Dear Advisors,

Advisors with more than 5 years of experience will recall AIC’s “Buy, Hold and Prosper” campaign, based on their attempts to effectively mimmick the performance of Warren Buffet’s hallowed Berkshire Hathaway. Long before the market collapse of late 2008/early 2009, AIC’s investment philosophy resulted in considerable negative performance, massive net redemptions and allowing their competitors to coin the phrase “Buy, Hold and Suffer!” Anecdotally, Berkshire Hathaway’s share price dropped by about 54% in the 2008/9 meltdown…and Warren Buffet bought into “Government Sachs” while it was down with cash held waiting for such buying opportunities…so even the Oracle of Omaha times the market!

Evidence of Buy and Hold’s failure is everywhere. As an example, consider the investment results in the SPY, the ETF that is the cheapest way to own the S&P 500: a Buy and Hold investment approach would have netted you a 10 year return of about -22% in $US terms. Take off the currency losses during that period and you end up with even nastier negative results. And remember 85% or more of mutual fund managers under-perform their benchmarks. After ten years of negative results in the world’s largest capital markets, how can an Advisor tell a Client with a straight face that Buy and Hold actually works? So, if Buy and Hold doesn’t work as well as we Advisors were led to believe by the Investment Industry Establishment (IIE), the alternative is Active Management.

The IIE has led us to believe that all Active Management is a) very risky, b) hard to do well, and c) done mostly by neurotic do-it-yourself investors whose lives are swallowed up by being glued to their screens and trying to compete with full-time trained traders. Positioning all Active Management as a “fringe approach” to investing works to the benefit of the IEE, not necessarily to the Client’s benefit. 

Click here to watch a short video on What Mutual Fund Companies Don’t Want You to Know

Unfortunately, the IIE hasn’t been telling Advisors or Clients the whole story. The reality is that Active Management has been utilized by the most sophisticated institutional and private investors for many decades. Stepping out of a falling market shields the investor from further declines, i.e. it reduces Clients’ investment risk AND and their stress. How can that possibly be a bad thing for Clients?

Stepping out of a falling market does reduce risk, but if you get out, at some point you need to get back in for the next rise of that sector. This requires an ability to actively time markets that most Advisors simply don’t have-even if they had the time to do it- and which mutual funds companies don’t want Advisors to do…they’ve even imposed minimum holding periods (30, 60 or 90 day periods are common) and short term trading warnings and potential restrictions for Advisors who violate these rules.

So, if avoiding market risk is good for Clients but the mutual fund regulations have implemented structural controls to prevent it, does this not look like a structural conflict of interest? ETF’s as “Trading Widgets” don’t have these liquidity restrictions and thus completely change the game to the benefit of Clients if they’re effectively actively managed…and it’s about time.

Cheers,

Andrew H. Ruhland, CFP, CSA

Client Centered Advisors

Dear Advisors,

The Investment Industry Establishment (IIE) are masterful marketers, with lots of cash flow to support ongoing research into how to influence Advisors to trust their fund managers and keep their Clients fully invested through thick and thin. The reason is pretty obvious-it works to the IIE’s benefit to gather and keep assets because this keeps the management fees flowing…and they are very good at it. We’re starting to see marketing featuring fabulous 2009 1 year returns…and just wait until we get to March 1st 2010 and they start pumping out the propaganda on their 1 year returns. Perhaps we need to be more discerning and take a closer look at how that same fund did in 2008…and how much stress that caused Clients and Advisors.

Fund companies have managed to keep most Advisors onside for a couple reasons I can see: 1) MFDA Advisors don’t know they have an alternative (they DO), and 2) because fund companies pay out the DSC commissions and collect trailer fees from clients and distribute them to advisors. The regular recurring compensation of trailer fees has become an increasingly important part of successful Advisors’ business models, so Advisors have become somewhat beholden to the fund industry to collect and distribute these stable revenues. As a Fee-Based Advisor, I was in this position until I left the mutual fund business in late 2008. Is it any wonder that Advisors resist any public criticism of mutual funds despite their obvious flaws? It appears to be about mutual self-interest.

Please note that I’m not a) criticizing the collection and payment of trailer fees to Advisors per se (i.e. as long as the Advisor earns their fees) and b) I’m not saying that mutual funds are not an appropriate investment vehicle for some people. 

What I am saying is a) Clients have a right to know how much they’re paying to the people they’ve entrusted to nurture their nest egg,  b) mutual funds are not necessarily the best investment vehicle for everyone, and c) there are more cost-effective alternatives to mutual funds that can and should be a part of the product shelf available to Advisors.

Like it or not, the rest of the industrialized world is way ahead of Canada re: Fee Transparency, and our regulatory tide is moving toward bringing Canada up to international standards. This will bring the value that both Advisors and fund managers provide to investors under even more intense scrutiny. Advisors cannot – and should not try to – change this tidal force, but rather focus on making certain that they broaden the scope of their advice and services and learn how to communicate it effectively to existing and potential clients. It’s not about the fee that’s paid, it’s about the value of what Clients receive for what they pay. “Price is only an issue when your value is in question.”

Cheers,

Andrew H. Ruhland, CFP, CSA

Client Centered Advisors

Dear Advisors,

Unless you’ve been stranded on a desert island for 5 years, you’re probably pretty aware of the emergence of ETF’s as the managed money solution of choice for investors around the world…and just starting here in Canada. ETF’s have essentially commoditized access to countries, regions, sectors and currencies for a fraction of the cost of an actively managed mutual fund. This commoditization essentially makes ETF’s a “Trading Widget.” So why all the excitement over a Widget?

Much has been made of the lower MER’s of ETF’s compared to actively managed mutual funds that pay trailer fees, and with good reason. When all other variables are equal, the price of investment management DOES matter…lower fees result in better returns for clients, and better Client results should be the first priority for excellent, client centered advisors. Experienced advisors realize that when it comes to comparing investment managers, things are definitley NOT equal. A lower MER on an ETF compared to a mutual fund is great…but ongoing management is still much more important than anything else! The intra-day liquidity of ETF’s is what really makes them an ideal “Trading Widget.”

As Financial Advisors, we’ve been conditioned for years by the Investment Industry Establishment (most mutual fund companies) to believe in things like Modern Portfolio Theory, the Efficient Market Hypothesis, etc. This belief in the “buy, hold and prosper” approach was used to persuade Advisors to keep their Clients fully invested through all market conditions. As an Advisor of 15 years, I bought into this philosophy for many years and became skilled at keeping Clients in during bad markets. Looking back on the last decade of investment results, my clients would have been better served by active portfolio management that focused on avoiding falling market segments-after all, moving to cash to avoid a 25 to 40% drop like we started to experience in September 2008 would have addded tremendous value to Clients. We didn’t have viable Trading Widgets available to make that happen because we were MFDA licensed…besides the fact that we wouldn’t have known where to go or when to get back in. Things are different now.

Now that ETF’s are finally gathering traction and momentum in Canada, dedicated active portfolio managers now have the “Trading Widget” they need to navigate markets cost-effectively. Now that’s something to get excited about!

Click here for Canada’s first (and currently only) actively managed ETF-based solution.

Cheers,

Andrew Ruhland, CFP, CSA

Client Centered Advisors

Canadian Financial Advisors, it’s time to get serious about ETF’s. The global acceptance of ETF’s is growing very rapidly, and this represents a major risk to the recurring compensation of Canadian Financial Advisors who are not securities licensed because most ETF’s don’t pay trailer fees…the few that do pay a tiny trailer compared to mutual fund trailers.

In fact, ETF’s are also a threat to the transaction-based compensation for Brokers, too…as a client, why would you bother to buy 4 to 6 stocks in a sector that are rated “outperform” by the Brokers’s research department, when you can simply buy one ETF that covers the whole sector and eliminates single security risk?

When Brokers start putting ETF’s in their own Fee-based accounts, they will have a distinct pricing advantage over actively managed mutual funds…by as much as 100 bps…and MFDA and Insurance-licensed Advisors will start to lose market share rapidly.

A recent post on Seeking Alpha summarizes the growth of ETF’s as a % of trading on the NYSE as well as a % of mutual fund assets. 

Click here for entire article

While the % of mutual assets in the US appear at first glance to be small (and thus potentially nothing for advisors to be worried about) a couple notes need to be added:

• The recent and projected growth rates of ETF’s is a steep curve…we’re headed up the shaft of the proverbial “hockey stick” chart, which means the trend is just starting to gain momentum, and the trend is your friend IF you’re riding it.
• These projections are based on ETF growth and relative AUM figures in the U.S. where mutual fund fees are much lower than here in Canada, which has the highest mutual fund fees in the industrilaized world. Thus, Canada’s mutual fund industry – and the advisors whose trailer fees contribute to Canada’s high MER’s -  is at much higher risk than the mutual fund industry in the U.S.

This should be very concerning for MFDA and Insurance -licensed Advisors. Invesco Trimark has recently introduced its own version of ETF’s in a mutual fund wrapper (to be addressed in future blog posts), but this is only one option for MFDA advisors to offer their clients…and Insurance-licensed advisors are still out in the cold re: ETF’s from the mainline investment management companies.

There is one other 100% ETF-based investment solution available to both MFDA and Insurance-licensed Advisors that keeps the total MER to the client at a reasonable level (lower than comparable mutual funds), keeps the advisor’s trailer fee at 1% annually(paid monthly), and has the most important added benefit for clients and advisors: active management to nimbly protect and grow accounts even in challenging markets.

Click here for info on actively managed ETF-based portfolios.

Cheers,

Andrew Ruhland, CFP, CSA

Client Centered Advisors

Welcome to the Client Centered Advisors Blog. Financial Advisors are constantly being criticized in almost every form of today’s media, including a very open questioning of the value they bring to Clients’ lives. Glorified salespeople who put their own financial interests before their Clients’ best interests but call themselves “advisors” of one kind or another give critics plenty of material for sensationalist headlines and do a tremendous disservice to those truly professional Advisors who practice their craft with sincere intentions and thorough diligence. We believe that being truly Client Centered leads directly to building a sustainable, efficient and profitable Wealth Management practice…true Service to Clients leads to Prosperity for both Clients AND their Advisors.

The purpose of this Blog is to bring forward-thinking advice, perspectives and practical solutions for ethical Advisors who are serious about doing the right thing for Clients…a “Knowledge Community” of sorts. Google executives are credited with saying “No one is as smart as everyone.” In that spirit, we look forward to hearing insightful, constructive and challenging feedback from Advisors (MFDA, IIROC and Insurance) who view their profession as a noble vocation, with Trust as the sacred foundation.

Cheers,

Andrew H. Ruhland, CFP, CSA

Client Centered Advisors