Assessing the Value of Advice

The first six months of 2022 have been some of the worst times to be invested throughout history for traditional investors. Many statistics are floating around; “Worst 6 months in the U.S. markets in 30 years”, “First time in decades both equity and bond markets are selling off.

When times are good, the job of a portfolio manager is much easier – conversations revolve around the portfolio making significant gains and clients’ comfort levels are high. However, the most valuable time to have a portfolio manager is through times of uncertainty when emotions are high.

I often consider myself to add the most value through times of uncertainty by transitioning from a portfolio manager to an emotional coach. Seeing negative returns within an investment portfolio is never fun, but bringing the conversation back to a client’s long-term financial plan is beneficial as the markets go up and down. It is challenging for investors to quantify the value added by a portfolio manager during these times. I believe a portfolio manager can regularly add value above investment returns based on three categories: portfolio construction, wealth management and behavioural coaching.

Value add through portfolio construction

Our clients’ two most significant value adds from us are cost-effective implementation (fees) and asset allocation.

Our industry knows that asset allocation can dramatically influence performance in any given year. Canada has been one of the best performing stock markets due to the oil and gas rebound for 2022 year-to-date, albeit negative performance. This sector has been out of favour with the rest of the world since the financial crisis in 2008. Having an allocation to the Canadian marketplace has protected the downside on a portfolio basis, but it will not last forever. Diversifying the underlying holdings while making strategic modifications to undervalued asset classes should add value to a client’s portfolio over the long term.

Fees speak for themselves. Always ensure you know what you’re paying for and if you’re getting value for that price.

Value add through wealth management

Wealth management is much more than just managing investments. Properly structuring a portfolio in terms of tax optimization and estate planning provides immense value. Rebalancing the portfolio can add value over time by selling investments that have increased in value to redistribute to investments that have decreased – sell high and buy low. Another significant component is creating a spending strategy (withdrawal order) to keep more money in your portfolio based on tax efficiencies.

As portfolio managers, we implement base tax strategies maximizing the use of RRSPs and TFSAs to shelter gains and income while managing an efficient portfolio to decrease the tax paid as much as possible through all life cycles.

Value add through behavioural coaching

Behavioural coaching surrounds the investment world daily. As previously mentioned, most behavioural coaching traditionally happens through down markets due to the ingrained behavioural concept of fight or flight. Timing the market is nearly impossible, one may be consistently lucky, but with the complexity of the ever-changing global environment – it is tough to time market tops and bottoms1. Even with this knowledge, investors controlling their investments struggle to eliminate the biological fight or flight reflex that tells us to cash in when things are not going well or fall victim to capitulation2.

A portfolio manager can add significant value by keeping clients invested and managing emotions by bringing the conversation back to their long-term objectives during difficult times.

The Bottom Line

Though the year’s start has been difficult, the summer is starting to bring us a change in the winds. Throughout history, markets have always rebounded. Although the past does not project into the future, we continue to stay disciplined with our investment philosophy and expect an eventual rebound. Our job is to shoulder the stress of the ups and downs of the markets while always being transparent and ensuring that our clients are comfortable with their total financial picture.

1Source: Investopedia: Market Timing Fails as A Money Maker
2Capitulation is when an investor gives up hope of recouping losses on an investment. They end up selling a stock because they cannot handle the emotions behind the losses despite the investment having solid fundamentals.

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