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Finding the Right Investment Broker

When you invest, you have a number of choices on obtaining advice.  Where that comes from depends on you, whether it be obtained from self-study, investment newsletters or from a professional advisor.  I wish to review some of your options in this article.  The question often asked is, “Who is my best choice of advice for making good investment returns?”  Ultimately, the answer starts with you, acting with the best advice and information for your particular circumstances. 

If you remember nothing from this article but for one thing, it should be this.  You are responsible for earning your money, and for spending or investing it wisely – NO ONE ELSE!  If you take your money and gamble it away on lottery tickets, it will be your fault.  If you follow bad advice from an advisor, and you lose your money, it will be your fault.  Plan carefully, shop around and make wise choices in the same way you purchase any expensive product or service – remember how hard you worked to save your money, and think about what will happen if you need to start over.

If you are not looking to invest in the stock market, then you will be looking to maximize your interest rates on your savings and term deposits.  You are not likely going to find an investment broker showing you much interest, other than the salaried employees at your own bank or financial institution.  High interest savings accounts for money you may need soon or for an emergency fund, and a “laddered” portfolio of fixed income securities, such as term deposits, guaranteed investment certificates or bonds is what they should discuss with you.  See my article on laddering of fixed income products.

I will review your options for investments advice in this article.  However, please also see my other web site articles on investing, especially Investing Strategies for Individuals and Investment Advisor Sales Tricks and Tactics – Caution Required  if you are new to the stock market world.

Mutual fund dealers and banks/credit union advisors

Mutual funds are investments available to almost anyone with any amount of money.  They are pools of funds created by combining money from many investors.  This money is used by professional money managers to buy stocks.  Mutual funds will give you instant ownership in a number of companies.  I am talking about funds that invest in the stock market (“equities”) here, but there are many types of mutual funds.  A great benefit of mutual funds is the instant diversification it gives you.  If one company goes broke, it does not have a major impact on your investment.

Mutual funds are sold by sales representatives that work for mutual fund dealers, banks, credit unions, life insurance companies and similar financial institutions.  These sales representatives may or may not have other designations, such as the Certified Financial Planner or Registered Financial Planner designations, and seldom have extensive investment credentials, such as a Certified Investment Manager designation.  If they have a planning designation, they should work with you to develop a plan to meet your future objectives, such as retirement, and design a portfolio appropriate for your personal situation.  If they have no designations, they should not be calling themselves a financial planner, but they are still required to limit their recommendations to products suitable for you.  The Mutual Fund Dealers Association (MFDA) requires members to assess suitability taking into account your age, investment knowledge, annual income, net worth, investment objectives, time horizon and risk tolerance.

Note that this requires your advisor to choose “suitable” investments for you, but there is currently no requirement to choose the investment that is in your best interests as long as it is suitable.  In other words, if two securities are suitable, with one paying a higher commission, will they choose the one that pays them the best commission or the one that is expected to give you the higher yield?

Mutual fund sales reps only have access to mutual funds and cannot tell you individual stocks.  Depending on who they work for, they may only be able to sell you their own mutual funds (e.g. those issued by their own employer) or they may have access to all funds, giving you much better choice.

They are paid by you when they buy or sell the mutual fund, and/or by ongoing annual “trailer” fees, based on the type of mutual fund in which you have invested.  You will likely not see these fees because they are deducted from the money you have invested, although new disclosure rules should be in place for 2016.  For example, for a Canadian equity mutual fund, average fees are in the range of 2.3% that are taken off of that mutual fund each year.  Of that fee, approximately 0.75 to 1.0% will go to your individual advisor annually as the trailer fee, with the balance going to the mutual fund managers who buy and sell stocks for that mutual fund.  International, global and specialty funds have higher fees and a higher trailer fee to the broker, as do “segregated” funds (which have special guarantees attached).  Lower risk funds, such as balanced, bond and money market funds have lower fees.

Mutual fund sales representatives often have no minimum threshold of account size, so there services are available to everyone.  This is a benefit to you if you do not have enough money to interest a full service broker (discussed below).  Still, you should shop around, and compare the recommended funds to others that may be available that have lower fees and better historical track records (even though history is no guarantee of the future).  For investment details, you can often find useful information using GoogleTM.  The cost of fees can have a major impact on your returns, and they are paid regardless of how well your investment performs.  At the time I am writing this article, a 2.3% fee is currently higher than you can make on a guaranteed investment certificate – so you are paying a guaranteed fee without any promises on return.  Look for low fees.

Have a look at my article, Questions to Ask before Buying a Mutual Fund.  This will do two things.  First, it will get you answers to important questions.  Second, it will tell you whether your advisor is interested in your success and knows his or her stuff, or just trying to make a commission.  One final point with respect to mutual funds – if you are a U.S. citizen living outside the U.S.A., talk to your U.S. tax return preparer before buying a Canadian mutual fund.  There will be special U.S. tax forms to complete (as there could be if you also open a Tax Free Savings Account), resulting in higher tax preparation fees.

Full service brokerage firm

For those individuals without the time to do their own research, or for those who have no interest in doing so, a full-service broker is likely the best choice, if you have enough money to attract their interest.  Either through individual bias or by design of the brokerage firm rules, many brokers will not accept you as a client if you have less than a certain amount to invest, often $300,000 or higher, but typically $100,000  or $150,000.  However, do not let this stop you from asking.  Successful business people realize that big customers can come from anywhere, and all start out small.  In addition, with good service, brokers will get referrals from you of family and friends who may have more money.  Besides, this is a people business, and if you enjoy your work, then working with small accounts is as much (or more) fun than working with large accounts.

When you hire a full-service broker, you are paying for their expertise in guiding you to buy the right investments for your personal situation.  Similar to MFDA rules, the Investment Industry Regulatory Organization of Canada (IIROC) has rules to guide them.  Rule 1300(q) states that, “Each dealer member, when recommending to a client the purchase, sale, exchange or holding of any security, shall use due diligence to ensure that the recommendation is suitable for such client based on factors including the client’s current financial situation, investment knowledge, investment objectives and time horizon, risk tolerance and the account or accounts’ current investment portfolio composition and risk level.”

These brokers will usually charge you for their services in one of two ways.  Some brokers will charge you a commission for each time you buy or sell or an investment.  It may be a percentage of the transaction or it may be a flat amount – it will vary based on the size of your transaction.  Other brokers will charge you an ongoing fee based on the value of the investment in your account (“asset based fees”).  These typically range in the area of 1.5% to 2.5% of your portfolio market value.  For example, if you have $500,000 in your account, a 2% fee would cost you $10,000 per year.  Will your broker be worth this much money to you by improving your performance by the amount of his or her fees?  If you are investing for the long-term with a blue chip portfolio and without plans to do a lot of trading, the first option (buy/sell commissions) will likely be less expensive for you.  Your broker should review your options with you and help you pick the one that is in your best interest.  However, your broker does deserve to be paid a fair price for not only the time spent meeting with you, but also for your share of their time doing such things such as researching appropriate investments, reviewing your account, calculating your returns and benchmarking your portfolio.  They should be able to explain these things to you, and they should be competitive with other brokers having the same knowledge, experience and doing the same thing.  As with accountants, lawyers, fee-only financial planners, you will pay more for better advice – just make sure you are getting what you pay for (more on that below).

If you are paying an asset based fee, which is becoming the standard in the investment industry, there are a couple of additional considerations.  If there are mutual funds in your portfolio, the broker may also collect ongoing “trailer fees” from the mutual fund (as discussed above), unless they are special F-class funds that pay no fees.  Ensure you are not paying fees twice if you have mutual funds in your account.

In addition, make sure you are not paying excessive fees or commissions on bonds, GICs or fixed income securities.  In cases where broker commissions are already built into your purchase cost when buying bonds and fixed income securities, you should not be paying additional fees.  If fees are not built into the cost, you should still see a lower fee applied to the fixed income portion of your account, possibly in the range of 0.50% to 0.90%.  You will need to discuss this with your broker, or if he/she is not forthcoming with a discussion on fees, have a chat with his/her competition.  Fees are an area that is not well understood, and people tend to be shy about asking about them.  However, in these days of low interest rates, if you are paying a 1.5% to 2.5% fee based on the total size of your investment account, and you have GICs in your account, are you making anything on your GICs?  I also suggest that you review fees that you pay on money market, bond and balanced mutual funds.  For more about them, I refer you to my article on Questions to Ask Your Financial Advisor .)

In return for fees, your broker is giving you advice on the best investments to purchase based on your stage of life and the suitability guidelines discussed above.  They design and recommend a properly diversified portfolio for you, and monitor it for you.  They should tell you about the risks, and be there to explain the scary times to you.  They will meet with you periodically to review your portfolio and recommend changes.  They will also explain your performance and compare it to appropriate benchmarks (market averages) so you understand how will you are doing (or at least, they should be doing these things).  From these reviews, you should evaluate their performance.  Are you making more money than you could make by investing in safe secure GICs?  Are they adding more value to your portfolio than you could do yourself?  How much did they make versus how much did you make?  Are they explaining everything to you in a way you can understand?  The bottom line is this, “Are you getting your money’s worth?”  If not, look at alternatives.  However, do not expect instant miracles.  The markets go up and down, and so will your portfolio.  However, over the long term, you should make money, and in the meantime, your broker should be guiding you along the way.

Under this full service broker option, there is another variant.  For investors that meet certain higher thresholds (often $500,000 to $1,000,000), they may qualify for “private wealth management” services.  A higher level of service, higher qualifications of advisers, and more investment choices are often available.  Typically, you would authorize a management team to make day to day investment decisions for you based on guidelines established by you, and a fee based on the size of your account would be charged.

Do-It-Yourself

This is the self-study and investment newsletter option.  If you have time and interest, doing your own investing is a choice to consider.  You need both the time and the interest; without both you will not be successful.  You need the knowledge to understand the types of investments available to you.  You must understand the risk of losing your money for each choice you make, and you need to understand that the markets will go down at times but you cannot panic.  Note the importance of the word “understand.”  People who perform poorly with investments are often those who do not understand.  They do not understand one or more of the products, the allocations among products, the risks, the frequent ups and downs of the stock markets, the effects of timing of buying and selling, etc.  They sell when markets go down and buy when markets go up – just the opposite of what you need to do.

If you enjoy reading about investing, and have an understanding of the pros and cons, then you can do it yourself.  See my Useful Links for some sample investment newsletters and useful web sites.  You can use an online discount brokerage service (there are several to choose from) and purchase a wide variety of investment products suitable to your needs.  The fees can be very low with online discount brokerage accounts; for example, perhaps $10 or less for each purchase and sale that you make, with no ongoing management fees.  However, if you buy certain products, such as mutual funds, there may be embedded fees within the security.  Investing in a proper balanced portfolio of equities and fixed income, re-balanced to an appropriate allocation from time to time, can yield you very good returns.

You can choose “active management” where you are buying and selling specific securities based on your analysis of the strength of your chosen investments, or where you are buying mutual funds that do the same.  Or, you can choose “passive management” where you buy Exchange Traded Funds or index based mutual funds that invest in market indices.  Your performance will generally follow the average of the related index, minus any fees you are paying. Your performance will be based on your abilities, and your fees will be lower than the other alternatives.

You may wish to employ a new low cost option – use of a “robo-advisor.”  For more details about robo-advisers, see this Wikipedia definition.  Effectively, you employ a robo-advisor for a small fee to advise you on the structure of your portfolio, with very little personal contact.  I admit I have little experience in this relatively new approach.

Finally, you may want to join or form an investment club in your area, whereby a friends and colleagues meet together and invest as a group, sharing their information and research, etc.  Doing this requires commitment of all the participants, and needs to be carefully thought out before moving forward.  Search the Internet for advice and guidelines.

As a do-it-yourselfer, any losses incurred will be your fault for choice of bad investments, whereas by hiring advisors, any losses will be your fault for choice of bad advisors.

Conclusion

You final choice needs to be based on an objective evaluation of your own skills.  It is very important to make your decisions keeping the following points in mind:

  1. Do I want to be in the stock market, and do I meet the suitability guidelines to be in the market? Two critical suitability considerations include the ability to afford losses, and the personality to stay in the market when it drops. Remember, the Canadian market measured by the Toronto Composite Index dropped by 50% from the fall of 2008 to the spring of 2009, and did not get back to where it started until 2014 (and by the autumn of 2015, has fallen below 2008 again).
  2. It is possible to use a combination of the above alternatives, working with a broker and doing some investing on your own. However, it is very unlikely that you will find a broker to advise you on your own account.
  3. If you hire an advisor, you still need the skill set to interview several advisors and choose wisely. Check with friends and colleagues for references, write down questions to prepare for meetings, and then meet two or three advisors and ask them what they would do for you.
  4. Evaluate performance using benchmarks every year and change your approach if appropriate.
  5. Take an interest in investing, regardless of which approach you use. After all, it is your money – do some reading about investing on a regular basis.

There is no perfect solution, but I hope I gave you something to think about.  Would you like another opinion and further information on this topic?  See the Canadian Securities Administrator web site for various publications, including “Working with a Financial Advisor”.  Also see the Money Sense article at http://www.moneysense.ca/invest/a-perfect-fit/Money Sense Magazine is one of my recommended subscriptions for new investors, as is the Money Reporter.

Blair Corkum, CPA, CA, R.F.P., CFP, CFDS, CLU, CHS holds his Chartered Professional Accountant, Chartered Accountant, Registered Financial Planner, Chartered Financial Divorce Specialist as well as several other financial planning related designations. Blair offers hourly based fee-only personal financial planning, holds no investment or insurance licenses, and receives no commissions or referral fees. This publication should not be construed as legal or investment advice. It is neither a definitive analysis of the law nor a substitute for professional advice which you should obtain before acting on information in this article. Information may change as a result of legislation or regulations issued after this article was written.©Blair Corkum