Spend a couple of hours with Stan Buell, head of the Small Investors Protection Association (SIPA) (which I did today at Charlottetown's The Brickhouse Kitchen And Bar) and listen to a few of the stories he has accumulated from his days helping the many abused investors who have lost millions to just plain bad advisors and it won't take you long to start thinking about who is in control of your money.
These people (the bad advisors) were apparently trustworthy, in some cases, vice presidents with large, apparently safe, banks and investment firms under the ever watchful eye of the self-regulating Investment Industry Regulatory Organization of Canada (IIROC).
Over our lobster mac and cheese and seafood chowder (both to die for, if you enjoy the type of catch that the local folks brought in that morning) we wondered why it was that the people who put their trust in these various scoundrels were so easily taken.
Certainly, the institutions backing them were a good part of the reason. The scary part was that even though, in many cases, investors did get some (definitely not all, after lawyer contingency fees, settlements, etc.) of their money back, the banks fought for years to protect these bad advisors (and themselves). So, in the case of one situation, after fighting 10 years over a couple of million dollars, the retired plaintiff got some of his money back and passed away 4 years later. Not a happy story.
Friends, I have in many past blogs tried to discuss the necessity of making certain that your adviser is fiduciarily responsible, but both Stan and I have come to the realization that many do not even understand what that means.
We think that we have to break it down into more understandable terms:
If and when your advisor sells you an investment (ETF, stock, bond, mutual fund), it is her / his responsibility to make certain that, at that moment in time, it is suitable for you (the Know Your Client rule).
Beyond that, it is no longer his / her responsibility. You own it, you are responsible. Period. She / he is not. If that investment, somewhere down the road becomes unsuitable, it is not their responsibility to tell you to sell it. If they are good, they should, but as they are not legally accountable (i.e. they have no fiduciary responsibility), you are rolling the dice. It is all on you to monitor and research. Do you have the time and the expertise for that?
Did they advise you to use margin (use debt) to purchase that investment?
Uh Oh! More warning signals.
Stan spends his valuable time fighting the good fight, trying to get the governments to recognize how the self-regulating organizations have an extreme conflict of interest and are not interested in forcing their members to provide a fiduciary duty.
Have you seen the latest big bank profit results?
The Wealth Management arms of these institutions are recording record revenues. I guess the pressured sales tactics as reported by CBC Go Public Investigation into Big Banks are working.
At least the bank shareholders must be happy. What about unsuspecting clients?
As a portfolio management company (like High Rock) registered with the Ontario or other provincial securities commission, we have a fiduciary (legal) responsibility to monitor and protect our clients' portfolios. That is why we are so very focused on risk. You, as a trusting investor, have to make certain that you are dealing with advisers who have a fiduciary responsibility to you.
We (the smaller but likely more responsible money managers) do not have the resources to compete with the advertising powerhouses of the financial industry (that allude to safety and security that may in actual fact be, in many cases, a myth), so we need to rely on continuing to tell the stories that Stan tells.
So have a look at the SIPA website and pass it on and help Stan tell his stories and get the message out there. Think about it. What if you were to lose everything to a rogue advisor? What would you do?
You may be richer than you think, but you may not be as protected as you think!
My answer is always: "it depends".
Basically, it is not about the amount of your investable assets, we won't draw that line.
It is more about the fit: If you are a young investor and a good saver (that will all come out in the Wealth Forecast) and have a long-term,wealth building goal and understand that wealth is not created instantaneously (i.e. via gambling), but is a gradual building process, you will be a good fit.
We have a host of multi-generational families in our (High Rock) care (including our own children and grandchildren) and a broad cross-section of clients that give us the experience of preparing investing strategies for lots of folks from many walks of life.
We try to limit ETF MER costs to our clients by using actual securities in our Fixed Income and Tactical models, but will use ETF's in our Global Equity model, but always with an eye to keeping MER costs to a minimum.
At the moment, MER costs for the majority of our clients are approximately 0.03% to 0.06% (of the total portfolio, depending on how fully invested you are) in a balanced 60% equity / 40% fixed income style of portfolio.
If you are in a fully invested 60/40 ETF portfolio, by comparison, you are probably paying an additional 0.30% to 0.50% (or more) on top of whatever your advisor is charging you. Have you investigated what your ETF MER costs are? It is important (especially in the low return environment we have been in for the last few years), you definitely should research this. If your advisor isn't forthcoming (they should be able to provide exact details, not just approximate data) that is a definite warning flag.
In our smaller client portfolios, where we can't get securities (usually bonds) in smaller denominations, we will have to use bond ETF's and that will add to the portfolio's MER cost, but we will always be completely transparent about the MER costs and do our best to keep them as low as possible.
So smaller portfolios may have some additional MER costs, but our level of service and commitment to you should more than compensate.
If we are the right fit.
The "fit" works both ways: we need to be the right fit for you and you need to be the right fit for us.
But unlike many investment advisory practices at banks and large financial institutions, you don't get shuffled to a lower tier of service and investment options if you are a smaller client.
Our discretionary management (you still have separately managed accounts, SMA, held at our custodian, RJCS, as opposed to a pooled fund) allows us to buy and sell securities simultaneously for every client: there is no discrimination or priority as to size when it comes to trading.
So our big clients are happy and our smaller clients are happy.
Everybody has a plan tailored to their specific goals and a matching portfolio strategy.
There is a new low-cost, fiduciarily responsible alternative to the old school, expensive, big bank or investment dealer style of growing your money with the service and care (risk management) that you will not get at a robo-advisor and High Rock (recognized by the Small Investors Protection Association, SIPA, as a "new breed") is leading the way forward.
In my world, boring is good.
A slow, steady, gradual, low volatility, predictable rate of growth is a good thing.
Now, of course, we are competing with those that want to tell you that you have to do something and you have to do it now or you will miss out on the big opportunity that awaits you!
They are selling excitement!
It's easy to buy excitement because it is entertainment and we all know that we want to be entertained!
Speaking of which, I just finished season 1 of Dwayne Johnson as Financial Advisor Spencer Strasmore:
Or perhaps even more exciting is Jason Bateman as Financial Advisor Marty Byrde:
Now these guys sell excitement (comedy and drama)!
They even talk it up like a few financial advisors I have witnessed in my past, you know: "grab the opportunity now" (and other standard financial advice cliches) kind of stuff.
But, alas, the real world is not like that (not the one that I know anyway).
Here it comes, you may be thinking, he's going to say something about planning...
You are correct. How boring is that?
So many folks don't have a plan. You need to have a plan before you can take advantage of any exciting "opportunity" because you need to be able to figure out how that opportunity is going to fit into your future.
But its August, its the summer, its just not the right time.
Ok, so should we wait until September? If you have kids, then that is such a good time because you won't be running around with back to school issues? Perhaps October? Maybe after Thanksgiving, or November, such a boring month! Not December, way too busy. January? Yes, to start the new year!
And before you know it another 6 months passes on by and there is no plan.
Obviously that little lecture is not for High Rockclients, because they all have plans and are well on their way to having their portfolios built, achieving their goals and getting a wonderful nights sleep (that is where boring is very helpful) in a methodical, disciplined way.
If you think that gambling is exciting, then you should take a trip to Vegas (but keep in mind that the "house" has the odds stacked heavily in its favour).
If you want to be a steward of your families financial future, then you are going to have to get a plan together.
Be fearful of the exciting sales pitch. Go with the boring folks, who talk about how managing risk (and cost) is their biggest priority.
John Maynard Keynes : "When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill done".
I did not come up with this on my own, but had help from James Mackintosh of The Wall Street Journal.
Nonetheless, following up on, in what we would consider to be a time of high risk (last Wednesday's blog), volatility spiked last Thursday as the political rhetoric between the US and North Korea heated up and slipped lower on Friday, yesterday and further today as it cooled down:
Traders and speculators (gamblers) have been whipped into a frenzy. They like volatility because it frightens the retail (individual investor) and they are keen to take advantage of those that get frightened by the wild market swings.
The problem, at these late stages of the economic cycle, is that investing (finding value in an asset for the purposes of receiving a future income stream or appreciation in that value), has little to do with what is transpiring in the stock market.
Reasonable value has long been taken out of stock markets (sometime in 2013) and expected future (12 month forward) prices, relative to earnings earnings are trading at about 17.5 times. Well above the 10 year average of 14 times (24% above).
In fact, with earnings over the next 12 months expected to grow at a rate of about 6.5% and the the price to earnings ratio 24% over its average, earnings would have to grow by an additional 30% to just meet the 10 year average P/E ratio.
In an economy that is growing at barely 2%, that is not likely going to happen.
Another of our metrics of value: Enterprise Value to EBITDA (Earnings before Interest, Tax, Depreciation and Amortization) is at its highest levels since the dot com bubble.
With value out of the equity market in general, it is left to the gamblers to play the trading game to try to find a way to continue to build momentum for stocks to move higher.
Earnings growth is better now, but it was non-existent in 2015 and 2016, yet stock prices continued to rise. Now there is some residual growth, but it is not booming, just catching up.
The new Trump administration gave hope and hype at the beginning of the year, but that is so far a bust.
Hope and hype and pretty mediocre earnings have fed the emotions of the buyers so far this year, but stocks are expensive and in the end they will return to the mean (average) values as all things do, eventually. Buying stocks at these levels would likely be less than prudent.
We will talk about this and other things financial, economic and wealth management related on our (new format, dialogue version) weekly client webinar today. The recorded version will be posted on our website (after 5pm EDT). Feel free to tune in!
Yesterday, just as we were about to go live with our weekly client webinar, the President of the United States, arguably the most powerful man / nation in the world, stated that if North Korea persisted in continuing its threats toward the US, that they would be met with "fire and fury like the world has never seen" (Game of Thrones meets Reality TV).
My business partner Paul saw the headline come across his Bloomberg terminal while we were discussing risk (how appropriate) and as one of our clients noted in their feedback to us, "seemed reasonably distracted". Yes, indeed.
We spent a little bit of time on our call talking about the lack of volatility (the VIX index close to its lows) currently in the financial market place which shows the general level of complacency surrounding investors at the moment.
Not since 2015 have we had a serious spike in volatility:
I remarked that, at that time, when volatility spiked, our phones were ringing off the hooks with folks who were frightened by the situation, looking for answers and assistance. Now, a great deal of folks have put their financial and investing risk issues somewhere back to number 5 or 6 on their priority list, because they do not feel any urgency to act.
Paul, on our call yesterday, said very succinctly that: "the time to address risk is now", not when it scares the daylights out of you, by then, it is too late.
Lucky for our clients, we are always analyzing and measuring the level of risk and adjusting our portfolios accordingly so that when that next big spike in volatility comes (and it will), we will be prepared (and that, as discretionary portfolio managers, we have the ability to get everybody out of the way of danger instantly and simultaneously, something you won't have with a non-discretionary portfolio manager, who will have to call you first).
Will it be now? With the political posturing between the US and North Korea escalating? Perhaps. Or it could be when a few large holders of equity assets determine that valuations just don't warrant as much risk as there is at current prices. Or perhaps the rising interest rate policies in Canada and the US strip enough liquidity out of the monetary system that selling assets for some becomes necessary.
Or it could be a combination of all three.
When the very tightly wound elastic band snaps back, it will have some significant repercussions.
Best be prepared.
Sorry for the bad news folks, I hope your advisor has been keeping you up to date on your portfolio (if you live in Canada), because despite the advertised returns,
the US$ recent 10% decline against the $C has wiped out a great deal of those returns for those of you who have consolidated portfolios that are converted back to $C. You may see some declines in your total portfolio in your July statement.
The S&P 500 ETF (SPY) in $C terms has only returned a little over 7% in the past year vs. the over 20% return in $US.
The Canadian Bond Index ETF (XBB) has produced about a -2.5% total return over the same period.
That will not be good for those of you fully invested in a 60% equity, 40% fixed income portfolio (with exposure to the $US). Combined total return over the last year now in the 4 to 4.5% area. A far cry from what you might have been expecting.
Even if you own a hedged S&P 500 ETF like the Vanguard (VFV)
may It has returned only about 7 3/4 % over the last year.
As we discussed in detail on our weekly client webinar last Tuesday, the historically sound correlations between stocks and bonds are no longer giving you as much risk protection as you may have had in the past.
It is why we feel the need to be tactical in your portfolio management is so important. Risk is high and is getting higher.
We have been underweight US stocks and underweight $US.
We changed that a little last Friday when we bought $US at a nice 10% discount from its recent high's vs. the $C.
That is an enormous advantage to our clients: now we have $US to make purchases of US stocks when they get cheaper. In all likelihood, at the same time the $C will probably lose some of its recent strength (as correcting markets tend to drive investors to the safety of the $US), but we will already have $US in our and our clients accounts and won't have to buy a more expensive $US.
Fully invested, buy and hold, balanced portfolios are fraught with risk that many don't fully appreciate.
When I first (reluctantly) signed up for Facebook (at the behest of my children), some 10 years or so ago, it was basically for sharing family photos.
It asked me a bunch of questions for the "Details About You" section of my bio:
"just trying to make a positive difference in this world...one day at a time" is what I wrote.
That pretty much sums it up and is what keeps me engaged from one day to the next: my family, my friends and my clients and anyone else who wants to enter my small circle in a positive way.
After I wrote my blog last Friday about the difference between what we do at High Rock and what the other 97% do and why we believe in being bound to a legal fiduciary responsibility to our clients, I posted it on another social media network, Linkedin.
And received this response:
Scott, There is not a single day where I don't feel the safety you are providing enables me to look forward. I am in a way ecstatic I am one of the fortunate few who has a discretionary portfolio manager looking after my family wealth, but then can't even begin to tell you how much I appreciate the fact that my discretionary portfolio manager in particular is recognized by the SIPA as being a "new breed".
I remember you and I discussing how there was a new market forming where those who know the are being fleeced by the 97% of the industry will want a different service.
I also remember your vision about building a brand that was based on doing the right thing, doing right by your clients every time and always, always put them first. Many others commented you could not scale, be profitable or that it would be impossible to manage - well, they were wrong, and you were right... And all of us who trust you with our family wealth KNOW IT!
It makes what I do all that much more rewarding!
I love my job!
Scott Tomenson,CIM Managing Partner, Chief Investment Strategist