Getting to know your clients is the key to retaining them, finds a new study.

“It turns out that personalization is by far the number one thing that you can do to drive trust, and then second to that is transparency,” Rob Crnkovic, co-founder and chief research officer at CapIntel, told Investment Executive.

When asked how their financial advisor could improve, 28% of Canadian investors chose to answer “more personalized advice tailored to my financial goals,” according to a poll commissioned for the 2024 CapIntel Investor Engagement Report conducted by Angus Reid.

Further, 65% of Canadian investors reported that the main reason they stay with their advisor is because the advisor understands their personal situation and preferences.

“You need to really dig in and understand who your clients are, what their goals are, what their timelines of those goals are, and how things are changing on a year to year, even month to month or quarter to quarter basis,” Crnkovic said.

The third most important factor to clients was whether financial advisors could provide them with financial education.

“When you go and meet a doctor, you ask a lot of questions and you’re given a lot of information, but folks are actually a little bit embarrassed sometimes to ask questions of their financial advisor,” Crnkovic said. Adopting a “no stupid questions” policy can help build trust.

The survey also showed that clients continue to prefer in-person meetings as the preferred communication method with 41% of respondents selecting this option. This was followed by 28% preferring email, 18% preferring phone calls and 10% wanting video calls.

However, emails, phone calls and video calls add up to 56% of respondent preferences. “If you encompass all the different ways you can have a remote relationship with your advisor, that trumps in-person right now,” Crnkovic said.

In terms of frequency, one in three clients expected their advisors to check in with them about their investment strategy twice a year, and another one-third preferred quarterly contact. Crnkovic said financial advisors could provide investors with information via digital channels more frequently, but suggested keeping each interaction concise.

Three-quarters of respondents said they were satisfied with their current financial advisor. Satisfaction levels were the highest in the prairies with Alberta, Saskatchewan and Manitoba scoring 80% or more. Customers in Quebec (69%) and the Atlantic provinces (59%) were the least satisfied.

The research included 1,001 who worked with a financial advisor carried out from Nov. 20 to 23, 2023.

Jonathan Got

Jonathan Got is a reporter with Advisor.ca and its sister publication, Investment Executive. Reach him at jonathan@newcom.ca.

As your calendar for 2024 begins to fill, don’t forget to allocate time to your professional development. With the two-year continuing education (CE) cycle just ended, now is a great time to consider learning opportunities without worrying about CE requirements or deadlines. Many activities that don’t offer CE credits can nonetheless help you grow as a financial advisor, entrepreneur or leader.

“Everybody relies on their dealer and fund companies for education — and they’ve got their own agendas,” said Jason Pereira, partner and senior financial consultant with Woodgate Financial Inc. in Toronto. “We live in a multimedia world with lots of great opportunities for learning.”

Below are some of those opportunities, based on input from advisors and industry participants.

U.S. conferences

The dozens of advisor conferences in the U.S. are “a very underutilized resource that most advisors are not aware of in Canada,” Pereira said. “The ability to network and see the way things work outside of Canada is mind expanding for how you look at the industry.” Knowing about industry developments beyond Canada has helped him adapt his business and stay ahead of regulation, he said.

“There are so many great U.S. conferences … that a Canadian advisor is really selling themselves short by not attending at least one of these every couple years,” wrote Jason Watt, an instructor with Business Career College in Edmonton, in an email.

Kitces.com keeps a master list of U.S. conferences for advisors. Here’s a short list of favourites:

• Limitless Advisor, March 11–21, Charlotte, N.C.
• SHIFT, March 24–25, Orlando
• Futureproof Retreat, March 24–27, Colorado Springs, Colo., and Futureproof Festival, Sept. 15–18, Huntington Beach, Calif.
• FPA NorCal, May 28–29, San Francisco
• Carson Excell, Sept. 9–11, Orlando
• FPA, Sept. 18–20, Columbus, Ohio
• XYPN, Oct. 15–17, Minnneapolis, Minn.
• Academic Research Colloquium for Financial Planning and Related Disciplines (dates weren’t confirmed by publication time)

For a master list (in progress) of Canadian conferences in 2024, visit CE Corner.

Financial therapy

Andrea Thompson, founder and financial planner with Modern Cents in Oakville, Ont., wrote in an email that she took Ashley Quamme’s course Financial Therapy Skills 101 Intensive last year as a way to better integrate behavioural finance into her practice.

“I would recommend anyone who is approaching their practice from a humanist perspective to engage in some type of financial therapy course — not to become a financial therapist but to better understand a client’s innate programming, and behaviours that stem from them,” Thompson wrote.

Quamme said in an email that in 2024 she plans to offer popular sections of the course in one-hour sessions.

Another option is this year’s Financial Therapy Association (FTA) conference in San Diego in May. The theme is Financial Therapy for All: Across Cultures, Across Generations. Attendees don’t need to be members, and an international rate is available, said Natasha Knox, who is conference chair as well as founder of Alaphia Financial Wellness in the Greater Vancouver Area.

Knox also recommended FTA’s live workshops. This month’s workshop, which begins Jan. 19, is Fostering Financial and Relational Security with Attachment Theory.

“It’s the second time we’re running it,” Knox said. The course “bridges the gap between theory and implementation, so that people have the opportunity to ask questions and maybe even practise, so they’re not cutting their teeth on their clients.”

Podcasts

The best ones will have you taking notes and making changes. Shout-out to Ben Felix of Rational Reminder (with Cameron Passmore) and Money Scope (with Mark Soth): “Five stars every time,” Watt said, referring to Felix’s content. “Best low-commitment way for a financial advisor to get better at everything.”

In an email, Felix said Money Scope, which launched in December, is based on a financial planning curriculum he developed with Soth, a physician and personal finance blogger. “We wanted to build a content library that covers the full lifecycle of financial planning, from designing a good life to estate planning,” Felix wrote.

Here’s a short list of advisors’ favourite podcasts, in alphabetical order:

• Financial Advisor Success
• Financial Planning for Canadian Business Owners (Pereira’s podcast)
• Financial Therapy the Podcast with Rich Kahler
• Hull on Estates
• Kitces & Carl
• Life in the Tax Lane
• Money Scope
• Most Hated F Word
• Rational Reminder
• TaxBreaks
• Tax Chick

Potpourri

• Barbara Stewart, a CFA charterholder and researcher on women and finance, recommends Movement51 offerings. “Their courses would appeal to advisors who want to learn more about the venture capital landscape,” she wrote in an email.
• The free 2021 course on low-income retirement, developed by Alexandra Macqueen, who is now vice-president of learning, development and professional practice with FP Canada, and hosted by Business Career College, is still available.

(Relatively) new and noteworthy programs

Succeeding at Succession

In 2022 industry veteran and author George Hartman launched Ultimate Practice, which offers practice management resources and coaching. With Ultimate Practice’s Succeeding at Succession course, advisors work through the details of their exit plans.

“In addition to the assignments and questionnaires and resources built into the course, [advisors] develop what we call a playbook,” Hartman said in an interview. “They take what they’ve learned and translate that into how they’re going to use it in their own succession plan.”

He said participants have commented that the course helped them consider factors they previously hadn’t identified, resulting in changes to their succession strategy, choice of successor, timeline or other playbook details.

Both financial and behavioural factors are discussed during the course. “We talk a lot about the emotional side of leaving the business,” and how advisors will spend their time in retirement, Hartman said.

The course is offered live for 10 weeks to a group of 10 to 12 advisors ($1,997, with payment options), and a DIY version is available for those who want to work at their own pace ($997, with payment options).

The next live session starts Jan. 22, and includes a weekly group chat.

“Once a week we get together for a 60-to-90-minute conversation about what they’ve learned and how it applies to their situation,” Hartman said.

The first group to take the course — in fall 2022 — continue to meet quarterly to discuss one another’s progress, he said: “Everyone [in the group] became personally interested in the success of their fellow students.”

Investment Professional Leadership Program

Professionals still ramping up their practices may want to consider the Investment Professional Leadership Program from Ivey Business School. Developed in collaboration with the Investment Industry Association of Canada, the in-person program is aimed at mid-career investment professionals with 10 to 15 years’ experience who want to take their practices to the next level. It runs over several days and costs $12,500 (including meals and accommodations.)

Brianne Gardner, senior wealth manager with Velocity Investment Partners, Raymond James in Vancouver, took the program in 2023 as part of the second cohort of participants. (Raymond James CEO Jamie Coulter is among the program’s industry guests.)

In an interview, Gardner described the course as intensive, hands-on and collaborative, and said it fuelled personal and business growth.

Specifically, it helped her consider how her practice can adapt to disruptive trends, such as artificial intelligence, and how to manage her physical and mental health as she runs a growing practice. Referring to implementing what she learned during the program, she said, “It’s figuring out how you can be the best for yourself, your team, your business and your clients.”

For Gardner, that meant identifying and creating a plan to address her three biggest pain points: personal health, her team’s capacity and efficiency, and marketing for a high-service brand.

The plan’s implementation will be tracked and measured to hold herself and the team accountable, she said, adding that three new people have recently been added to the team as part of the plan. She said she looks forward to reflecting on the changes in one to three years.

Applications for the program are due Jan. 25.

Private Equity Certificate

The CFA Society Toronto and Mink Learning — the educational arm of Toronto-based private equity consulting firm Mink Capital — have teamed up to offer a new private equity certificate. As more high-net-worth clients look to invest in private markets, the on-demand course trains participants on the ins and outs of private equity so they can advise their clients or invest themselves. The course covers private equity funds as well as buying and selling companies.

Registrants can log into their accounts beginning Jan. 9 and have six months from their start date to complete the exam.

Send your suggestions for additional educational resources to michelle@newcom.ca.

Michelle Schriver

News

Michelle is Advisor.ca’s continuing education editor. She has worked with the team since 2015 and been recognized by the National Magazine Awards and SABEW for her reporting. Email her at michelle@newcom.ca.

Only 19% of Americans use their parents’ financial advisor. Worse, the nine in 10 investors who use a different advisor didn’t even consider their parents’ advisor, according a report from Boston-based Cerulli Associates released Tuesday.

Cerulli found that while 41% of those under 30 stick with their parents’ advisors, that number falls to 31% for the 30–39 age range and 19% for the 50–59 demographic. Those relationships may have started as a “marriage of convenience,” but advisors have an opportunity to create long-lasting relationships with their clients’ children, research analyst John McKenna said in a release.

The advisors who succeed in doing so often receive higher praise: of the investors who remained with their parents’ advisor, 96% said they would recommend them, compared to 86% of those who used a different advisor than their parents.

The younger demographic’s mobile nature makes them more likely to switch advisors unless the firm gets to know their financial needs, the report said.

Although many financial advisors don’t target investors still in the wealth accumulation stage, doing so would be a “path of least resistance” for both clients’ children and the advisory firm.

“With an increasingly affluent millennial demographic, advisors cannot afford to squander such business-expanding opportunities,” McKenna said.

The results came from a digital survey of about 850 people who were asked about their parents’ advisors in June.

Jonathan Got

Jonathan Got is a reporter with Advisor.ca and its sister publication, Investment Executive. Reach him at jonathan@newcom.ca.

Should I give a gift to someone who gave a referral?

“If you’re not in the gift-giving business, don’t start,” said Rob Kochel, vice-president of Invesco Global Consulting, at a seminar run by CFA Society Toronto last week. “The moment you start, it’s hard to stop.”

For example, Kochel said his financial advisor used to give him a large poinsettia each December, which he and his wife would proudly display on their front porch. One year, the poinsettia didn’t come at the usual time, and as the month wore on, Kochel realized it wasn’t going to arrive.

“It’s a week before Christmas,” he said. “Now it’s my problem. [My wife says,] ‘You’ve got to find us a poinsettia.’ Everywhere I go, they’re all Charlie Brown poinsettias.”

Turns out, his advisor had sent a letter advising that the annual client gift would be a charitable donation instead of a poinsettia — but the Kochels only received the letter in January.

George Hartman, president and CEO of Toronto-based Market Logics Inc., told Advisor.ca that timely gifts, rather than gifts initiated exclusively by the calendar that become expected or routine, can help advisors to deepen their relationships with clients.

He also suggested the gifts should be personalized to align with recipients’ interests, such as a subscription to a top wine magazine for wine enthusiasts. Meaningful gifts should also be “of sufficient quality to be valued,” Hartman said. For example, “a ballpoint pen with a logo is seldom valued, [while] an engraved Montblanc is.”

Kochel agrees. At the CFA Society Toronto event, recounted the example of receiving a $15 Starbucks gift card following a speaking engagement. He said using the card led to embarrassment when he ordered more than $15 worth of coffee and pastries at the coffee chain and didn’t have another form of payment.

If a non-gift-giving advisor wants to thank a client for a referral, Kochel recommends sending a handwritten thank-you card, and handwriting the address as well. The messier the handwriting, the better to demonstrate how hard the advisor tried, he joked. He also suggested using green ink since it will stand out (but never red).

Hartman agrees that handwritten is best, adding that e-cards saying that an advisor has donated to charity can fall flat. “People don’t believe you,” he said.

Furthermore, “you don’t need to be part of the gift,” Hartman said, referring to advisors who give their clients sports and concert tickets. “Let the recipient decide who [goes] with them.”

Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.

The quandary

Using a profile that includes your real name and occupation as a financial planner, you regularly participate on social media, commenting on a wide range of topics. After a series of posts in which you criticize federal tax policy, allude to the low intelligence of specific politicians, and say you’re disappointed that “F Trudeau” flags are out of stock on Amazon, your number of followers surges. How do you proceed with your posts?

The experts

Markus Muhs, senior portfolio manager, Muhs Wealth Partners, CG Wealth Management, Edmonton, Alta.

Criticizing federal tax policy — like the changed rules for corporate-class mutual funds or the FHSA [first home savings account] — is well within the bounds of what a financial advisor might comment on.

But there are obviously lines not to cross. I’m on Twitter, and my posts are filed with the firm and monitored. Tweets would get flagged if I talked about stocks, for example, or used profanity, or “liked” an offensive post or one with profanity.

I certainly wouldn’t make ad hominem attacks about Mr. Trudeau or another politician. Even commenting on such posts would probably be going too far; it could show up in my feed. (I also think twice before replying to someone’s tweet if they have a million followers and could bring a lot of attention to my post.)

I’d probably delete the post [described in the scenario above]. Posts reflect back on me as a financial planner, the firm and my business. Clients across the political spectrum follow me online, and I think about what they’ll think if they read my posts.

But it’s not honest to pretend you’re apolitical about everything just to appease everybody. What clients respect more is if you share your stance on issues, so long as you do it in a respectful way. You can get good, intelligent followers by having good, intelligent political discussions. There’s not much to gain from getting a bunch of new followers by taking the approach in this scenario; you’ll probably get flak from reasonable people. I’d rather say something intelligent and provide evidence, so that even a client with the opposite opinion would say, “You know, Marcus has a point there.”

Being totally corporate and official on Twitter and just sharing your firm’s articles — it’s not going to get you anywhere. I get extra follows when I comment on the Oilers or offer my two cents on the potential Alberta Pension Plan. Be personable on social media, create your own content, and comment on others’ content and share it.

Damienne Lebrun-Reid, vice-president, standards, certification and enforcement with FP Canada, and head of FP Canada Standards Council, Toronto

Generally speaking, FP Canada does not oversee the conduct of our certificants in their private lives. We are more interested in client-facing conduct, because our mandate is to protect the public.

But when a financial planner engages in conduct — on social media or elsewhere — that is associated with their expertise as a planner, it becomes a question of whether that conduct impacts their integrity and whether the public would perceive the conduct as reflecting on the planner or financial planning profession. That’s where we become concerned.

For example, if a planner posted a comment [similar in nature to the scenario above] about the finance minister and leveraged trust in the comment based on their expertise as a planner and member of the profession, that could create a public perception that they’re speaking on behalf of the profession. That would be something FP Canada would be interested in reviewing and understanding.

Context is everything. If a planner posts something in their personal feed and it’s apparent that the comment is a personal perspective — it’s not leveraging the trust that Canadians have in financial planners, it’s obviously a personal comment — then it’s much less likely that would create a perception of a lack of integrity for the profession.

As a lawyer, I was trained that when someone in a social context asks for advice, I begin by saying, “I’m not giving you legal advice; this is my personal opinion.” That is something financial planning professionals are learning to do. It’s important that the person receiving the information understands the context in which you’re providing it. So, bring the context into your comments.

A disclaimer in your profile about comments being your own can also help provide context for your comments.

It may be relatively easy to perceive how a comment about the finance minister or, say, a CRA tax opinion could be related to providing financial planning advice. But sometimes it’s the comments that a planner thinks aren’t related to the profession that can come back to reflect on them. The planner hasn’t made the connection that they have to consider how the comments are received and interpreted by the audience, and how the comments reflect back on them and the profession.

Certificants should ask themselves: Is my comment being read the way I intend? Am I bringing my professional hat into the conversation, and if so, how does the comment reflect on me as a professional? If my employer or client saw this, would I be comfortable?

A challenge with social media is falling into a no-break response pattern, leaving no time to pause and reflect, or to ask, What if this were published on the cover of a magazine or newspaper? As professionals, it’s our obligation to check ourselves. Financial planners must be careful that what they’re communicating is received in the way intended. Language matters, the words we choose matter. You don’t control the audience or the sharing, so you have to control the content.

Guidance on off-duty conduct

FP Canada doesn’t monitor certificants’ social media accounts, Lebrun-Reid said, but posts could come to the certification body’s attention if, for example, they’re picked up in the media.

FP Canada previously received a complaint from a member of the public about online homophobic comments, Lebrun-Reid said. It turned out the comments weren’t made by a certificant. Still, the complaint serves as a reminder: “What you’re saying can go beyond your one tweet; it can have an impact,” she said.

In guidance on off-duty conduct and professional integrity, FP Canada explains that professional regulators are increasingly scrutinizing professionals’ social media posts. Posts that are “highly inappropriate or unprofessional” have been found to constitute professional misconduct, the guidance says. It provides several examples of court cases that raised the issue of conduct, such as comments about religion made by a teacher on Facebook.

The guidance also notes a case in which the court found that a regulatory body can legitimately impose requirements relating to civility, respectful communication and other matters that impact a professional’s ability to express themselves freely, and that failing to abide by such rules has been found to constitute professional misconduct.

“Think carefully before posting, liking or following anything on social media, and consider whether you would be comfortable having clients, colleagues or employers see it,” the guidance says.

FP Canada will discuss off-duty conduct at an ethics session on Nov. 22 during its financial planning conference.

Michelle Schriver

News

Michelle is Advisor.ca’s continuing education editor. She has worked with the team since 2015 and been recognized by the National Magazine Awards and SABEW for her reporting. Email her at michelle@newcom.ca.

On the ride home from work last week, Stephanie Wolfe had to field a lot of questions about the financial services industry.

The executive vice-president and head of marketing at Horizons ETFs Management in Toronto was in the car with her daughter, Victoria, who had spent the day at Horizons and some of its partner firms learning about ETFs, financial planning and stock trading. And she was still processing it all.

“She had a ton of questions!” Wolfe said.

Victoria was one of thousands of Grade 9 students across Canada who took part in this year’s Take Our Kids to Work Day — a program designed to give students first-hand experience in the workplace.

Victoria and the other two Grade 9 girls who spent the day with the Horizons ETFs team got an overview of the industry, took part in a question-and-answer session with company executives, and got career tips at a resume-building workshop. Then it was off to see industry partners and spend time on the CIBC Capital Markets trading floor.

In addition to teaching financial literacy to young people and showcasing the industry, Wolfe said the day addresses the challenge of creating a more diverse, equitable and inclusive workplace.

“I didn’t have access to this kind of a program when I was in Grade 9, to learn so early that this job could be for me, that I could have a career here,” she said. “It is very rewarding to see these girls have that opportunity.”

Since it was started nearly 30 years ago, Take Our Kids to Work Day has been embraced by many in the financial services industry, some of whom offered advice on how to make the day special for young participants.

Make it a showcase

Erin O’Connor, managing director and executive vice-president of HiFi, a marketing and communications company serving the financial services industry, said she was happy to play host to the teenagers that Horizons brought in.

She said it was an excellent opportunity to break down preconceptions and show that finance is about more than spreadsheets and investment products.

For the financial services companies, the opportunity is to hook the next generation of employees.

Mark Beckles, vice-president, social impact and innovation at RBC, said the day provides an opportunity to show young people the different types of jobs there are across the bank.

“Show them the unique or surprising parts of your business,” he suggested. “Remember to put yourself in the student’s shoes. Ask yourself, ‘What are things I can do that will help make the most of the day and capitalize on the students’ interests?’”

Keep it simple

Katrin Tosine, head of corporate communications at BMO Wealth, said it is best to assume this may be the participants’ first detailed exposure to the financial industry.

“Keep it simple and high level,” she said. “And find connections between what the organization does and the Grade 9 experience.”

Her group offered fun ice breakers, a combination of large and small group activities, panels that gave students a chance to learn about the industry and ask questions, and plenty of informal engagement with students throughout the day.

Learn from the students

Arlette Edmunds, chief human resources officer with AGF Investments Inc., said Grade 9 is an excellent time to make young people aware of the financial services industry, as well as the importance of money management.

“It allows them to think about the courses they want to take throughout high school and in their post-secondary studies,” she said.

She also suggested it might be a good time to take the pulse of the next generation of consumers.

“Tell your company’s story, but also take the time to learn from the students,” she said. “This is a great opportunity to hear directly from them about their needs, habits and preferences, which will help you better cater to them in the future.”

Allan Janssen

Allan has been a journalist for nearly 40 years, writing for daily newspapers, consumer magazines and trade publications both in Canada and abroad. He has been with Newcom’s financial team since 2020. Email him at allan@newcom.ca.

Desperate. Pushy. Aggressive.

These were common adjectives used by financial advisors when asked at a seminar run by CFA Society Toronto last week what they want to avoid feeling when asking clients for referrals.

Rob Kochel, vice-president of Invesco Global Consulting, understands that aversion.

According to research comissioned by Invesco, 77.5% of financial advisors say referrals are their top source of new clients. Yet of those advisors, 88.1% have never asked their clients for a referral because they felt doing so would create an imbalance in the client/advisor relationship.

Many advisors aren’t equipped to ask for referrals properly, Kochel said at the CFA Society Toronto event, with many relying on inadequate “referral scripts.” He said scripts that don’t work include ones that position the referral as another form of compensation for the advisor and ones that frame the referral as an invitation to become part of an “exclusive club” of clients. (The latter is the number one referral technique in Canada, Kochel said.)

Instead, Kochel recommends that advisors use a technique his firm developed and market-tested with a focus group of wealthy clients. The script draws upon the advisor’s own aversion to asking for referrals.

“You’ve probably noticed I don’t often ask you for introductions,” the script begins. “That’s because I don’t want to appear desperate, and I don’t want you to feel obligated to provide one. But given current market volatility, I see some things that concern me: I see clients who were not contacted by their advisors. People who are going all-in on GICs right now. And I see many advisors who merely talk about markets, not about individual client situations.

“For these reasons, if there’s anyone you care about who could benefit from a fresh perspective, I would be glad to help them.”

Kochel recommended substituting “desperate” and “obligated” with adjectives that ring true for the advisor delivering the script, as well as personalizing the concerns within the script. Otherwise, “[clients] are going to say, ‘You went to a seminar. We’ve never heard you say this stuff before,'” Kochel joked.

He said the script works because it preserves the equilibrium between advisor and client, includes vulnerability from the advisor, allows the advisor to share their values, and closes with an offer to help versus a request for a referral.

Advisors often wonder when to use such a script, and Kochel suggests doing so after the client gives a compliment. He also said advisors have told him they’re hesitant to ask clients for referrals when their portfolios are performing poorly.

However, “people remember people that contact them during tumultuous times,” Kochel said. “What our research says is oftentimes, they don’t even hear what we say to them, but they listen to the tone of our voice.”

Reaching out serves the dual purpose of reassuring clients that you’re on top of their financial plans, as well as increasing the likelihood of a future referral. Research commissioned by Invesco found that 82.1% of clients who’d had a conversation with their advisor in the past five weeks were willing to refer their advisors.

Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.

The financial services industry views stock-picking as a credible endeavour that adds value by knowing when it’s best to get in and out of certain securities or sectors. Yet, stock-picking adds no value in aggregate and subtracts value once fees and taxes are included. That’s not me talking; that’s a combination of logic plus evidence from a Nobel laureate.

The logic is simple: the extent to which one side of a trade wins is equal to the extent to which the counterparty loses. The proposition is zero sum before costs, because the two sides cancel each other out.

The evidence comes from a paper written by William F. Sharpe more than 30 years ago. In “The Arithmetic of Active Management,” Sharpe showed that the average actively invested dollar must underperform the average passively managed dollar. This is true of all asset classes over all time horizons and in all market conditions.

In other words, because traders are on opposite sides of the same trade, taken together, the pair is neither better nor worse off than a passive investor who simply holds the shares. And that’s before considering fees and taxes, which are consistently higher for active strategies.

So, trading does not create wealth; it merely redistributes it. There is never a time when it is better or worse to trade stocks. The odds never change. It’s a wash.

Despite the evidence, the industry talks up stock winners while remaining silent on the losing counterparties. If the audience (including advisors) can be convinced that it is both possible and rational to reliably pick stocks, then the desired behaviour follows, and profits are increased.

For decades, industry players have made claims that “we’re entering a stock-picker’s market” — as if such a thing existed. This is akin to saying we are entering a lottery number-picker’s market. In reality, the odds never change.

And, while the industry is quick to opine that we are entering a stock-picker’s market, it almost never points out when we are leaving one. Why is that? If a stock-picker’s market existed, wouldn’t there be products or services that pick stocks while in a stock-picker’s market and use indexing when not in a stock-picker’s market?

Judging by their behaviour, it seems that a large majority of financial advisors believe active management will prove successful over long time horizons when the evidence makes it clear that is not the case. Currently in Canada, the ratio of assets under management in active funds versus passive ones is about 6:1 (based on data from the Canadian ETF Association). Those numbers should likely be reversed.

Twice a year and in all major countries, Standard and Poor’s releases index vs. active (SPIVA) reports that tabulate the percentage of active funds that beat their passive benchmarks over one-, three-, five- and 10-year time horizons. In almost all asset classes and jurisdictions over almost all time horizons, fewer than half the active funds manage to beat their benchmarks. And the likelihood of beating the benchmark consistently goes down as the time horizons are extended.

Nonetheless, advisors tell their clients to take a long-term perspective when making investment decisions. How do they justify their recommendations in light of the evidence? This misguided mindset has been allowed to persist for too long.

To begin, we need to face the evidence. Advisor education should make it clear that active management is unlikely to yield positive results over time. Note that “unlikely” is not the same as “impossible.”

More explicit packaging would also help. Fund Facts that investors receive should come with a clear explanation of how active funds tend to underperform their benchmarks over time.

We should also make sure that, from the beginning, advisors are trained with the best information. The long-run solution rests with making sure new advisors don’t repeat the mistakes of the previous generation.

John De Goey is a portfolio manager with Designed Securities Ltd. He can be reached at jdegoey@designedsecurities.ca.

If you could put in 20 hours each week to reach 100 prospects, would you do it?

That’s the amount of time Benjamin Felix and Cameron Passmore, both portfolio managers with PWL Capital Inc. in Ottawa, spend developing and recording their weekly podcast, Rational Reminder. While they began the project with the goal of getting 100 listeners per episode, they’ve grown that figure exponentially over the past five years.

The podcast now reaches 30,000–50,000 listeners per episode, said Felix and Passmore, who recorded an episode of Rational Reminder live at CFA Society Toronto’s annual wealth conference last week.

Only 40% of their audience is Canadian, which Felix said is “not ideal, because one of the reasons we wanted to do it is to market to Canadians.”

Nonetheless, the pair say the podcast is their top source of new clients, as well as a source of new recruits.

“So many of our new team members in the past couple of years came from the podcast — people reaching out saying, ‘I hear you guys, I relate to you. I like the mission you seem to be on,'” Passmore said.

Felix and Passmore started Rational Reminder in August 2018 with an episode called “The cheapest advice probably isn’t the best.” They’ve since released 271 episodes featuring financial experts such as Eugene Fama, Kenneth French and Michael Kitces — as well as astronaut Chris Hadfield.

Their impetus for starting the podcast was to find a better way to connect with clients and prospects than an annual appreciation event, which cost them between $10,000 and $15,000.

“We would fly someone in at great expense [from] across North America, put them up at a hotel, [rent] a ballroom and serve food,” Passmore said. “So our goal was, if we can reach 100 people a week [instead], that’d be great. And the cost is almost nothing other than our time.”

The pair upgraded their setup after their hundredth episode so they could film accompanying videos for YouTube, where they have 25,000 subscribers.

They estimated that a professional-level setup costs between $5,000 and $10,000, with the camera the most expensive component. “You can spend a lot on a backdrop if you want,” Passmore added. “But you can do it on the cheap as well, if you want to.”

The co-hosts said they’ve learned a few lessons in the past five years. Felix regrets not uploading videos to YouTube from the beginning, as “the growth in viewership has been incredible relative to audio.”

But Felix was prescient on another topic: episode length.

“I’m the one who wanted it short: 30 to 45 minutes, because that’s the cadence that I was listening [to] at the time,” Passmore said, noting that Felix persuaded him to let the episodes run longer. “When you engage with someone who’s put their life into [their] research, they want to talk.”

The portfolio managers also try to strike a balance between deep dives into academic research on investing and more general business discussions. Passmore, for example, does book reviews.

“We seem to have a reasonably good balance of geeky and less so,” Felix said.

Felix and Passmore, who spend between 10 and 20 hours per week on the podcast, said their commitment to releasing weekly episodes has been a big reason for their success. But more important is their passion for the medium and the content.

“It has to be what you love doing, because [otherwise] it’s too much work,” Passmore said.

Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.

We need to contemplate something uncomfortable that has gone unaddressed for too long and that many financial advisors do not want to contemplate: their own misguided beliefs.

A research paper originally published in 2016 and entitled “The Misguided Beliefs of Financial Advisors” included evidence that Canadian mutual fund advisors chase past performance, are too concentrated in their recommendations, and pay little or no attention to product cost — behaviours long recognized as demonstrably incorrect and harmful to investors.

The unexpected twist was that the advisors engaged in these harmful activities in their own accounts, even after they retired from the business.

Why did the advisors do this?

Before the Misguided Beliefs paper, it was easy to assume that advisor recommendations were based on self-interest and misplaced agency. The thinking was that advisors gamed the system to maximize their personal revenue: specifically, they recommended high-cost, actively managed products that had performed well in the past to get their clients to buy more of them. Plus, it was easier and more profitable to recommend products with embedded compensation, and these products were often among the most expensive.

Yet, the advisors in the paper were not trying to swindle their clients; they believed what they were doing was appropriate. They themselves could have saved money by avoiding products with embedded commissions but chose not to. The original abstract even came with a warning that regulatory changes aimed at eliminating compensation-based biases would not solve the misguided beliefs problem. That was the research’s counterintuitive finding.

Misguided beliefs and why they persist

Examples of misguided beliefs in action include recommending:

• a fund based on its one-, three-, five- or 10-year performance;
• more than one product for a specific mandate (whether it’s Canadian stocks, American bonds or a niche sector, there’s simply no need to add more names to make things look more diversified than they really are); and
• high-cost products when low-cost alternatives exist.

Note that the client-focused reforms address cost, as do the FP Canada Projection Assumption Guidelines, where planners are instructed to lower expected returns by both product and advice costs.

The interests of ordinary investors are best protected by building customized portfolios that are cheap, diversified and agnostic toward past performance. In John Bogle’s immortal words, when it comes to investing, “you get what you don’t pay for.” The more a product costs, the less it is likely to return to the investor.

The Misguided Beliefs paper reflects groupthink rooted in the social psychology research of Stanley Milgram, Leon Festinger and Solomon Asch. These trailblazers showed how easy it is for people to conform when there is group pressure to do so. Most advisors understandably want to fit in and, as a result, do what everyone else in their shop does. Once a pattern of routinely recommending actively managed funds that have done well in the recent past is seen as being appropriate (even laudable) behaviour, it soon becomes the norm. Once a norm is established, it becomes difficult to dislodge. In-group favouritism and belief congruence take hold. Misinformation is normalized and questionable conduct follows.

Ideas to counteract misguided beliefs

Here are three actionable steps to address advisors’ misguided beliefs. I’m interested in hearing others.

• Institute mandatory disclosures as a precondition of opening an account. Have a generic, industry-wide disclaimer that has the client acknowledge, in writing, that diversification and keeping costs low are important and that past performance may not persist and should not be relied on.
• Retrain advisors, perhaps through a course that challenges misguided beliefs.
• Nip the problem in the bud. The mutual fund licensing course could provide evidence that counteracts misguided beliefs.

Conclusion

Any industry should quite properly seek to maximize profit, but allowing misguided beliefs to stand is wrong. And how can anyone be serious about investor education when the trusted advisors doing the educating are misinformed?

The problem before us is entrenched, presumptive and, judging by the overall lack of industry action, seemingly innocuous. But it is costing Canadians billions of dollars annually in the form of excess costs and forgone returns.

John De Goey is a portfolio manager with Designed Securities Ltd. He can be reached at jdegoey@designedsecurities.ca.