There is so much wisdom to be gained by talking to successful people — about both what went well and what has frustrated them.
Having these discussions and slowing things down matter. Not everything has to be done quickly, especially when it comes to finances. Making intelligent informed decisions are better, even if it takes time, than making quick wrong decisions.
When we first take on new clients, we must obtain their basic information — things like address, birthdates, social insurance numbers — for regulatory reasons. But this information doesn’t really help us understand a client.
As a Portfolio Manager, we have a high duty of care as we can do trades on behalf of our clients and we have a fiduciary duty to always do what’s in our clients’ best interest. From a regulatory standpoint, Portfolio Managers are required to know their clients at a deep level.
Whether acting as a Wealth Advisor or Portfolio Manager, when accounts are opened, we have to document the client’s investment objectives and risk tolerance.
To have a meaningful discussion about investment objectives and risk tolerance, it is important that we get as much background information from our clients as possible, as well as their future goals and needs. One of my favourite parts of the job is getting to know clients and finding out how they accumulated their wealth. Every client’s story is unique, and some of the stories are fascinating and inspiring. In most cases, the accumulation of wealth involved a lot of time and hard work.
We always ask new clients to give us a history of their experience with investing, and this gives us a bit of a baseline of how the discussion should flow.
Older clients generally have more investment experiences — but not always.
We’ve had clients that have never really invested outside of a principal residence, and then they may sell their house in their 80s and suddenly have a large lump sum to invest. We have also had clients that were in their late 60s with little investment experience who have received a large inheritance.
On the flip-side, we’ve had new clients who have either worked for technology companies, sold businesses, or received an inheritance early in life and by their early 30s have multiple years of investment experience.
Working with clients has allowed us to assess what has frustrated clients the most with respect to investing: If they could turn back the clocks, what would they do differently to help their financial situation?
Here are the Top 10 words of wisdom that we have absorbed over the years from client discussions.
1) Consider whether investments are illiquid
There has been so much frustration over the years with clients that have purchased investments that are illiquid. Earlier this year, we wrote an article about the settlement dates changing to one-day settlement.
In our opinion, other than real estate, every investment you purchase should be liquid to enable you to get your money back.
We’ve heard numerous stories of people having money with smaller companies where they have no ability to get the money back, or it is frozen, or they only allow small redemptions annually.
Sometimes investments are locked in for multiple years has been a frustration. A common frustration is people who have put money into a mortgage investment corporation that is locked in for five years.
If an investment can’t be sold, without a harsh penalty, within a short period of time — well, there is a better alternative. Why put yourself in that situation?
2) Be careful with proprietary products
Putting money with a company that recommends proprietary products does not make any sense to me.
At any point in time, if you are not happy with your investments you should have the right to sell the investment (see above) or have the right to transfer the investments to another financial institution if the service level is not sufficient.
Many investors have highlighted that their bad experiences have come from an advisor pushing and putting them in a proprietary product. It could be a special class of mutual funds that they promote as having a slightly lower management expenses ratio, but also lacks the ability to be transferred without selling (and often having to realize all the capital gains in one year).
Prior to investing in any product, you should ask the financial professional you work with one question: Is this investment able to be transferred to another financial institution?
If the answer is no, avoid it.
3) Know how investments are taxed
The term “what ends up in your pocket” is not always understood by investors. What does stand out is marketing pitches that post higher rates without highlighting the downsides. The advertised yield often is not guaranteed, and it almost never explains the tax components of the investment.
Let’s say, for example, a company advertises an investment that pays a six per cent yield. After the change in value, taxation and inflation is factored in, the real net rate of return that ends up in your pocket can be materially lower. Having a discussion about the after-tax rate of return is especially important to ensure sufficient funds are available to deal with today’s longevity in retirement.
We have heard from clients that having a greater weight to tax-efficient investments would have paid huge dividends over the years.
4) Embrace risk as necessary
The ability to deal with volatility and market fluctuations often takes years of experience. For newer investors, any downturn in the investments can cause an emotional response that can result often in the wrong outcome (i.e. selling investments after a market correction).
If you don’t have a good financial professional to guide you through periods of market volatility, then wisdom sometimes is only gained by making past mistakes. Wise investors look at market downturns as an opportunity to accumulate great investments for the long term if they have money on the sidelines, certainly not a time to liquidate.
The advice: Don’t look at risk as a bad word, but rather as a necessary component to successful long-term investing.
5) Understand compounding returns
Working hard early in life and building up equity has such a long-lasting benefit. Most had wished they had worked a little harder earlier in life and saved more. It would have made for an easier retirement.
Making money on money, the snowball effect, and compounding growth are all terms we have heard while gathering the words of wisdom.
This is a super important concept for young investors to learn: The earlier you start saving in life, the easier your financial position will be throughout life.
6) Adopt a minimalist lifestyle
One comment that is worth noting is that it isn’t always about making money and investing. In many cases, controlling spending is a vital component to financial success.
Spending excessive amounts of money on buying stuff that isn’t needed has compounding financial consequences. Instead of paying down debt, you go out and buy more stuff that isn’t needed ends up costing so much more in the long run. We have reviewed situations where clients made decent money over the years but didn’t control their spending. They were concerned about keeping up with the Joneses.
Many of our older clients wished they had adopted a more minimalist approach to life earlier. They wished they had focused on health and spent time on those things that matter most instead of spending time shopping and buying stuff.
Not only did this stuff have a financial impact, they end up spending the later part of their life trying to dispose of the possessions they accumulated — most of which set them back years financially and were not needed.
Most wished they had gone for more walks in nature and spent less money in shopping malls or shopping online. This would translate to both a healthier body and healthier financial situation.
7) Find the right financial institution
All too often when we look at a person’s situation they have been investing far too long at the wrong financial institution, or not investing at all. Keeping money in a bank account for a long period of time, and not investing, is a mistake. Often being at a financial institution that can only offer higher-cost investment products is another common mistake.
One regret many clients have is not getting informed sooner about different options. It is not until an introduction is made to a Portfolio Manager or Wealth Advisor who prepares a second opinion report that clients realize there are lower-cost and greater-service options available.
One misconception is that dealing with the wealth division of financial institution is only for the ultra-wealthy. Once clients have $500,000, or greater, they can look at a variety of financial institutions.
The takeaway: Excess cash should be invested, and time should be spent to ensure that all investments are held at an appropriate financial institution that offers fee-based options and the best service.
8) Pick the right financial professional
Just as financial institutions are not equal, neither are financial professionals. As an example, some financial professionals are only licensed to sell certain types of investments because of having a certain type of licensing (i.e. an insurance licence or mutual fund licence only). Even advisors that have all the licence requirements are not the same.
We’ve heard many complaints from people who invested with another advisor who had lost them a lot of money, or who they feel did not have their best interests at heart. They had an advisor that either did not have the licensing to provide the best options or lacked the knowledge to assist them.
If you don’t have the right person helping you, it is time to make a change — and many had wished they had made the change years earlier than they did.
9) Utilize all types of accounts
We have had many situations where individuals who ask for a second opinion have not had their accounts set up correctly.
It can be as simple as not having a Tax-Free Savings Account (TFSA) when they have excess money in a non-registered account. It can be having an RRSP account that they should have converted to a RRIF years ago and began taking income payments. It can be having a RRIF account and only taking out the minimum payment when they should have elected excess amounts. It can be that the ownership of the accounts or the beneficiary designation are also not correct.
Discuss the types accounts, ownership, beneficiaries and withdrawal levels.
10) Make deliberate decisions — with help
We’ve heard that individuals want to be working with a Portfolio Manager who will help them clearly articulate plans and help them make very deliberate choices.
The planning can be around minimizing taxation, and maximizing after-tax returns, to ensure extra dollars are available for whatever wants are most important. These wants range from helping invest in the education of grandchildren right through to making contributions to charities that are most important, and everything in between.
Kevin Greenard CPA CA FMA CFP CIM is a Senior Wealth Advisor and Portfolio Manager, Wealth Management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at timescolonist.com. Call 250-389-2138, email [email protected], or visit greenardgroup.com.
