Usually only investors with large accounts, such as those over $500,000 or $1 million, can get access to a Portfolio Manager. If that doesn’t include you, there are financial advisors available at banks or mutual fund companies you can work with. Online investment advisors, like ModernAdvisor, were created to bring the service and expertise of Portfolio Managers to smaller investors.
So what are the benefits of working with a Portfolio Manager instead of a financial advisor?
1. Fiduciary Duty
Fiduciary duty is a legal responsibility to act solely in another party’s interests.
Portfolio Managers have a fiduciary duty to act with care, honesty and good faith, and must always put their clients’ interests first.
Investment decisions therefore must be independent and free of biases. As a result, clients are able to place a higher level of trust in Portfolio Managers.
Financial advisors are not held to the same standard as Portfolio Managers, meaning they are free to recommend investments to you that may not be the best for you, but pay them the highest commission.
2. Professional Qualifications & Registration
Portfolio Managers are required by the provincial securities commissions to have the highest level of education and experience in the investment industry. Both the firm and the individual managing your investments are monitored by the provincial securities commissions with which they are registered.
Firms are registered under one of the Adviser categories (Portfolio Manager or Restricted Portfolio Manager) and individuals that manage your investment portfolios are registered under the category of Advising Representative or Associate Advising Representative (which work under the supervision of an Advising Representative).
Advising Representatives must either: be a Chartered Financial Analyst (CFA) charterholder and have 12 months of investment management experience or have obtained the Canadian Investment Manager (CIM) designation and 48 months of investment management experience. The experience requirement is lower for CFA charterholders as one of its requirements is 48 months of qualified investment experience.
Financial advisors and planners are not registered with the provincial securities commissions, but with financial industry organizations such as MFDA or IIROC. As well, the qualifications needed to become registered with one those organizations are much easier to achieve.
3. Firm Requirements
Firms that are registered as Portfolio Managers must meet strict financial reporting, capital, and insurance requirements in order to maintain their registration in good standing with the provincial securities commissions.
Portfolio Managers must have their financial statements audited on an annual basis, before filing them with the securities commission. Failure to do so in a timely manner results in penalties, and ultimately revocation of registration.
Failure to maintain adequate insurance and working capital can result in increased reporting requirements and other penalties, including revocation of registration.
4. Investment Plan and Written Agreement
Each client of a Portfolio Manager has an individual written agreement (called an Investment Management Agreement, or IMA) which defines the working relationship with the Portfolio Manager, including ongoing communication, the types of investments that will be included in your portfolio, the type of reports you will receive including content and reporting frequency, fees, risks and other issues related to your circumstances.
You will also receive an Investment Policy Statement (“IPS”) which outlines how your portfolio will be managed, including your asset allocation, the specific investment strategy that will be used and the types of investments that will be used.
5. Portfolio Approach
As the name suggests, Portfolio Managers adopt a portfolio approach when investing their clients’ assets, as opposed to recommending or selling investments on an individual basis. This allows a Portfolio Manager to construct a portfolio of investments that complement each other. As a result, each client can achieve the maximum benefits of diversification and the ability to stay on track with their investment plan over time.
Portfolio Managers provide ongoing management of your investment portfolio, including rebalancing your investments to your specific target asset allocation as needed. This target asset allocation is unique to your objectives, risk tolerance, time horizon, financial situation, and will adhere to any restrictions outlined in your IPS.
Clients of Portfolio Managers typically give their Portfolio Manager authority to make investment decisions on their behalf without requiring approval for each transaction (called “discretionary management”). Financial advisors are generally required to have your approval prior to making trades in your account.
6. Management Fees
Portfolio Managers typically charge a fee that is a percentage of the value of each client’s account, known as a management fee. This fee is transparent and reported on client account statements.
Unlike most financial advisors, Portfolio Managers generally do not receive fees or commissions from fund companies when selling funds. This means that they have no incentive to push products which may have high commissions, but may not be the best investment for you.
Portfolio management fees are often much lower than typical mutual fund fees, often 1% or less. This compares favourably to the average mutual fund expense ratio of 2.10% in Canada. While this difference may seem small, when compounded over many years it can make a big difference in your overall wealth. See our blog post on The Easiest Way to Save Money Every Month to get an idea of the difference even a small fee savings can make.
Those are the key things to know about working with a Portfolio Manager. If you are currently using a financial advisor, maybe it’s time to make the switch to a Portfolio Manager. If your account is not several hundred thousand dollars in size, an online investment advisor could be right for you.