In an era of ‘do-it-yourself’ everything, one in which we are given ‘expert’ tips on how to do everything from renovate our kitchens to estate planning, it stands to reason that more of us would be drawn to the idea of managing our own investment portfolios. Online trading firms like Questrade promise to empower self-directed investors to buy and sell stocks, currencies and other securities and question the value of discretionary services. In Questrade’s television ad, a man is seen asking his fund manager why his returns are low, while investment company reports record profits and management fees take a bigger bite of his retirement every year.
Those who work in the financial services industry will often point out that many investors will debate the merits of whether they should manage their own investments or to outsource the decisions to experienced professionals. The Financial Post reports that it’s not unusual, even among very knowledgeable business people, to be confused about whether to opt for discretionary or non-discretionary investment portfolios. Discretionary portfolios are managed investment accounts in which a broker has free rein to buy and sell securities without the client’s consent.
Is the criticism of managed funds valid?
It depends who you ask.
One of the best arguments in favour of hiring an expert comes from stock fund manager Robert Rodriguez of First Pacific Advisors who has just retired. His philosophy of picking cheap stocks and holding a large cash position in the situations where nothing meets his criteria may have appeared simple, but it worked in terms of protecting assets and building wealth. Rodriguez’s stock fund, FPA Capital Fund, produced an annualized return of 15.02% between July 12, 1984 through 2009, after which Rodriguez stopped managing FPA Capital. As John Coumarianos points out in Marketwired, Rodriguez leaves behind a legacy of treating investors with respect by not only protecting assets, but also by communicating with clients in such a way as to justify what he was doing within the context of the investor’s long term goals.
Another top rated portfolio manager, Andrew Peck of the Baron Asset Fund, told CNBC the typical investment in his fund is held for an average of eight years, which allows him to outperform competitors.
“When I am contemplating a new investment, the question I’m asking myself is, what type of company can I identify that I would feel comfortable owning for that period of time?,” he said. Peck puts a high premium on ensuring a company has a “meaningful and sustainable competitive advantage” before he invests his clients money in it.
Opting for a discretionary service is one thing; selecting one from a dizzying array of banks, brokers and portfolio managers is another. Arthur Salzer, CEO and chief investment officer at Northland Wealth Management, believes there are eight key factors to consider in making that decision. Investors should ask themselves if the firm has skill, experience and resources to evaluate and manage assets across public and private markets. Arthur Salzer also places a high premium on firms that invest without conflict-of-interest. As Salzer explains in a Financial Post article he wrote earlier this year, firms preferred by investors should have “the ability to allocate capital without conflict-of-interest to any independent asset manager from around the world in areas such as direct lending, real estate, private equity and hedge funds.”
Qualified managers should be committed to upgrading their knowledge of evermore sophisticated investment products. It can be a full-time job just staying on top of a constantly changing industry and understanding how those changes can benefit clients. This level of sophistication in the investment climate wasn’t there twenty-five years ago. We exist in an environment of increasingly volatile financial markets with low interest rates and a myriad of non-traditional investment options.
There is no one-size-fits-all approach that satisfies every investor. When it comes to deciding investment approaches, it’s an important enough decision that necessitates a family discussion when an entire family’s future financial well being and security is under consideration. Opting for a manager whose full time job it is to look out for your best interests can be still be a wise choice.