By the time your investment portfolio reaches the $500,000 mark, it’s a good time to review your options. After all, at this point a comfortable middle-class retirement is within your grasp, or close to it. So while you want to make the most of what you have, it’s more important than ever to protect yourself from loss too.
Fortunately, you have even better options now than you had at $100,000. At the lower amount, you probably didn’t attract many professionals willing to put together a completely customized portfolio for you. But at half a million, many experienced money managers who would have ignored you before are now willing to lavish you with attention and service.
The best part is you’ll pay even less than before. A typical mutual fund investor pays between 1.5% to 2.5% of her invested assets in fees every year, and gets access to a mutual fund adviser who is restricted in the products he can sell. Once you hit $500,000, however, you’ll find that you can make use of the services of investment counsellors and full-service brokers. Generally, they’ll only charge you 1% to 2% in fees, while providing you with a much higher level of professional investing service.
Of course, if you are knowledgeable enough to have invested capably on your own all along (using MoneySense’s Couch Potato portfolio of index funds, perhaps, or individual stocks), then what you’ve been doing might continue to work well. More money means more options but it doesn’t necessarily mean doing something different.
Still, keep in mind that investment counsellors and brokers can help you with much more than just picking stocks or funds—they can help you manage your portfolio as a whole. Most will take you through the process of setting your investment objectives and risk tolerance, figuring out your asset allocation, and then selecting the most appropriate investments. They can also help you to minimize taxes by ensuring the right investments are held in the right types of accounts, be they RRSPs, TFSAs or non-registered accounts. Often these financial professionals are also trained in related fields such as financial planning and tax. They may be able to prepare a full financial plan or give you tax advice, which are sometimes covered by your investment fees with no additional charge.
Real, personal money management
If you want to turn over day-to-day management of your money to well-qualified professionals providing a high level of personal service at reasonable fees, a private investment counsel firm may be your best option. “That’s a nice hands-off approach for an individual with half a million,” says Jason Heath, a fee-only certified financial planner with E.E.S. Financial Services in Markham, Ont. Investment counsellors (also called portfolio managers) are licensed to manage your money on a “discretionary” basis, which means they make the actual day-to-day investment decisions, subject to your direction. (They are not “advisers” because they actually manage your money instead of just advising you on how to do it.) You can find them at the private wealth divisions of the big banks, but they are also found at many independent investment management firms, some of which have developed impressive reputations managing pension funds.
The big banks typically provide a host of “wealth management” services such as estate and tax planning (often at no additional cost), whereas the independent money managers usually just manage your money. These pros have a “fiduciary” responsibility to look after your best interests, a higher standard generally than that of brokers and mutual fund advisers which mandates that they put your interests ahead of their own. The catch? Half a million is enough for some investment counsel firms to take you on, but others insist on a minimum account size of $1 million or more. However, they will often bend the minimum account size stipulation if they expect your assets to grow.
With investment counsel firms, you’re generally buying the investment expertise and disciplined process of the firm, rather than the skills of any one individual. An investment counsellor will sit down with you to define your investment objectives, risk tolerance, time horizon, target asset allocation and other financial considerations in a document called an Investment Policy Statement (IPS). The IPS sets the direction for other well-qualified portfolio managers in the background to actually buy and sell securities. Those investments generally take the form of pooled funds (similar to mutual funds, where you own units in the fund) or segregated accounts (managed like a pool of funds except you actually own the individual stocks and bonds and you can often tailor the contents). Then your investment counsellor reports back to you regularly.
A fully fledged portfolio manager or investment counsellor usually has the well-respected chartered financial analyst (CFA) designation, although some have the less rigorous but still highly regarded Canadian investment manager (CIM) designation. They typically charge 1% to 1.5% of assets per year, or less for very large accounts.
If you decide to go the investment counsel route, it pays to shop around: Investment philosophies and approaches differ between firms. Referrals from professionals like financial planners and accountants can help you to draw up a shortlist of candidates to interview. Plus a professional referral might get you in the door even though you’re under the minimum account size. You can also find a list of firms in your province, including account minimums, at the Portfolio Management Association of Canada.
Still want to call the shots?
If you want investment advice but you’d like to okay each trade, a full-service broker might be your best option. Generally they’re advisers only—you make the actual decisions about what to buy and sell—unless they’re specially licensed to provide “discretionary” management. Brokers operate under a host of different job titles such as “investment adviser” or “wealth adviser”—they usually don’t actually use the title “broker” much anymore. They are licensed to buy and sell bonds, stocks, exchange-traded funds and mutual funds, and their brokerage may be bank-owned or independent. Often the firm will provide support for other services such as financial planning or estate planning at no additional cost.
With brokers, you’re buying the particular skills and expertise of the individual broker more than that of the brokerage firm, although the firm’s research and other services are important. Brokers run their own business with a high amount of independence within the larger business. Skills and qualifications vary widely. Minimum qualifications to be licensed are quite basic, but many brokers accumulate a wide range of additional educational and professional qualifications, as well as the savvy that comes with experience.
Traditionally, brokers earned commissions on each trade, but these days they’re as likely to charge you a set percentage of assets (typically 1% to 2% of assets per year for a balanced account, with larger accounts often getting better rates). The experts differ on which payment option is best. If you’re a buy-and-hold investor you’ll probably pay lower fees with a commission, “but just be careful the account is not being churned,” says Heath. Paying fees as a percentage of assets is probably cheaper if you trade a lot and is more transparent overall. Individual brokers typically have a lot of leeway to set their own account minimums and rates.
One of the challenges for brokers is that it’s difficult for them to keep on top of every client’s portfolio. “The problem is brokers tend to have diverse sets of clients where every portfolio is different,” says Gordon Stockman, a certified financial planner with Efficient Wealth Management of Mississauga, Ont. Some brokers manage this by making their recommendations from a limited menu of securities (sometimes from a short “focus” list recommended by the research department). But when your broker decides it’s time to sell one widely held security and buy another, making the change in every account is still daunting, since the broker must call up every client individually. That’s why it’s easier for brokers to effectively manage the securities in your account without neglecting you if they operate more like investment counsellors, says Stockman.
Another approach is to employ a broker who advises you on an investment portfolio devoted to exchange-traded funds (ETFs). That greatly simplifies the task of keeping on top of the contents of your account, but in such cases, they should charge you a lower fee.
Finding a broker you can trust can be tough, as there is a lot of variation in ability and training. Licensing requirements ensure basic investment knowledge but don’t ensure top-notch advice. Referrals from professionals such as financial planners and accountants can help, as can referrals from friends and family, if they’re particularly knowledgeable about investments.
Interviewing at least three candidates before making a choice is a good idea, as it will give you a better idea of what’s out there. After all, there are plenty of stories out there about brokers who, well, end up making you broker.