Most Canadians will have weighed up the advantages of using an advisor at some point in their lives. But with more and more options open to the DIY investor, the question of whether to use a professional is one many people don’t fully understand.
Do you need financial planning? Do you need someone to manage your investments? And, importantly, how do you know the advisor you’ve hired is providing the right advice for you?
To make the best decision, investors need to understand the difference between a financial advisor and Portfolio Manager. The titles are often used interchangeably but they are not the same and the two perform separate functions.
“Advisor” is a broad term and that person can provide a number of services, from financial planning, retirement and estate planning, savings advice, and tax efficiency, for example. These services are available through different channels.
For example, financial planning firms often focus on a client’s plan and outsource the management of assets, with a share of the client’s fee paid to a third party. Banks, or the brokerage firms they own, have internal advisors that generally prioritize their own products such as mutual funds, ETFs or GICs. Meanwhile, some advisors are licensed to sell only mutual funds, meaning a wider offering but often higher fees as the client pays for both the advisor’s services and the fund management.
Then there are Portfolio Managers, who may create and recommend suitable portfolios, with access to a wide range of security types including stocks, bonds, mutual funds, and ETFs, to meet the investment objectives of a specific investor. In doing so, they make day-to-day trading decisions on a portfolio of assets. Unbiased and untethered to any particular product or bank, there are a number of benefits to working with a Portfolio Manager.
Portfolio Managers are fiduciaries, which means they are legally bound to act with care, honesty and good faith, and in the client’s best interest. Investment decisions, therefore, must be independent and free of bias, which results in a higher level of trust. It also means that the Portfolio Manager must address any conflicts of interest when building and administering a client’s portfolio. This fiduciary standard, which also exists for lawyers and accountants, does not apply to a typical financial advisor.
The lightning rod for so much debate, and often mistrust, in the financial services world. Advisors may be paid by commission based on volume of trading, or by incentives that risk being skewed by in-house products or third-party fees, rather than a client’s specific needs. Portfolio Managers, however, do not receive commission, and are not compelled to overtrade a client’s account to boost their earnings. They have an obligation to buy and sell securities that are suitable for client based on their objectives and risk tolerance.
While advisor’s fees can be embedded as a cost of doing business, Portfolio Manager’s fees are typically a percentage of a client’s assets. They are also transparent, generally lower than mutual fund fees, and typically go down as a percentage of your portfolio as your assets grow.
Discretionary management and personalized service
This is a key difference. What separates a Portfolio Manager from an advisor is their personalized business relationship and the rigorous process they’ve gone through to understand the client’s personal circumstances, financial goals and objectives and risk profile. A Portfolio Manager develops a written agreement, known as an Investment Policy Statement or IPS, that takes into account a client’s specific investment needs, objectives and any restrictions.
Once the Portfolio Manager determines a client’s risk profile, the Portfolio Manager selects an appropriate mix of suitable investments and makes discretionary adjustments to the client’s portfolio. This ability – and authority – to make changes quickly to a portfolio, without the constant need to contact each client for pre-approval, is critical when reacting to market changes.
Once only reserved for those with the largest amount of investable assets, in recent years, more and more Portfolio Management firms have broadened the type of clients they are able to work with. This has been made possible by increased use of advanced technology, and the team-based collaboration of planners (who may or may not be registered to provide investment advice) and registered Portfolio Managers, who each serve a specific function in helping clients meet their overall wealth management needs.
Education and experience
In short, in order to be registered with the provincial securities commission, Portfolio Managers must meet the highest level of experience and education in the industry.
Firms are registered either as a Portfolio Manager or Restricted Portfolio Manager, while individuals are registered under the category of Advising Representative or Associate Advising Representative, who work under the supervision of an Advising Representative.
An Advising Representative must either be a Chartered Financial Analyst (CFA) charterholder and have 12 months of relevant investment management experience, or have obtained the Canadian Investment Manager (CIM) designation and 48 months of relevant investment management experience. The experience requirement is lower for CFA charterholders because one of its requirements is 48 months of qualified investment experience.
Advisors and planners, meanwhile, are instead registered with financial industry organizations such as MFDA or IIROC, and the individual qualifications required are easier to obtain.
For planners, the ultimate professional credential is the CFP or Certified Financial Planner designation, which requires significant education and work experience to obtain. The Financial Planning Standards Council (FPSC) spent years seeking to conserve the title “Financial Planner” for those who have obtained their CFP and continue to maintain it in good standing through ongoing professional development, and adherence to a professional code of conduct.
Ultimately, the Portfolio Management firm is considered to be the pinnacle within the investment management industry, with the highest standard of education, professional experience, capabilities, and duty to clients.