myself to where I want to go. 

For 2020, Expect The Unexpected (Again)

"It's still a bull market, things are going from the lower left to the upper right and will continue until they stop" said Dennis Gartman to Bloomberg's Tom Keene on a Bloomberg Surveillance podcast on December 19 shortly after announcing his retirement after a 30 year career as an investment writer. Asked about what to do for 2020, he suggested: "pray". He also quoted famed economist John Maynard Keynes who, back in the 1930's stated that "markets can stay irrational far longer than you and I can remain solvent".

There are plenty of opinions on both sides of the bullish/bearish equation and while, at the moment, the bulls are in control (The American Association of Individual Investors had the bull camp at 44.1% on December 18th and the bear camp at 20.5%), this was the case just before the December 2018 debacle.

It is no surprise to any of you who read my blogs that all this bullishness makes the hairs on the back of my neck stand at attention. My contrarian nature, after witnessing the last 40 years in financial markets has me in super caution mode (as far as stock markets are concerned). 

According to a newly transferred-in client, their former advisors warned them of my (our High Rock) large position in cash. How they can make that claim certainly amazes me as each of our clients has very different and tailored portfolio strategies, but nobody has more than 1% cash. We may have an underweight exposure to equity markets which means that we have more exposure to High Interest Savings funds (which offer approx. 1.95% in annual interest) until we see better valuations for investing in stocks, but that is not cash.

Unlike many advisors, as portfolio managers, we offer our High Rock clients the option to be invested in the same assets (same mandate) as we (Paul, Bianca and me) are (% weightings varying according to our individual strategies as determined by our Wealth Forecasts). Which is always their choice. A choice that can, at any time be adjusted to be more or less aggressive than we might want to be. It clearly minimized the downside in 2018, but likely limited the upside in 2019. If stocks continue to rise, 2020 will possibly be a year of under-performance. If volatility returns in 2020, our clients will be protected. Regardless, every client with a Wealth Forecast will progress towards their long-term goals while we manage the risk associated with achieving them. As we will always say: why take more risk than necessary and increase the chances of not achieving your long-term goals.

So 2020 will likely provide opportunity to put more money into stocks as it has in the past:

And we will look to find those opportunities when they are presented as we have done in the past, but we will do it when we believe, for our own portfolios, that it makes good risk-adjusted sense for our own strategies and for those clients (the large majority) who have entrusted us to look after their long-term financial goals.

2020 will bring plenty of challenges to the global economy and the geo-political environment. The U.S. Federal Reserve issued a report suggesting that President Trump's trade policies have (no surprise here) levied a negative impact on U.S. manufacturing. The U.S. deficit is ballooning (lower tax revenue and increased spending) in times of economic growth, which limits the ability of the U.S. treasury to be able to assist in an economic downturn. The Phase 1 trade deal between the U.S. and China will not have any immediate impact, so in the lag time, there will be plenty of uncertainty. 

Canadian GDP growth was negative in the first month of the final quarter of 2019 and confidence is slipping. Bank of Canada inactivity on interest rates may in fact be hurting the economy as rising bankruptcies have become a problem with household debt levels at close to record highs and debt-servicing costs rising. If unemployment rises, marginalized high-debt households will only exacerbate the bankruptcy situation.

As our good friend David Rosenberg suggested in his December 20 Breakfast With Dave letter: "the stock market has a mere 7% correlation with the economy today... this has never happened before... Normally, what the economy is doing explains at least 50% of the moves we see in equities...But not in today's controlled landscape driven by algo's, leverage, ETF flows and central banks".

If stock markets continue to rise, we will continue to capture the benefits, but perhaps at a more conservative level. If they don't, we are prepared. So, why take on more risk (as stock prices rise, risk increases) than is absolutely necessary (for your long-term goals)? 

Of course you can, if you want to, your money is your money. With my money, however, I prefer to be more cautious and that has benefited me in the past and will likely do so again in the future. My eyes are on my long-term goals.

Wishing you all a happy, healthy and prosperous 2020!!

Are You More Than Just A Number ?

In our High Rock survey that we conducted through November, we asked our clients what they thought of our client service. While we are of course thrilled at the 86% that find it above average or better, we realize that we have work to do to improve for those 14% who think it just average. 

Point being is, we want to improve. We want to give our clients the best client experience possible. Our team has very defined skill sets and we want our clients to be able to take advantage of them all. With how many investment advice groups do you get direct access to the portfolio manager (if you want to talk specifics or just get a general sense of their thinking process and research)? If your advisor just puts you in a bunch of mutual funds, there is zero chance you will be talking directly to the portfolio managers of those funds (you might be sent a summary, if you are lucky). You are not getting a whole lot of attention for the 2% MER that you are paying. You are paying them, but they don't want to be bothered by you. So they hide behind their screens hoping that the sellers of their funds (the advisors) will maintain client control.

Life is dynamic, so no matter what your original plan (Wealth Forecast) is, there could easily be something that comes up to force you into a decision for change. Our Certified Financial Planning (CFP) professional, Bianca Tomenson, is on standby 24/7 if you need to generate a "what if" scenario or two to assist you with that decision making process. Oh, and by the way, it is all inclusive in our 1% management fee (plus the 0.15% custodial fee charged by our partner RJCS who manages all the back office activity, and holds your accounts, protected under the Canadian Investor Protection Fund (CIPF)).

If that decision requires an adjustment to your portfolio strategy, then we make it and implement it. There are no additional trading costs to you.

The financial institutions of today are scrambling to cut costs and increase efficiencies and profitability at every corner. The highly impersonal robo-advice world believes that they can do this with technology and maybe they can: be better at profitability. 

Unfortunately, they leave out the human element of personal care.

Our new clients are coming to us because they feel frustrated by just being a number at a financial institution, concerned that they don't have a tailored solution to reach their financial goals and tired of overpaying.

I don't suppose you (or anyone you might know) have similar frustrations or concerns with your wealth planning and investment situation?

And Now, For Something Completely Different!

(With apologies to the Monty Python folks) 

I will let those who consider themselves expert in the field to determine how effective the U.S. - China Phase 1 trade deal will be, although I might be so bold as to suggest that it was likely done more to placate stock market participants than creating anything of significant substance. Ultimately, time will decide. As for Brexit, again, I suspect that the headline election results take away some uncertainty, but the ultimate impact on the U.K. economy and the implications for another Scottish referendum are still going to hang over the U.k.'s economic outlook.

In the meantime (for something completely different), lets look at some of the things that are going on behind the scenes that few are paying much attention too.

While stocks are making new highs, the global economy continues to struggle (and there is no immediate relief coming from the U.S. - China deal and / or the U.K. election):

The U.S. consumer provides about 2/3 of the economic growth for that particular country and with both the manufacturing and service economies struggling, has been supporting all the recent growth. Today's retail sales data for November fell short of expectations:

And despite President Trumps emphatic claims of the best economy ever, it would appear that there is little now supporting GDP growth moving into 2020.

While he also likes to tout the refrain "Jobs, Jobs, Jobs"... Average employment growth (pink line) has been actually trending lower:

And the number of Americans filing for unemployment benefits unexpectedly increased by 49,000 to 252,000 in the week ending December 7. The highest number since 2017 (it does appear that these numbers are starting to go the other way):

And finally, way in the background... what drove stocks higher through 2014, was Quantitative Easing, which grew the U.S. monetary base and heaped liquidity on the financial system. Since late 2015, the U.S. Federal reserve has been drawing liquidity out of the financial system (tightening monetary policy and raising interest rates). While there have been three rate cuts in 2019, the monetary base has barely grown and the divergence between the S&P 500 and the monetary base has continued to widen significantly.

With all of the good news built in to stock prices, it remains to be seen what the not so good news might do when it actually starts to matter. Stay tuned.

Setting Our Goals

We all need coaches. If we are sports fans, we see it first hand: the folks standing behind the bench or on the sidelines, mostly behind the scenes, responsible for preparing their charges for a game, event or competition. My daughter Miranda (a world class triathlete in her own right) coaches triathletes (that's the crazy sport where they swim, then cycle then run for staggering periods of time) who simply just want to improve their performance. 

I have a coach (Greg Wood of Sandler Training). I wish I had met him years ago, but he is helping me to build my/our business, which is, as it turns out, financial coaching. Yes, we (at High Rock) are indeed coaches. 

And that, to a large degree, is a huge differetiator in the world of financial advice. Our coaching expertise comes from a broad range of experience and education (from financial planning to managing investment risk and portfolio strategy), that gives us the ability to work with our clients to help them get to their financial goals.

We all have goals. Sometimes those goals are just vague ideas of some far off notion of how we would like to live our lives in the future. The key is to set aside some time and start to build a clearer picture of exactly what those goals are be they long-term, short-term or regular, day to day goals.

When we set a goal, be it personal or financial or athletic, and make it very specific, it starts our psyche churning and we begin to think about how we are going to motivate ourselves to achieve it. We start to focus our behaviour on creating a plan of the actions that we need to take to make it happen.

This is not rocket science by any means and at the outset, may seem pretty simple. However, to be successful in achieving our goals, it will take planning and more importantly, likely having to challenge ourselves to be disciplined in our approach.

When we prepare Wealth Forecasts (the High Rock version of a financial plan), sometimes it becomes a bit of a task to get our clients to focus on getting the important financial details to us (sometimes it is not a first priority) or we get the Wealth Forecast prepared and presented, but it takes some effort to motivate them to sign and return the (regulatory mandated) paperwork so that we can put it all in place. Perhaps it is just not making that TFSA, RRSP or other contribution to your savings / investments? Sometimes needing to adjust your preconceived notions (usually a result of receiving historically bad advice or coaching) of exactly what will and won't work in managing your strategy. 

However, just as if we are training for that personal best time in your next triathlon (or whatever sport you might participate in) or maybe you are just trying to keep healthy with exercise, if we miss our workouts, we are not staying disciplined and our goals may become somewhat more distant. 

That is behavioural and it is behaviour that drives success.

Every coach (worth their salt) wants their clients to be successful. However, the behaviours that we need our charges to undertake that are necessary to be successful (discipline, risk-taking, prioritizing) have to be as much a part of the process. So behaviour also drives attitude! Creating behaviours and holding yourself accountable takes effort. That effort will ultimately determine whether you will be successful in achieving your goals.

So, as we close out the year and prepare for a new one and as we close out the decade and prepare for a new one, maybe use the December downtime (likely between December 25 and December 30) if there is any in your schedule, to give some thought to your goals, your plan and your actions that will bring you all the success that you want in the future.

And if you want some financial coaching, we have a fine team to support your efforts.

Bank Of Canada Sees A Different Economy Ahead

While Business Confidence tends to lead Canadian GDP (above chart), it is clearly making lows not seen since 2015 (when the Canadian economy dipped into recessionary territory, i.e GDP growth fell below 0).

Somehow, however, the BOC, in its decision to leave interest rates unchanged earlier today, sees something better:

"There is nascent evidence that the global economy is stabilizing, with growth still expected to edge higher over the next couple of years"

I did have to look up "nascent" (to get the exact meaning): just coming into existence and beginning to display signs of future potential.

Apparently this is something that Canadian Business is not seeing. Which means that either the BOC is looking through a rose-coloured crystal ball or Canadian Business is not seeing the brighter future. 

The BOC acknowledges the risks: "Indeed, ongoing trade conflicts and related uncertainty are still weighing on global activity, and remain the biggest source of risk to the outlook."

I would suggest from recent headlines that the ongoing trade conflicts are not going away in any hurry and even if some solutions are found, there is going to be a considerable lag between the time of implementation and the benefits from any resolution.

So, obviously, I remain in the cautious camp with the rest of the Canadian business folks who are less confident.

The real reason that the BOC won't lower interest rates, unless they absolutely have to is because they are worried about the Canadian household coming to the trough if lower rates should happen: "The bank continues to monitor the evolution of financial vulnerabilities related to the household sector."

The real vulnerability is employment. If the less than confident businesses start taking cost-cutting measures by reducing employment, the over-indebted and vulnerable households will start to feel it and so will the two things that are supporting the Canadian economy: the consumer and the housing market.

That may show up in November's employment / unemployment data (Labor Force Survey to be released this Friday) or even in future employment reports into 2020.

We will also get a glimpse at how U.S. business confidence is driving employment / unemployment this Friday.

As President Trump stated yesterday in London: "If the stock market goes up or down - I don't watch the stock market... I watch jobs. Jobs are what I watch."

Perhaps the Bank of Canada will be watching too?