Updated: Sep 2
In 2016, the Ontario Securities Commission mandated that investment advisors (and dealers) must provide their clients with basic information about a mutual fund prior to buying it for them. This is so that the clients would have the ability to make a somewhat informed decision on whether or not to invest. Each fund must show its performance over a several year period, in comparison to an appropriate index benchmark. Additional information is also required, including the fund’s biggest 10 investments and the nature of its composition. This is partly to help people determine if a fund, after fees, had fared better than other investments, such as an exchange-traded fund (ETF). In contrast, there is no requirement for an investment advisor to show any type of professional track record or history to a prospective client. That’s a problem. Hiding the Truth Why don’t advisors have to disclose their performance? Surely the industry and its regulators understand it’s important to do so, as evidenced by the OSC ruling on mutual fund performance. How are people supposed to make an informed decision to work with an advisor if they have no information on the advisors’ track record? For example, does the advisor add value over a relevant benchmark, such as a passive balanced portfolio? Have they performed well for their clients? You may hear that it’s impossible to show a track record because every client is so different, and that everything is tailored to each client. In my 20 years of experience in the industry, I’ve learned that there’s a lot more lip service surrounding customization than one would think. Many advisors use cookie-cutter models for all of their clients, perhaps with a small tweak here and there. Many others have only three model portfolios that they slot their clients into; conservative, moderate, and aggressive. People tend to act according to the manner in which they are incentivized; if it was good for advisors to show their track records, it would be happening already. Despite claims to the contrary, the industry actually does know how to produce aggregate performance reports for investment professionals. It’s easy to make a composite of all clients, or take the mean, median, or mode of their clients’ returns, or show if advisors have earned their performance-based fees. People should be able to make fully informed decisions, based on real information, without the smoke and mirrors. Know What You Need to Know Perhaps the value of an advisor is more in crafting an investment strategy, keeping clients calm during troubling times, helping them plan their futures, and less in trying to pick the best stocks. It would seem that a portfolio of low-cost ETFs, like those from Vanguard or iShares, complemented by an allocation to alternative investments (those that are uncorrelated to the markets), might be in order for most people. Many clients have similar objectives — e.g. “Make me money and don’t lose it”, or “Protect what I’ve invested and help me grow it.” The advisor can help determine what that means to each client and what the asset allocation should be. If your advisor is choosing the individual stocks or mutual funds for your portfolio themselves, ask for evidence that they’re doing a better job than a low-cost ETF would do. You’re paying for them to do this; make sure you’re getting value for your money (and make sure you know how much you’re paying). Any investment selected should have a proven track record of beating a similar investable index, on an after-fee basis, in the appropriate currency, over time and over at least a market cycle. Shouldn’t investment firms insist that their advisors provide this disclosure to clients? Shouldn’t the regulators? There’s so much that goes into the decision of hiring an advisor. Performance history is just the tip of the iceberg and should at least be one thing that’s clear. It’s definitely something a client should ask their advisor for. I’d want to know. Wouldn’t you? Jesse Kaufman is the CEO of AdviceCheck™, which he established in 2019. Formerly a Portfolio Manager at The Kaufman Wealth Group of Richardson GMP Ltd., Jesse is a Chartered Alternative Investment Analyst, Chartered Investment Manager, Accredited Investment Fiduciary, and a Fellow of the Canadian Securities Institute.