What are the three types of investment advisor?
Who do you deal with—and are they the right fit for your needs?
It’s important to understand that terms like ‘financial advisor,’ ‘investment advisor’ and ‘portfolio manager’ mean different things and encompass a wide range of skills and knowledge. Far too many investors in Canada are unaware that there are several different types of licensed advisors, and choosing the wrong one could result in you getting the wrong type of investment solution for your specific needs. Here’s a look at some common types of financial professionals in Canada and what they specialize in. If you have additional questions about these designations and your options as an investor, please contact us.
Mutual fund representatives
The vast majority of investment advisors in Canada are mutual fund sales representatives. These agents are licensed to sell mutual funds, and quite often that is all they can sell or give advice on (for example, they can’t provide investment advice on individual stocks, bonds, exchange traded funds or insurance products). Additionally, many of them are only able to sell the funds offered by the company that employs them (called house funds) and cannot access any others. Mutual fund sales representatives are regulated by the Mutual Fund Dealers Association (MFDA).
Licensed and regulated advisors
Another type of advisor is one that is licensed under the provincial insurance body. These individuals are permitted to only sell insurance products, including traditional life and health insurance, as well as segregated mutual funds and GIAs (which are the insurance industry version of a GIC). They are not allowed to offer advice on any other type of investment product.
The third type of advisor is one that is regulated by the Investment Industry Regulatory Organization of Canada (IIROC). In the past, these people were called stock brokers. Nowadays, not only do they sell stocks and bonds, but many of them also sell mutual funds, ETFs, and insurance products as well as derivatives, options, commodities, and futures.
Discretionary portfolio managers
The final type of advisor is one that is IIROC regulated as outlined above, but who is also licensed to manage their clients’ money on a discretionary basis. These individuals are called Portfolio Managers (PMs). Essentially, these advisors can make changes to your portfolio on your behalf without receiving explicit permission for individual transactions. This is a highly specialized designation that is reserved for a relatively small number of advisors in Canada, including several members of our team.
How these designations impact investors
Perhaps you are wondering why all of this is so important.
All of these advisors are required to ensure the suitability of the investments that they are recommending to their clients. That said, while an investment may be perfectly suitable for a client, that doesn’t mean that it is necessarily the best solution for that client. For example, a bond fund may be suitable for a RESP that is needed in four years and three months, but an actual bond maturing in four years and three months may very well be the most optimal solution for that client. Knowing these subtle differences is the key.
Your selection of who will manage your money is very important because the investment tail wags the dog. That is, if you hire an advisor that can only provide you with their own company’s house mutual funds, then their money management solution for you will obviously be limited to their house mutual funds. The same goes for insurance licensed individuals and IIROC advisors.
It is correct that IIROC advisors do have the largest assortment of investments for their clients, but like most things, the availability of more tools is not a guarantee that the end result will be better than those who are selecting from a smaller list of available investments.
I really cannot emphasize this enough – your investment success still comes down to the advisor’s knowledge, skill, and experience as well as your relationship with that advisor.
Why we chose to pursue PM designations
I personally chose to pursue licensing as a Portfolio Manager (PM) because I believe it allows me to better serve my clients. PMs are regulated under IIROC and have access to the same large assortment of investments that other IIROC advisors enjoy. However, PMs must charge a flat fee rather than charge on a commission basis.
The other difference between a PM and the other types of IIROC advisors is that PMs do not have to contact their clients for permission for every trade they make—as noted earlier, they have an agreement signed with their clients to make changes as needed within a framework that factors in the client’s risk tolerance and investment objectives. This is called discretionary trading.
All other advisors must contact their clients with specific investment recommendations and receive permission from the client before they can make a change. If a non-PM advisor makes changes on a discretionary basis without having the PM license they can be fined, suspended, or dismissed.
The advantages of discretionary portfolio management
The advantage for a client employing a PM is that the trades occur when the PM feels it is the right time to do so, rather than when he or she is able to reach the client for permission. The average IIROC advisor in Canada is dealing with 218 families (Source: Investment Executive, September 2009) and has one assistant (that’s the average—many insurance and MFDA advisors have significantly more). If the advisor (MFDA, Insurance, or IIROC) believes that the stock markets are about to fall and wishes to change all clients’ asset allocation from 60% stocks/40% bonds to 100% bonds to lower the risk, they can only do so by contacting each client family and getting specific permission to make the trade. This means that at least 218 phone calls have to be made (if not more because some families may have two or more clients in the household).
The net result is that it could take several weeks (yes, weeks) before all clients are reached. One can easily see that in a falling market, the first client reached would have received a better deal than the last client. The last client could very well end up having sold their stock position at a lower price and bought their bond position at a higher price than the first client who was contacted. How fair is that? Well, it isn’t. If the investment in one client’s account needs to change, then all client accounts holding the same investment should change at the same time and at the same price. That is the fairest way to do it, and that is what working with a PM permits.
Exceptional wealth management without transaction delays
The key point we’d like you to take from this post is that a PM is permitted to use all the tools at their disposal on an as-needed basis and in a much more efficient manner. This is particularly helpful in a rapidly rising or falling market.
Of course, the license to discretionarily trade means an increased level of supervision by the advisor’s head office—which, for the client, is never a bad thing. PMs must employ a documented and disciplined investment process and all transactions are subject to daily review. PMs meet with clients to review the results of trades, discuss any questions clients may have, and update any required changes to the client’s profile.
Becoming a Portfolio Manager is a fairly arduous task as it demands quite a bit of knowledge and expertise (and so it should, as it carries a lot of responsibility). One must be experienced in the business, complete significantly more coursework and exams than other types of advisors, make an application to the firm’s internal PM committee, and be granted authorization by both the firm’s compliance department and the regulator (IIROC). The firm I work with (DWM Securities Inc.) has 981 advisors, but only 19 of them are Portfolio Managers.
Making the decision that’s right for you
So how should you go about determining which type of advisor you should be working with? Not all investors need a Portfolio Manager, and many individuals do quite well with insurance advisors, mutual fund advisors, and regular IIROC licensed individuals. I always recommend interviewing prospective advisors. If you’re not sure what questions you should be asking, there is a very good checklist in Chapter 16 of my book In Short: Successful Investing During Turbulent Times. Again, we welcome current and prospective clients to contact us with any feedback or questions they may have.