How and Who Should Manage My Money?

How and Who Should Manage My Money? By Wes McComb

July 10, 2023

There are many options available to investors on how to manage their investments. What institution should it be held at, do you need advice or not, what type of investments should be held, what services are provided, and many others are all questions that investors have. You may even wonder if the choice you have already made is still the right one for you today. I am going to go through the main distribution channels and list the pros and cons of each. I think my list is complete but if anyone feels I have missed any please let me know.

Robo advisors first made their appearance ten plus years ago and had my industry, full-service brokerage, concerned. They provide relatively low fees to their clients with some guidance on asset mix. There is a person available online to help with the initial plan set up. They primarily use Exchange Traded Funds as the investment vehicle which provides diversification and low hidden fees. But even with massive advertising (you aren’t still using dad’s guy, are you?) they really haven’t taken off. They have mostly attracted people with smaller accounts that want to have some more guidance than discount brokerage and don’t need a personal relationship. With the relatively low fees and smaller accounts robo advisors have not been able to expand into more in-depth financial planning, estate work etc. My understanding is that they still make their money on the traditional interest rate spread on client’s cash balances and trading from the discount arm of the business.

Discount brokerage firms were started back in the 1980s when set commissions were eliminated. Prior to this there was a set percentage of commission charged per transaction. This monopoly was great for brokerage firms since no service was needed. Even when I started there were older advisors that still waited for their phone to ring to enter unsolicited orders. Those days are over, and it made all full- service brokerage firms up their game. Discount firms now, or close to, charging zero dollars for a transaction. They again make their money off interest rate spreads, foreign exchange, bond spreads and other fees that most client are unaware of. Discount brokerage is good for investors that have the time, interest and fortitude to do their own investing. It would be an interesting study to see if a client with an identical profile does better with advice or not.

Private banking is of course offered by schedule A banks. The allure for clients is that it provides both debt and investments with contact point. For the banks it is attractive since they don’t have to pay the employees as much money and the clients maintain more loyalty to the bank than the advisor. Often, at full-service brokerage the client has such a good relationship with their advisor that if the advisor decides to move to another firm the clients go with them. Banks don’t like this. With private banking the client’s investments are usually managed by internal and third-party money managers for a fee for assets under management. The downside is that most of the private banking advisors are drawn from the lending side of the business and don’t have as much specific investment knowledge. As well, the investment recommendations are cookie cutter and are not as easily customized.

Insurance firms offer investment management as well. They have a very long track record in this area, developing much of modern statistical science by calculating the premiums needed to cover payouts-

actuarial science. For investors the primary products they offer, outside of insurance itself, are mutual funds and segregated funds. Since most insurance firms don’t have any or few physical branches, their products are sold through captive or independent insurance agents. Usually, the agent’s primary specialty is in insurance, so their focus is not on portfolio management. Since the fees on their retail products are generally above average most high net worth clients don’t gravitate to insurance companies. Though, I remember in the late 1990s, early 2000s Manulife offered Guaranteed Investment Funds (GIFs). These GIFs offered a 3 percent guaranteed return per year or the return on the mutual fund (whichever was best) if invested for 10 years. Manulife did a massive advertising campaign pushing GIFs. I had one client insist on putting money into one. We decided since she would get a for sure 3 percent, we should put it all in a high volatility international fund. At the end of 10 years the fund was down significantly (remember the stock market boom ended in 2000). Manulife had to make her whole plus the 3 percent per year. This obligation on these GIFs almost sunk that venerable institution. They don’t offer GIFs any longer.

Bank branches are one of the most popular methods for Canadians to invest. They are in almost every neighborhood, have good reputations and often have a personal connection with their clients. Besides plain vanilla GICs they can offer inhouse mutual funds and specialty GICs with stock market linked returns. There have been some regulatory changes recently so more independent fund companies are also on their shelves. However, like insurance companies, being limited to mutual funds as the favored investment product doesn’t appeal to everyone, such as wealthier and fee conscious clients. This lack of choice sends even loyal clients looking for alternatives.

Independent mutual fund companies (not owned by the banks or insurance companies) are mostly sold by independent fund salespeople or bought by discount brokerage clients. Fund companies like CI, AGF, Trimark, Templeton, Fidelity etc. had their heyday in the late 1990s to 2009. However, this channel of advice has maintained the level of assets being managed due to the close relationships developed with the fund advisor. Though there is still some discussion on what credentials the advisors should have many offer good financial and estate planning. The fees are generally higher, but this form of money management is good for smaller clients needing independent advice.

Family offices are generally established for one or two wealthy families which then offer their services to others since they already have the infrastructure in place. In most cases they will provide extensive tax and estate planning which may be the most important aspects for ultra-wealthy clients. Though some may have internal money management most will use third party money managers that are independent of the family office. These third-party money managers such as Burgundy, Phillips Hager North, Jarislowsky Fraser etc. may also accept retail clients though they generally focus on attracting institutional investors. Fees will usually be lower than mutual funds, but they still have to pay custodian and trading fees on top of their own fees so, all in, they are usually above one percent. Even the Canada Pension Plan, with their huge assets of 570 billion dollars to spread out costs, has fees of about one percent.

Full-service brokerage is the most common destination for high-net-worth clients. These offer tax, estate, financial planning, money management etc. that these types of clients are looking for. In Canada most are owned by the banks but there are excellent independent ones as well. Each advisor usually has 150 to 250 relationships so are able to provide more personal service than many of the other distribution channels. However, because of the lower number of clients per advisor, a client usually

needs at least 500 000 dollars in investable assets to get access to one. The suite of investment products available is extensive and each advisor will have their own favored method of investing for clients. They are mutual funds, third party money managers, advisors that invest directly in stocks, bond, ETFs etc. and they may offer fee based or transactional services. Fee based is most common these days but if clients are holding large positions in their own company shares the fee may be waived until a sale occurs. Most often clients have some form of hybrid money management, with direct and third-party money management. Advisors will discuss what the best one is for you. Fees go down as assets grow but as a rough guide expect to pay on a portfolio over a million dollars 0.9 to 1.5 percent all in.

The list above are the options available to investors. You may end up with some combination of them. Do some research to find the best one for you. Remember, the most important thing is to just get started. The sooner the better for your financial well-being. Please let us know any questions or guidance needed.

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