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Cameron Passmore CIM, FMA, FCSI

Portfolio Manager

Benjamin Felix MBA, CFA

Associate Portfolio Manager
Contact
  • T613.237.5544 x 313
  • 1.800.230.5544
  • F613.237.5949
  • 265 Carling Avenue,
    8th Floor,
  • Ottawa, Ontario K1S 2E1
May-09-14

A tale of two advisors

This is the story of two financial advisors, Brian and Adrian. They both took different paths to enter their career, and they are motivated by different things.

Brian had just finished his undergraduate degree in art history. He didn’t have much work experience outside of bartending for a few months in the summers, but he was ready to start a real career. Without any concrete idea what he wanted to do, he attended a career fair and dropped his resume off at several booths. He was thrilled to receive a call from a financial services company the next day. He was told that as long as he had an entrepreneurial attitude, there was a professional position open with unlimited earning potential! He had read the business section of the newspaper a few times and didn’t really understand the talk about stock indexes or investing, but he was assured that he would be trained on the job. Feeling excited, Brian decided to give it a shot. He gave up his bartending job to dedicate time to studying for the licensing exam; it meant living off of his savings for a while, but he thought it was worth it. The first few weeks consisted of sales training, different ways to build trust, and ways to smoothly handle objections. There was also time spent learning about the products that he would be selling and how he would get paid by them. Brian was taught that actively managed mutual funds were the foundation of a strong financial plan; how could investors succeed without a professional money manager in their corner? He also learned the difference between trailing commissions and the deferred sales charge. It sure was going to be difficult to build up an income from scratch with trailing commissions, the upfront pay from the DSC was the only way he would survive. Brian passed the licensing exam without issue. There was still a 90 day period of supervision by his branch manager, but he was able to start meeting clients and selling right away. One sales manager joked that his mutual funds license was a license to print money. Brian still didn’t know much about investing or financial markets, but he trusted that the products he had been trained to sell were reasonably good investments. His personal savings had run out and he was beginning to live off of credit cards, but he was now licensed to make some quick cash. He just needed to go out and win somebody’s trust.

Adrian knew what he wanted to do with his life. He had been interested in financial markets and investing from a young age, and the idea of applying this interest to a career was very attractive. He completed an undergraduate degree in finance and accounting and was a member of the student investment club for all four years of his education. At the end of his senior year he wrote the CFA Level I exam and planned on finishing the next two levels in the next two years. Adrian had been working as a summer student in investment firms for three of the four summers while he was in school, and had made inroads with several of the portfolio managers that he had met. He had witnessed the financial crisis in 2008, and was sure that he wanted to work for a firm that would keep the best interests of their clients first. After following the media coverage of the industry, he had decided that it would be very difficult to do the best possible thing for the client if he was being paid commissions by the products he was selling. Adrian spent some time searching for the right opportunity, and eventually found a fee based firm looking for an entry level investment advisor. In order to deal with more than just mutual funds he had to pass two exams, and then there was a 90 day training period during which he was not able to advise any clients. Even once the mandated 90 days was up, he would not meet clients on his own until he had satisfied further internal proficiency requirements. Being held off from meeting clients was not a big deal though, he started receiving a salary as soon as he was hired by the firm. He was also allotted $1000 per year in education allowance to help him pursue his CFA and other designations. Adrian spent an hour a week reviewing case studies with the portfolio manger he works for, and he was present in many client meetings to gain as much experience as possible before being allowed to meet clients on his own.

Brian and Adrian work in the same city, they are both extremely approachable, well dressed, and well spoken. They both call themselves financial advisors. Which one is looking after your money?

By: Ben Felix | 0 comments
May-01-14

How do you invest?

What’s the first thing that comes to mind when you think about an investment professional? They must be able to pick the best stocks, the best industries, and the best geographies to invest in over a given time period. “Apple is hot right now”, and “China is going to be huge this year!” might be things that you expect me to be able to tell you. I don’t think that anyone can do that, especially consistently, and the data agrees with me. Only a small percentage of people that try to pick stocks and time the market end up having performance that is better than the market itself, especially after the costs of trading and research associated with this style of investing. Finding the small percentage of people that will outperform the market before they actually do it is equally challenging. So if the traditional method of trying to beat the market doesn’t work, it makes sense to accept the returns of the market at a low cost using inexpensive tools that hold the whole market, like ETFs. That makes sense, and it’s easy to do, but the question of which market we are going to buy comes next. Just like we don’t want to bet on any one stock, we don’t want to bet on any one market. The solution is to build a portfolio that is globally diversified; by not betting on any single market we are reducing the overall volatility of the portfolio while positioning ourselves to avoid missing unexpected growth. Not many people expected US markets to perform so well in 2013, potential for a large missed opportunity. To further eliminate placing emphasis on any single market, we build globally diversified portfolios with equal equity allocations split between US, International, and Canadian markets. Coming back to the US market in 2013, it would have been very easy to become emotionally attached to the strong performance. Buying more US stocks seemed like the smart thing to do. We eliminate emotional investment decisions like that by rebalancing the portfolios back to their target allocations. Rebalancing is a systematic process of selling off asset classes that are performing well and buying asset classes that are performing poorly; it is a rules based system of selling high and buying low, and it decreases portfolio volatility while increasing expected returns.

The last piece of this story comes from robust academic research performed on all of the available data from markets around the world. It has been found that certain types of stocks exhibit stronger performance than others. Research has shown that throughout history, small stocks and value stocks have outperformed the market. When we invest in a market, we add a tilt toward these types of stocks. A tilt is best described as an increased amount of these types of stocks relative to the market. If the US market has 4% small value stocks, our portfolio might have 11%. In the same way, research has shown that large growth stocks have lower expected returns than the market, so we tilt the portfolio away from these types of stocks. If the US market has 17% large growth stocks, the portfolio might contain 5%. Our style of investing is market based, globally diversified and rebalanced, with tilts toward small cap and value.

By: Ben Felix | 0 comments