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The Pendulum Swings

Whether you’re heartened or disheartened by the election of Donald Trump as President of the United States, one thing is clear – the pendulum has swung hard to the right. It’s not easy to sift through the conflicting policy statements to discern what the Trump anti-establishment, pro-business position actually is. He was elected on promises of –

  • big tax cuts (in corporate, personal, estate, and capital gains),
  • deregulation of health care, energy, and financial services,
  • renegotiation of trade agreements, and
  • fiscal stimulus (federal support for infrastructure projects).

Actions taken to date suggest a change agenda that extends far beyond the borders of the U.S.

How Canadians will be affected remains to be seen. The fear of a trade war with the United States has been lessened by the apparently cordial meeting this week between “Joe” Trudeau and Trump.

The financial markets have responded enthusiastically to the election of Trump, in spite of social and geopolitical concerns. The markets have been on a sugar high with the prospect of massive tax reforms, deregulation, and infrastructure spending. It’s great to get a surge in the markets, but remember the role of diversification in achieving solid, risk-adjusted returns over the long-term. For a reality check note the following guidelines published by the Financial Planning Standards Council (FPSC) in 2016 in terms of portfolio performance expectations over the long haul.

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To view the full FPSC Projection Assumption Guidelines report, click here.

Change is in the Air

While the U.S. Administration has promised to lighten the regulatory burden on financial services, sweeping reforms here in Canada are geared toward tightening the regulations. These are some of the major changes we’re seeing.

1. Consolidation within the investment industry and within the product offerings of those investment firms.

A recent example of this trend is the sale of Scotiabank’s subsidiary, HollisWealth, to IA Financial Group. IA Financial is also the parent company of our dealer, FundEX Investments Inc. Through a series of acquisitions IA Financial has become prominent in wealth management in Canada with close to $800 billion of assets under administration (including $11 billion that advisors associated with FundEX oversee on their clients’ behalf).

It’s important to have a broad array of investment choices, but with over 53,000 investments tracked on the Fundata research platform it’s clear we have way more than we need. Some consolidation is certainly welcome.

2. Lower fees on managed portfolios, including all types of mutual funds, segregated funds, exchange-traded funds, private investment pools, private wealth programs.

Competition is increasing. Investment firms are tightening their belts. To obtain a competitive edge they are rationalizing their offerings and launching new “preferred” pricing options, private investment pools, and private wealth programs — all more or less synonymous with lower management fees.

3. Better packaging of information for investors on investment risk, returns and costs  

For each of their fund offerings, investment firms are now required annually to publish a concise, easily understood document called Fund Facts. You may have already received some of these documents.

4. Transparency on the cost of advice and service 

On your December 2016 statements you will see additional information regarding the fees you paid to FundEX and Fraser & Partners for advice and service. We welcome the greater transparency on fees.

There is a debate in the industry over how advisors should be compensated – embedded fees (bundled within the cost of the investment) versus fee-for-service (FFS) (unbundled from the specific investments held in your portfolio). Rather than restrict the choices investors have when it comes to method of payment, I’d prefer to see the regulators raise the bar in terms of practice standards and let investors find the service that’s right for them.

The challenge in relying on practice standards lies in the difficulty of measuring success in a financial advisory relationship. Our work is not just transactional. We don’t simply meet with you and pitch the product that’s the flavour of the month.

  1. We strive to get to know you as a whole person – your values, stage of life, family, time horizon, risk tolerance, personal financial resources, tax, hopes and dreams, your mindset about money and resilience in the face of change.
  2. We bring our knowledge, expertise, and vigilance regarding regulatory, market analysis and product analysis, so that you get the best possible benefit from what’s available to you along the way.

From my perspective, advising is values-based and personal. It isn’t just a few calculators thrown up on the monitor to determine your financial destiny. It is the human element intertwined with technical expertise that matters. We may not always be popular because we’re not always going to tell you what you want to hear. You can depend on us to voice what is real and also to explore a range of possibilities from a place of understanding.

We’re gradually transitioning to a fee-for-service model, which represents an unbundling of the cost of investment advice from the specific investments in your portfolio. There are pros and cons to FFS. It won’t be worthwhile for all of our clients to make the change, but it’s an option for everyone.

Key benefits in using a fee-for-service structure:  
1) tax treatment – the fees on open/non-registered portfolios are tax-deductible (all or in part, depending on the situation);
2) the fee-for-service fund versions in most cases are somewhat less expensive and you can enjoy a small saving on the cost of portfolio management – click here to view an actual comparison;
3) no real or perceived conflict of interest;
4) fees can be negotiated directly between the advisor and the investor (within limits placed by the firm).

Other things to think about: 
1) tax laws can change – the carrying charges for investment advice are going to be scrutinized (remember when you could deduct safety deposit fees?);
2) there is ample research to demonstrate that financial planning pays off; clients may look at the cost of the advice without considering the benefits gained from the relationship with an independent advisory team;
3) clients could end up paying more when the fees are negotiable than when they are fixed and embedded;
4) some investors may no longer have access to an independent advisory service; it may not be financially viable for the advisor to work with clients who have small amounts to invest.

The following table compares embedded fees vs fee-for-service (FFS) with an unbundled advisory fee (assuming 1% in this example) on a $100,000 investment. We compared 4 of Fraser & Partners top mutual fund holdings with different characteristics to illustrate cost differences based on the type of fund.

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“When the winds of change blow, some people build walls and others build windmills.” ~Chinese proverb

In an environment of accelerating change some things stay the same – including our dedication to helping you navigate the complexities of life along the way.

Let us know if you have any questions or concerns.

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