A Tale Of Two Advisors

By Mark Barnicutt on January 30, 2010

As we’ve all witnessed over the past several months, the globally coordinated response of the world’s major central banks to inject liquidity into the capital markets has resulted in a major “bounce back” in equity prices from their lows in March 2009.  The purpose of this article is to not opine on the future directions of capital markets — there are plenty of those views around — but rather to comment on the advisor and investor behaviours that appear to be re-emerging.  Specifically, the fear that permeated the global capital markets in Fall 2008/Winter 2009 has now changed — at least in some circles — to speculation. It is these re-emerging behaviours and attitudes that have caused me to share the investment story of a good, long-standing friend of mine…..we’ll call him, “Peter”.

Peter is one of those well-educated, professionals with a six figure income, with a focus on saving and investing, that would make him an ideal client for any Investment Advisor.  Being good friends — and perhaps somewhat of a “guy thing” — we respect each other’s privacy and so have not historically discussed money matters — despite my profession.  Unknown to me back in 2004, though, Peter had become involved with an Investment Advisor (let’s call him Jack) at an investment firm who had sold him on the investment strategy of using excessive amounts of financial leverage for the purposes of purchasing large quantities of tax-sheltered investment vehicles in the natural resource sector.  As many high income professionals are frustrated with the level of income taxes that they pay, the allure of saving taxes, regardless of the strategy, has an understandable appeal, and the reason why these types of investment products are targeted specifically to such professionals.

From a portfolio management perspective, I’m not against the inclusion of higher risk investment strategies in clients’ portfolios but believe that they should be done for clients (especially those who are saving for retirement) — only once they clearly understand and accept the true potential risk and return profiles of the intended investments — for a small portion of their investable wealth.  In Peter’s case, he unfortunately allocated the clear majority of his investable wealth to this aggressive strategy….in other words, he had “bet 100% of the farm” in order to save 50% income tax.  Fortunately, for Peter, he had unwittingly placed his investment at time when the junior oil & gas sector was booming.  As a result, Jack’s aggressive leveraged investment strategy quickly made Jack look incredibly smart as Peter’s investment, not including his tax deduction, had almost tripled within a very short period of time.

One day while playing tennis with Peter, he started to brag about his recent investment successes. Being a good friend, I started to probe a little about the nature of his success and became very concerned when I hadn’t even heard of this company before.   Peter  was a classic case in Behavioural Finance as he was initially reluctant to recognize the real risks that he had assumed (ie: “How can it be risky – it’s gone up so much!”) and did not want to sell any of his “winnings” for fear that his 3 bagger would soon turn into a 5 or 6 bagger!  Although Peter reluctantly eventually sold 1/2 of his holdings  at various lower price levels (and strongly against his broker’s advice), he soon, unfortunately learned, that $3 stocks can very quickly — especially when junior resource sector bull markets end — become worth only pennies!!

This “roller coaster” experience caused Peter to reassess his retirement investment strategies.  Peter eventually started to realize that his best financial route to retirement was not about trying to “shoot the lights out” with a perpetual series of casino-like investment decisions but being more like the recent Fidelity commercials  which encourage clients to stay on a “straight & narrow path“.  It may sound boring and it may not provide a lot of entertainment value but Peter’s best route to retirement was about having a financial plan that had a clearly articulated and quantified goal, with a portfolio structure that had a risk and return profile that balanced his aspirations with his true tolerance for risk, followed by a formal process for review with his Advisor who would then show him how he and his family were progressing towards their goal.

On this basis, Peter soon transferred the remnants of his investment account to a new Advisor — a Financial Planner (let’s call him, Tom) who shared the same set of philosophical beliefs about saving for retirement as Peter now did.  Tom took the time to understand Peter’s retirement needs and put together an investment plan that had specific goals, timelines, savings contributions amounts, a portfolio structure that balanced Peter’s objectives with his tolerance for risk, all of which was based upon a prudent set of  expected rates of return.  Peter would now have a real investment portfolio with Tom as opposed to a collection of disconnected investment ideas that Jack had created.

Fortunately for Peter, Tom was able to restructure his investment account prior to the onset of the global bear market in 2008.  Although Peter’s portfolio has experienced a slight decline in value over the past 1.5 years — just as even the best of investment portfolios have — he takes comfort in the fact that he has a plan, and a portfolio that is comprised of a prudently diversified set of quality investments with an Advisor who will help him navigate future capital market cycles towards his retirement goals.  This compares to Jack’s Wealth Destroyer Portfolio, whose holdings recently traded for 1 cent/share!

The accumulation of wealth requires hard work, patience, perseverance and prudently selected investment strategies that align against each investor’s objectives and tolerance for risk.  Investors should not have to accumulate their wealth twice!  As has been headlined in the media over the past year, we have a looming retirement crisis in Canada.  As a result, the wealth management industry needs to have more Advisors like Tom — who are true stewards of client wealth — and a lot less Advisors like Jack who are simply sales people for their firm’s investment banking department!  I’m not saying that people like Jack shouldn’t have a role in the investment industry — companies need to raise capital — but let’s NOT put a title on their business card that calls them something they are not….Advisor…..instead let’s call them what they are — Salesperson — so that the Canadian public can clearly understand the difference between someone who’s selling securities (Salesperson) and someone who is stewarding client wealth (Advisor)!

For a  list of 21 Questions To Ask Your Financial Advisor, please click below for our article: “How Will Our Money Be Managed?

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