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Do you know where your investments are when you go to sleep at night?

January 20, 2014 by Editor, InvestingForMe

In my previous life as an investment advisor, my relationship with prospective new clients would always start as interviewer and interviewee. In other words, at that first meeting the goal was for both of us to ask questions to learn more about each other’s personalities, as investors and individuals, and to determine if we were a good match.


I wanted to know, were they a conservative investor (buy and hold – like me) or did they prefer a more active day-trading style of investing? For investors and advisors, these are important considerations when you decide to hand over your hard-earned savings to an investment advisor, and from my experience, not a lot of average Canadian investors realize the difference. You see, typically, matching a conservative investor with an active trader is like trying to mix oil and vinegar – they don’t work well together.

A peak inside the investment industry

Let me give you a couple of general impressions I found over the years as an investment advisor when it came to those first meetings with those prospective new clients and see if any of these observations might ring true for you.

If the first meeting went well and our personalities were a match (i.e. we came to the conclusion we both preferred the conservative, buy and hold approach), the next step would be for me to prepare an investment proposal for the prospective client so they would know the investment direction I would ask them to head towards.

The investment proposal would begin with a look at their existing investment portfolio including the individual investments, their asset allocation, and the types of accounts holding the investments. The first goal was to identify the client’s existing investments that would fit with the desired conservative investment direction and the second was to identify those investments that did not.

Now here’s the interesting part I noticed over the years. Interestingly, more often than not, their existing portfolio would include mutual funds and a few exchange traded funds (ETFs) that did not fit a conservative investing personality.

Professional investment management: an onion with lots and lots of layers

What most investors lose sight of is the fact that the individual investment advisor they deal face-to-face with is not most likely the professional that is making the investment decisions for your savings. Once you hand your savings over, your gal/guy will typically turn around and buy a mutual fund or exchange-traded fund and thereby hand off the actual investment decisions to another layer of investment professionals. And unfortunately that second layer of professionals never sat in on your meetings where you discussed your investment personality and financial goals.

So, often it was the case that the client had held their individual investment funds for a number of years (riding through the good and bad times just like any dedicated conservative, buy-and-hold investor would do). However, it’s that second layer of investment professionals (the funds’ investment managers) that were behaving more like active, aggressive investors – not the conservative, buy and hold managers the client thought was handling their hard-earned savings! And so the lesson here is that you have to look beyond your individual advisor and study the next layer of professionals if you want to ensure your savings are invested properly. And of course, most investors have no idea how their savings are being invested by that second layer of professionals.

Remember: More often than not, those second layers of professionals (and their firms) have a different objective for your savings than you do. Your savings goal is to support your family’s long-term financial goals whereas the professional money managers view your savings as a way to advance their careers. If they can outperform with higher investment returns, then they get that next big career promotion and big bonus! In fact, their career goals dictate that they have to be active traders (buying and selling) if they’re going to secure that next big promotion and bonus! So it shouldn’t come as any surprise to an investor that that’s how your hard earned savings are being traded, but unfortunately for the average Canadian investor it is a surprise. And when I pointed this little detail out to prospective clients, not too many were happy, to say the least.

So, how can you protect yourself from that second layer of professionals when you invest in mutual funds or ETFs? Answer: Get to know the mutual or exchange-traded fund’s Portfolio’s Turnover Ratio (PTR)!

In our follow up article, we’ll delve into this simple tool that can help you avoid inappropriate investments and their professional managers.


(This artice published by Troy Media)


 Read the next article in this series - Practice safe investing: Get protection by using a PTR!



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