WHO is managing your nest egg?

lorisa stein who is managing your nest eggBy Referral Resource Julie Brough, CFA, CFP

Strangely enough, few people know very much about the person they entrust with their financial security.  It continues to surprise me how little the financial services industry has done to educate their clients to the different skill sets and services available within the industry.  As a result, investors view financial advisors as interchangeable, without the knowledge to properly differentiate and ensure their needs are met. Is it any wonder investors end up unhappy and frustrated? 

Registration Requirements

There are three different ways to become licensed to provide investment services in Canada.  The educational requirements for each license increase with the breadth of investment options available and the level of control the advisor has over the investor’s investment decisions.

Mutual Fund Advisor

To obtain licensing as a Mutual Fund Advisor an individual must complete the Canadian Investment Funds Course or the Canadian Securities Course.  Those acting as Mutual Fund Advisors often obtain some form of financial planning designation and often emphasize financial planning as the core of their business.  A properly constructed financial plan is a valuable tool that integrates a savings/investment plan, an estate plan, tax planning strategies and reviews life insurance needs.  However, the ability to implement the investment portion of the plan is somewhat constrained by the investment vehicles available.  The Advisor can suggest a basic investment strategy, but once the money is moved into mutual funds, the Advisor has limited ability to ensure it is being managed by the fund managers as anticipated or to the desired asset allocation, leaving even the most attentive Advisor working from a disadvantaged position.

Investment Advisor

An Investment Advisor must complete the Canadian Securities Course and the Conduct and Practices Handbook (essentially a regulatory and ethics course) and within 30 months, complete the Wealth Management Essentials course, which provides an overview of many of the financial planning concepts.

Once licensed the Investment Advisor may sell stocks and bonds as well as mutual funds.  The larger bank-owned firms have also designed their own in-house managed investment programs that Advisors are incented to utilize for their clients.  The Investment Advisor has more options than the Mutual Fund Advisor in how to implement a strategy and may have more control over the asset allocation, risk level and diversification of the portfolio depending on the strategy selected.  I will also point out that most of the brokerage houses have put into place some form of financial planning team to ensure planning services are available to clients.

Both Mutual Fund Advisors and Investment Advisors are limited to giving advice to the investor, with the final decision on any change to the portfolio made by the client.

Portfolio Manager

To become licensed as a Portfolio Manager the individual must become a Chartered Financial Analyst (CFA), which is a three year program at a post-graduate level (a bachelor’s degree is generally required for admission to the program).  To earn the final charter a candidate must also have three years of eligible work experience.  The higher degree of technical training allows a Portfolio Manager to act with discretion with respect to their clients’ portfolios.  That means an Investment Policy Statement is developed to determine the investors’ objectives and risk tolerance and to set guidelines and limitations for the portfolio.  The Manager then constructs and manages the portfolio on a day-to-day basis focussed on the objectives and within the defined guidelines.

By having control over the investment process as well as transparency of the holdings, the Portfolio Manager has more ability to control the asset mix, diversification and risk level in the portfolio.

Fiduciary Relationship

Mutual Fund Advisors and Investment Advisors are required to provide recommendations to their clients that are “suitable” based on the investor’s objectives and risk tolerance.  This means that the Advisor is not required to provide the best option as long as the recommendation is suitable.  Portfolio Managers have the privilege of being exempted from certain suitability requirements, but are considered to have established a fiduciary relationship with their clients.  As a fiduciary, the Portfolio Manager is required to put the client’s needs first, before those of the portfolio manager or the firm.  Given the higher degree of control that a Portfolio Manager has over the daily activity in the investment portfolio, this high standard makes sense.

Taking the time to understand the structure of the financial services industry should improve your chances of aligning yourself with the best professional to suit your needs and reaching your financial goals.

Julie Brough, CFA, CFP
Morgan Meighen & Associates

Morgan Meighen is one of Canada’s longest-established independent investment management firms, dedicated to providing a completely customized investment portfolio for each client.