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A View From Here March 2017

March 6, 2017 • Print This Article

"The stock market is filled with individuals who know the price of everything, but the value of nothing." - Philip Fisher

The Most Important Thing is Return

There has been a series of marketing campaigns by unproven 'Robo-Advisors' as the low-cost alternative to wealth management. Since most have failed to provide adequate long-term returns, will this portfolio of exchange-traded funds (ETFs), that uses algorithms to create asset mix, prove to be a good choice? It is unlikely in my opinion. Ultimately, someone involved in the process must be adept at making good investment choices and fees are often blamed for the lack of satisfactory returns most investors achieve. This pursuit of saving money often costs us more in the end... no matter the product or service. I think it is safe to say that most would pay a premium for a better return, yet many have been so disappointed in that quest that they look to fees as a key element to achieve performance.

But this isn't anything new. A survey I recall from the 1990s concluded that Canadians have two concerns with financial services: fees and to not lose any money. As a result, actuaries who build financial products on behalf of financial institutions create 'solutions which embed a premium fee and reduce volatility. This usually comes at the cost of performance. I maintain that outside of the safest investments (GICs. Gov't Bonds and Treasury Bills) enhanced returns are only going to come from those who are proficient at investing. Case and point; new clients who transfer their investments to us. Their assets are usually smaller than similar-aged clients who have been with our practice for at least five years. Further, there seems to be the unanswered question as to what exactly the long-term returns have been even though that information is just a click away for every advisor or manager. Most have said that they had been thinking about making a change for many years, but have been too afraid to do so because the returns do not seem possible given their history and their concern over fees.

Fee Structure History

I have witnessed an evolution of fee structure over my tenure from commissions to deferred sales charges on mutual funds that hid a whopping 5% upfront charge and a 2+% trailer, in the 1990s and into the new millennium. As hedged and managed funds became more popular in the early 2000s, the advisory business moved in the direction of a percentage fee charged on assets managed. This appealed to many as it supposedly addresses a perceived conflict of interest from the traditional commission based structure. However, this wasn't always the case, as additional commissions were still paid to advisors from new and secondary issuance of shares and structured products created by firms. If you think about it, if advisors were not getting paid to place them, they might not be placed at all. It took the better part of another decade for these 'extra' fees to be essentially banned. As such, the cost as a percentage of assets managed has come down to the point that advisors focus on building scale by procuring new assets and offering financial and estate planning services in an effort to get a larger share of their client's wallet. This has essentially moved the actual practice of investing and planning the "cookie cutter solutions" to third party managers, often within the firm they work for. This is okay as long as the products and returns are satisfactory. Most often they are not.

A couple of weeks ago, my wife Alison and I had dinner with old friends who have been clients for well over a decade. When they brought up the success of their long-term performance, I said; "if you told anyone, they wouldn't believe you". The answer was that when they talk of their success, most don't believe it and are fixated on what fees they would be charged.

I believe that investors who are focused solely on what they pay must have accepted long ago that there is no satisfactory performance. This might have a lot to do with the decades of different fee structures that produced the same meager outcome. They might have determined that despite moving from money manager, to broker to mutual fund, that it is perhaps the fee that is holding them back from a decent return. I believe that most advisors carry that dark secret with them. Many say that it is not performance that matters, but instead helping clients achieve their goals that does. Isn't that the same thing? Where was it lost that the most important thing is the bottom-line return? What other practice does a financial advisory business bring to the table that eclipses this?

Good money management shouldn't be cheap and if done well - is a bargain. In January, all accounts received a performance and fee report that the regulators have mandated clients receive annually. In last month's A View From Here, I suggested that you look at this document or ask us to provide one for you. It exposes your performance, which is inclusive of all fees.

Commission versus Flat Fee - The Uphill Battle

On the surface, the commission model seems to be a conflict of interest between advisor and client as it suggests that advisors would attempt to make as many transactions as possible to earn more in fees. In order to address this, I must first say that trading is a terrible way to invest as it moves into the realm of gambling, and a stigma that has followed financial services for decades. As such, trading an account often without a defined investment mandate is like playing with a bar of soap in the shower; eventually there will be nothing left. In 1975's Play it Again Sam, Woody Allen was asked why he doesn't invest in the stock market. His character answers, "I don't' like stockbrokers, they invest my money until it's all gone." A flat fee based on assets is supposed to level that playing field but I don't believe it does. Any fee structure is okay as long as there is a satisfactory long-term return... again - the most important thing and why people ultimately hire financial advisors in the first place.

Advisors who are in it for the long haul know that the more we transact even in absence of a fee, the worse the return is likely to be. It will ultimately come at the cost of the business relationship over the long-term. What I prefer about our commission model is that once a transaction is made, there is no fee paid until another one is made. Last month we began to close out one of our long-term holdings. We had owned this business for almost seven years. That's seven years that we tracked, scrutinized and ultimately decided to remain invested in while no fee whatsoever was paid to do so. The return over the tenure speaks for itself.

There has been a lot of buzz in the investment industry about outlawing commissions, which has occurred in both the UK and Australia. Yet I still believe that at this point, it is the best approach for our accounts. Perhaps in the end, we will determine that a different structure is more appropriate, but it does not dismiss the fact that in the end...it is all about the return on your invested assets. Anyone who tells you different is unlikely to be achieving it and they know it.

Thanks for taking a look and as always,

All Good Things,

Adam Hennick
Mackie Research Capital
Tel: 416 860-6848 Toll Free: 1-877 860-6848

Filed under: Uncategorized

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Mackie Research Capital Corporation ("MRCC"). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor MRCC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to MRCC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member-Canadian Investor Protection Fund / member-fonds canadien de protection des ├ępargnants.

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