(Note: To see the table listing options for investment counsel, click here.)
If you’ve ever suspected that the rich have access to a closely guarded investment secret the rest of us aren’t privy to, you’re right. But it may not be what you think. There’s no magic investing formula that’s revealed after you make your first million, or a network of sophisticated insider trading intelligence that’s hidden from the rest of us. Rather the rich have access to the rarefied world of the private investment counsel. In this world your investments are personally handled by highly qualified and responsive investing experts, who carefully follow your direction and report back regularly. And believe it or not, the fees are often much lower than what you’re paying now.
Hiring an investment counsel is often considered the next logical step after you’ve worked with a broker or financial planner to grow your portfolio to seven figures. But if you haven’t heard of them, we’re not surprised. Most purposely keep a low profile. In their world, business is built on word-of-mouth, performance speaks for itself, and aggressive advertising would be unseemly. “It’s not a service that’s sold,” explains a senior member of one firm. “It’s a service that’s bought.”
Despite their air of exclusivity, if you’re interested in seeing what it feels like to get this financial red carpet treatment, we have good news. You can now gain access to some private investment counsel firms with an investment portfolio of as little as $500,000. That’s still a hefty nest egg, but well within reach of many middle class Canadians approaching retirement age. “It’s a misconception that it’s just for the super-wealthy,” says Warren MacKenzie, president of Weigh House Investor Services of Toronto, which helps investors select private investment counsel. Many firms are willing to take you on for even less than their stated minimums if they see a lot of potential to grow your portfolio.
What sets the counsel apart
Consider the experience of Diane Vezina, an executive coach and organizational consultant from Toronto who’s nearing retirement. She and her husband had the bulk of their life savings invested in mutual funds through a financial planner, but she became increasingly upset with the poor performance of their portfolio during 2007 and 2008. Like many investors, she is not an investment expert herself and works long hours in her job, so she relied heavily on the expertise of her adviser. But whenever she expressed her dissatisfaction to her adviser, she was told “everything’s OK, the world is unfolding as it should.” Her frustration culminated with the market crash in late 2008. “I was devastated at that point, because we were down by 23%. Ten years of investing had been wiped out.”
She became even more upset when she discovered that her adviser was also getting a hidden “trailer fee” from her portfolio of about 1% annually, on top of the 0.4% fee she knew about. When the mutual fund companies’ own fees were also included, she found she was paying close to 3% a year. As she dug deeper, she found out that the proportion of her portfolio invested in equities had gotten as high as 70% at one point, which she considered “too high for a woman who is within a few years of retirement.”
Finally she hired Weigh House to help her find a new adviser. After a thorough search she decided to go with an investment counsel, and in mid-2009 she selected three firms: Connor, Clark & Lunn; Avenue Investment Management; and Cougar Global Investments. She was immediately impressed. As is typical with private investment counsel, each firm assigned her a highly qualified representative with a chartered financial analyst (CFA) designation, the investment industry’s most respected designation for managing money. Also typically, she went through a rigorous process to specify her investment objectives, risk tolerance, financial constraints, and overall guidelines to managing her money (called an “investment policy statement” or IPS). She specified a more comfortable target allocation for her investments: it’s now 60% fixed income, 40% stocks. With her overall direction set, each of the investment counsel firms works behind the scenes to take care of all the day-to-day details of which stocks and bonds to buy and sell.
She finds her new counsel quickly return phone calls, visit in person when needed, and have planned regular follow-up meetings every three to six months. She says the advice she gets is informative and balanced, with no soft-peddling of market risks. “I was so impressed with their candor. I don’t think anyone told me the truth like that before,” she says. For the first time she receives monthly reports which compare the performance of her investments to benchmark indices for the over-all market. Now she can easily and clearly see how her investments perform compared to the market as a whole. For this she pays fees that are competitive with general private investment counsel rates of about 1% to 1.5% of assets per year—more than one percentage point lower than what she was paying before. “The bottom line is they are doing their job and making money and they are making their benchmarks.”
Three different flavours
As Vezina discovered when she started looking at investment counsel seriously, there are three different types to choose from: the bank-owned firms, the large independent firms and the boutiques. Each has its pros and cons, and each could be a good choice for you, depending on what you’re looking for.
Bank-owned investment counsel now comprise the four largest providers in Canada by assets, and six of the largest 10, according to research firm Investor Economics (see table to the right). They provide scores of CFA-credentialed portfolio managers to meet with you in many mid-sized cities across Canada, not just the big financial centres like Toronto and Montreal. They typically offer lots of different pooled funds and segregated account models, and they are backed by huge back-office asset management units which actually do the investing.
One potential benefit of going with a bank-owned counsel is that the banks view them as just one part of their overall “wealth management” strategy. Most banks locate their private investment counsel staff in the same offices as experts in financial planning, taxes, wills and estates, and other disciplines. Private investment counsel services might be a start to the relationship. But then do you need a will? They can provide a lawyer to draw one up. Need credit? They have private banking specialists who will ensure you get preferential access and quickly. Find yourself as executor of the estate of a just-deceased relative? They can help you manage it. “It’s really about putting together the strongest team you can,” says Andrew Auerbach, senior vice-president and head, BMO Harris Private Banking.
Canada is also home to many large, high-quality independent investment counsel. But if the banks are low-key, the independent firms can seem almost reclusive. In many cases their private investment counsel service is an outgrowth of their much larger business of managing money for institutions like pension funds. In that discerning and competitive arena, only firms that perform well over many years will thrive and performance speaks for itself.
Unlike the banks, most of the independents are specialized investment thoroughbreds which don’t try to look after all your wealth needs with teams of experts. And they’re likely to have offices in only one or several large cities. But some firms go to surprising efforts to meet outlying clients in person by visiting different areas for a few days and setting up sequential meetings with all clients in the area. Independent firms tend to offer fewer funds or segregated account models than the banks do, and stick to a particular investing style, such as value investing (buying good companies at bargain bin prices) or growth-at-a-reasonable-price (GARP). So you tend to get a pretty streamlined menu compared to the banks’ extensive buffet, but they’re often exceptionally good in those few well-focused areas.
The plucky small fry in the business are the boutiques. They are often led by one or more principals who established great reputations working for larger firms before striking out on their own and taking many of their clients with them. Typically they provide clients with superior personal service and direct access to the principals of the firm, who may have exceptional expertise and experience. “I’ve had some clients for 20 years now,” says Tom Trainor, managing director of Hanover Private Client Corporation, a 10-year-old boutique “family office” Toronto firm that provides a broad range of wealth management services for accounts $2 million and up in investment or business assets. “You really get to know the client situation.” Despite his firm’s tiny three-person size, he says he wins his share of business by word-of-mouth in David-versus-Goliath-like competition with the banks. While he can’t match the banks in resources or legions of experts, his advantage comes when clients consider “who is the person that’s really integrating everything together?”—and how closely they’ll get to work with him or her.
Get invited in
Given the low-key nature of private investment counsel, it’s not always easy to scout the available providers. Consulting firms such as Rodgers Investment Consulting and Weigh House Investor Services, (both based in Toronto), will help you select a private investment counsel firm. While they’re not cheap—expect a search to cost you several thousand dollars—they can save you money in the long run by helping you find a good private investment counsel firm at an attractive fee. Weigh House focuses much of its work with a few small and medium-sized firms and MacKenzie says most of those are willing to offer a volume-type discount to Weigh House clients that at least covers the cost of the search.
You can also approach investment counsel on your own. If you decide to take that route, a good source of leads is the Investment Counsel Association of Canada website (investmentcounsel.org), which lists all its members by minimum account size and by province in which they operate. Each listing also provides a lot of pertinent information about each firm.
If your portfolio is $1 million or more in size, you’ll have no problem getting taken on by most firms, although some can have minimums as high as $3 million. But don’t worry if you have a smaller portfolio. In “Which counsel is right for you?” on page 55, we’ve listed a variety of options, including several firms which will take on clients with portfolios of $500,000. One of the firms, Beutel Goodman Private Client Group, will even go as low as $250,000. If you’re relatively young with a high income, and they see a lot of potential for your portfolio to grow, some firms will take you on with even less than their stated minimum.
Which one should you choose?
Once you have several firms interested in taking you on, the choice of which one to go with is yours. It can be a tough one. It’s tempting to look at the returns earned by different firms over the last few years and then just go with the counsel that has performed best. But that would be a mistake, say the experts. Hot performers often lag later. Kelly Rodgers, president of Rodgers Investment Consulting, says instead you should look at the “five P’s”: philosophy, process, people, price and performance—“in that order,” says Rodgers. That’s because “if you get the first four right, the fifth will automatically follow.”
In looking at performance, it’s important to consider not just the returns, but the volatility of those returns. Rodgers says you should look at a firm’s performance compared to overall market benchmarks on a year-by-year basis. Look for counsel that perform comparatively well year-after-year, rather than blowing the lights out one year and lagging the next. “Ultimately, long-term success will come from consistently good rather than occasionally great.”
In describing their historical performance, private investment counsel firms will usually show composite returns earned by their clients in an investment category like Canadian equity compared to a relevant benchmark (in this case, the S&P/TSX Composite Index). That has the advantage of being “actual returns earned by real investors,” says Rodgers. Many firms follow the CFA Institute’s Global Investment Performance Standards (GIPS) to ensure fair, accurate and comparable performance reporting. Rodgers says to beware of other types of money managers showing you “simulated” returns from a selection of hot funds. It’s easy with hindsight to cherry-pick the hottest funds and then calculate historical returns.
You need to be comfortable with the firm’s investment approach. Investment counsel firms tend to emphasize preservation of wealth, so usually their style is fairly conservative. Many firms adopt a value approach to investing in equities, which emphasizes paying a good price for a company’s net assets and earnings potential. Others adopt a growth or a growth-at-a-reasonable price approach. Many of the banks offer a large menu of funds or segregated account models with different styles, so you can mix and match between different styles.
Once you’ve found a reputable private investment counsel firm that fits your needs and you’ve handed over your hard-earned savings, you can sit back and relax. It’s time for them to do their job, and of course, report regularly back to you. You may not be truly rich yet—but now that you’ve discovered the investing secret of the wealthy, you have a better chance of joining their ranks.