Financial planners: Practice what you preach

Do you know what your fund manager or adviser’s portfolio looks like?



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Here’s an interesting question to chew on: Do you know what your fund manager or adviser’s portfolio looks like?

Well, the men and women behind Steadyhand—one of Canada’s no-load, non-commissioned mutual fund companies—want you to know that if you’re a client, they’re eating what you’re eating. As of June 30, the employees at this firm had $25.4 million invested in their own funds, which represents 84% of the company’s assets on average.

David Toyne, director of business development at Steadyhand, says disclosing this type of information is critical because it demonstrates to clients that everyone’s interests are united—put it another way, if the ship goes down, everyone goes with it. Unfortunately, he notes, “information about a fund manager or adviser’s own portfolio is rarely made public, let alone discussed.”

He’s right. Indeed, I’d wager that if you did pose the question it would be uncomfortably sidestepped. But if a fund manager or adviser were completely forthcoming in their response, more likely than not they would tell you their own portfolio looks absolutely nothing like yours.

Why? Unfortunately, Canada’s mutual funds boast some of the highest management expense ratios (MERs) in the world: on average, actively managed portfolio cost investors about 2.5% of their assets every year. Most of that goes toward investment management and operating expenses for the funds, while about 1% goes toward undisclosed trailer commissions—the fees paid directly to an adviser by the fund company.

Quite often as a result, small investors are being placed in funds that aren’t necessarily in their best interests; rather, they serve to line the pockets of the fund managers who design these funds and the advisers who sell them to clients. Doubtless, fund managers and advisers wouldn’t want to pay the same types of inflated fees with which many investors get saddled.

Such potential conflicts of interest, Toyne aptly notes, is exactly why “the issue of co-investment is fundamentally important in ensuring an adviser or manager’s interests are aligned with their clients.” It’s a great point. Putting possible differences in risk tolerance and asset allocation aside, if the person providing you with funds wouldn’t hold the same types of investments for themselves, what is that saying about your portfolio?

It’s telling you you need to take your business elsewhere.

If the people you’re trusting to do right with your hard-earned income aren’t practicing what they preach it means they’re not looking out for your best interests. So go ahead and start asking questions. You may not like what you hear.

2 comments on “Financial planners: Practice what you preach

  1. I have to say I partially disagree with the point of this article. As a Financial Planner my level of sophistication is different from my clients and the type of investment vehicles I choose to use does not create a conflict with the advice that I provide. I have no qualms about sharing what I’m invested in with my clients and this disclosure should be made public but it wouldn’t change the advice that I provide. Should I begin sharing my real estate holdings, corporate structure and my wife’s holdings and my kids RESP as well? I think we are creating an issue where there really isn’t one. Clients are curious about what we may hold but they care more what we do for them.


  2. A typical holding in an adviser portfolio would likely be front-end at 0% which is the exact same deal I offer to my clients.In the past, I had DSC funds exclusively in my account. What is good for my clients is equally good for me.

    Unlike a client however, the adviser earns a commission on his own trade (pro account) which reduces the cost somewhat. If you are talking about an equity fund that would be about 1% per year.The same applies to a GIC purchase when it is purchased in an adviser account… Not sure why anyone would think an adviser would not buy his own recommendations.

    Also, I would like to correct your view that trailers are not disclosed. As far as I can recollect (two plus decades), they have always been disclosed. To add emphasis, CRM2 mandates that additional disclosure must also be done pre-trade although the vast majority of advisers do this already.

    I think you put too much weight on the Morningstar study conclusions which in my view, is flawed.

    For every Morningstar report that claims Canadian MERs are uncompetitive, there are other reports and studies that say Canadian MERs are indeed, highly competitive. Based on Morningstar’s less than stellar (pun intended) history of dicey press releases and admitted flawed research, in my view, their conclusions remain suspect.


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