Plan ahead for meeting with adviser
The Gazette, Monday, March 19, 2007
Don MacDonald
The RRSP season brings many small investors face to face with their financial adviser for the one and only time each year.
For many people, these portfolio reviews are also the only time they seriously think about where they’re going with their retirement savings.
If the conversations I’ve had with friends and acquaintances over the last few weeks are any indication, many people come away from these meetings deeply worried they’re being led down the wrong track by their adviser.
Often these concerns are little more than vague suspicions because, outrageously, most investment firms don’t present annual portfolio returns to clients and most people don’t know what return they’re aiming for or what constitutes a fair return in any given year.
They also aren’t aware just how sales-driven the investment business is. Whether it be full-commission brokerages of the big banks or suburban mutual-fund operations, the pressure is on every day to bring in more clients and produce higher revenues.
That’s not to say there aren’t great, conscientious investment advisers out there.
But too often, retirement portfolios end up with inappropriate, underperforming and/or high-cost investments that compromise the future financial security of retirement savers.
So what can ordinary people do to ensure they have the right portfolio to meet future needs and that their adviser is looking out for their best interests?
The first step is to get over the feeling that understanding and guiding your investments is just too complicated or difficult.
Warren MacKenzie, author of the book The Unbiased Advisor, said purchasing a car is more complicated than putting together a conservative mix of funds.
It’s the investment industry that has persuaded people the process is too opaque and mysterious to understand without help, he said.
“They’ve let themselves believe that it’s complicated and it really isn’t,” MacKenzie said in an interview. “It’s just a matter of making up your mind and taking charge. No one will look after your portfolio as well as you will.”
MacKenzie runs a firm in Toronto called Second Opinion Investor Services that offers an independent review of portfolios.
He offered some tips to people who are concerned about their retirement savings.
Make a decision to take responsibility for your own financial success and realize you can do it.
Read a couple of books about personal finance and investing principles.
Ask your adviser to calculate in percentage terms what your portfolio has returned over the last year, compared with an appropriate benchmark index.
If there is underperformance relative to the benchmark, ask for an explanation. MacKenzie noted there might be legitimate reasons for underperforming an index. He gave the example of the technology bubble when Nortel Networks came to make up almost 30 per cent of the capitalization of the S&P/TSX composite index. But if there isn’t a satisfactory answer, then it’s time to shop around for a new adviser.
Investors should ask their advisers for an investment policy statement that explains how
things are expected to work. The statement should include: a target average rate of
return; expected range of returns over different time periods; starting percentages in each
asset class in the recommended portfolio and permissible ranges for each asset class; and
all fees that will be charged.
MacKenzie said an investment policy statement is in the interest of both the client and the adviser.
In a down year in the markets, the adviser can remind a client that the portfolio’s decline is within the range described in the statement.
Think like an institutional investor such as a pension fund by focusing on the investment process and not investment products.
“You have a target. This is the asset mix designed to reach that target with the least amount of risk and this is the process by which we will rebalance it from time to time. Then when a broker calls up and says: ‘I think we should make this change,’ you say: ‘How does this fit into our plan?’
Taking charge of your finances is like any life change. You have to resolve to act and then take the first step. Chances are you’ll thank yourself in your retirement years.
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