Before your investment portfolio reaches $500,000, it’s a good time to review your options. After all, at this point, a comfortable middle-class retirement is at or near within reach. So while you want to make the most of what you have, it’s more important than ever to protect yourself against loss.
Fortunately, you now have even better options than what you had for $100,000. With a lower amount, you probably haven’t attracted many professionals willing to create a completely personalized portfolio for you. However, with half a million, many experienced money managers who would previously have ignored you are now willing to shower you with attention and service.
The best part is that you will pay even less than before. The typical mutual fund investor pays annual fees of 1.5% to 2.5% of invested assets and gains access to a mutual fund advisor who is limited in the products he can sell. However, once you reach $500,000, you’ll find that you can benefit from the services of full-service investment advisors and brokers. Generally speaking, they will only charge you 1% to 2% in fees while providing a much higher level of professional investment services.
Of course, if you have enough knowledge to invest on your own all the time (using The meaning of moneyperhaps a portfolio of Couch Potato index funds or individual stocks), then what you were doing may still be working well. More money means more options, but it doesn’t necessarily mean doing something different.
Remember, however, that investment advisors and brokers can help you with more than just choosing stocks or funds – they can help you manage your portfolio as a whole. Most will walk you through the process of setting your investment goals and risk tolerance, determining your asset allocation, and then selecting the most appropriate investments. They can also help you minimize taxes by making sure the right investments are held in the right types of accounts, whether they are RRSPs, TFSAs, or unregistered accounts. Often, these financial professionals are also trained in related fields, such as financial planning and taxes. They can prepare a full financial plan or provide you with tax advice, which is sometimes covered by investment fees at no extra charge.
Real, personal money management
If you want to entrust the day-to-day management of your money to well-qualified professionals who provide a high level of personal service at reasonable fees, a private investment advisory firm may be your best option. “That’s a nice, straightforward approach for someone with half a million,” says Jason Heath, a fee-only certified financial planner at EES Financial Services in Markham, Ont. Investment advisors (also called portfolio managers) are licensed to manage your money on a “discretionary” basis, which means they make ongoing investment decisions based on your guidance. (They are not “advisors” because they actually manage your money, not just advise you how to do it.) They can be found in the private wealth branches of large banks, but they can also be found in many independent investment management firms, of which some have built an impressive reputation in pension fund management.
Large banks typically provide a range of “wealth management” services such as estate planning and tax planning (often at no additional cost), while independent money managers typically simply manage your money. These professionals have a “fiduciary” duty of care to your best interests, which is generally a higher standard than broker-dealers and mutual fund advisors, requiring them to put your interests above their own. Hook? Half a million is enough for some investment advisory firms to take you on, but others insist that the minimum account size be $1 million or more. However, they often bend the minimum account size requirements if they expect your assets to grow.
Two great options for investing $500,000 or more
With investment advisory firms, you are generally purchasing the investment knowledge and disciplined process of the firm, not the skills of an individual. An investment advisor will meet with you to define your investment goals, risk tolerance, time horizon, target asset allocation and other financial considerations in a document called an Investment Policy Statement (IPS). IPS guides other well-skilled portfolio managers working in the background to actually buy and sell securities. These investments typically take the form of pooled funds (similar to mutual funds where you own shares of the fund) or separate accounts (managed like a pool of funds, except that you actually own the individual stocks and bonds and can often customize their contents). Your investment advisor then reports to you regularly.
A full-fledged portfolio manager or investment advisor typically holds the designation of a respected Chartered Financial Analyst (CFA), although some have the less rigorous but still highly regarded designation of Canadian Investment Manager (CIM). They typically charge 1% to 1.5% of assets per year or less for very large accounts.
If you decide to use the services of an investment advisor, it’s worth shopping around: investment philosophies and approaches vary from firm to firm. Referrals from professionals such as financial planners and accountants can help you shortlist candidates for an interview. Additionally, a professional referral can help you open doors even if you don’t exceed the minimum account size. You can also find a list of companies in your province, including minimum billing amounts, on the website Canadian Portfolio Management Association.
Still want to decide?
If you need investment advice but want to accept every trade, a full-service broker may be your best option. They are generally just advisors – you make the actual decisions about what to buy and sell – unless they are specifically licensed to provide “discretionary” management. Brokers operate under a variety of names, such as “investment advisor” and “wealth advisor” – they usually don’t use the title “broker” much anymore. They are licensed to buy and sell bonds, stocks, exchange-traded funds and mutual funds, and their brokerage may be bank-owned or independent. Often, the company will provide support for other services, such as financial planning or estate planning, at no additional cost.
With brokers, you are purchasing the particular skills and expertise of a specific broker rather than a brokerage firm, although company research and other services are important. Brokers run their own business, maintaining great independence within a larger company. Skills and qualifications vary greatly. The minimum qualifications required for licensing are quite basic, but many brokers have a wide range of additional educational and professional qualifications, as well as knowledge that comes from experience.
Traditionally, brokers earned a commission on each trade, but now they likely charge a set percentage of assets (typically 1% to 2% of assets per year for a balanced account, with larger accounts often getting better rates). Experts differ on which payment option is best. If you’re a buy-and-hold investor, you’ll likely pay lower fees plus commission, “but be careful that your account doesn’t change,” Heath says. Paying fees as a percentage of your assets is probably cheaper if you trade a lot and is generally more transparent. Individual brokers usually have a lot of freedom in setting their own minimums and rates.
One of the challenges brokers face is that it is difficult for them to control each client’s portfolio. “The problem is that brokers tend to have a diverse set of clients, and every portfolio is different,” says Gordon Stockman, a certified financial planner with Efficient Wealth Management in Mississauga, Ont. Some brokers deal with this by presenting their recommendations from a limited menu of securities (sometimes from a short “focus” list recommended by the research department). But when your broker decides it’s time to sell one widely held security and buy another, making a change on every account is still daunting because the broker has to contact each client individually. Therefore, it’s easier for brokers to effectively manage the securities in your account without neglecting you if they act more like investment advisors, Stockman says.
Another approach is to hire a broker to advise you on your ETF investment portfolio. This greatly simplifies the task of controlling the contents of your account, but in such cases they should charge a lower fee.
Finding a broker you can trust can be difficult because there are many differences in skills and training. Licensing requirements provide basic investment knowledge, but do not provide top-level advice. Referrals from professionals such as financial planners and accountants can be helpful, as can referrals from friends and family if they are particularly knowledgeable about investing.
Interviewing at least three candidates before making your choice is a good idea because it will give you a better idea of what awaits you. After all, there are many stories about brokers who ended up becoming brokers.
