shoemaker

Madeline Woodhead doesn’t have to wait until 3:55 pm anymore.

The ScotiaMcLeod advisor used to put in her own orders at the end of the trading day, as per client priority rules. But, she says, “It would be 4:05 and I would go, ‘Oh crap, I meant to do this before the markets closed.’ ”

After this happened a few times, she worried that her husband, Tim, whose portfolio she also managed, wasn’t getting the best possible attention. “In a fast-moving market like 2008, when you’re taking clients out of things, some days you’re trading until close,” says Woodhead, who’s based in St. Catharines, Ont. “I didn’t get out of a couple things I would have gotten out of.”

So, she decided to switch her portfolio, and Tim’s, to managed product. She’d done due diligence for clients well-suited to managed money—people who didn’t want to make frequent decisions, but were below the threshold for discretionary management.

“We chose the solution for clients,” she says, “and I thought, ‘Why wouldn’t I look at it for myself?’ I haven’t looked back.”

She’s also been able to use this change to bolster her relationships. She says, “I can tell a client, ‘I’m not thinking about my money through the day; I’m thinking of yours.’ ”

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John and Rebecca Horwood of Richardson GMP in Toronto also use third-party managers for clients’ and their own portfolios (see “The Horwood process,” below).

Doing that “removes the potential for a conflict of interest,” says John, who’s director, wealth management. “It also means we don’t have to segregate our investments. We tend to adhere to the long-term strategy that we recommend to clients within our own portfolio.”

Adds Rebecca, portfolio manager and director of wealth management, “John and I, as well as all 10 members of the Horwood team, invest in the core strategies [that are] recommended to our clients whenever possible. We’re paying the same costs [1% of AUM]. And our clients feel secure knowing that when it’s time to buy or sell, we are all on a level playing field.”

Nevertheless, the client always comes first.

“Recently, a closed-end fund proved to be [popular] with clients, to the point where my order wasn’t able to be filled,” says John. “In fact, none of the team orders were able to be filled. So we had to buy it in the open market.”

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Don Cromar, senior vice-president of private client services at PI Financial Corp. in Vancouver, has experienced similar scenarios. He runs ETF models for himself and his clients, and makes sure to enter his own orders last.

But he doesn’t see that as a disadvantage. “If you’re trading in highly liquid securities,” he says, “then we’re probably talking about pennies in terms of differences” between the advisor price and the client price.

And, he adds, it’s possible for an advisor to get a better price than a client, even if the client order was placed first. “Maybe it’s the end of the day, and the pro enters his or her trade, and after all client trades have been executed and because of market movement, the pro ends up with a better price.”

If that happens, Cromar says, “I have seen situations where a pro will voluntarily give the client the better price, just to put their clients’ interests ahead of their own.”

Discretionary advisors could also use average pricing. “Everybody’s getting the same price,” he says, “and no one is disadvantaged by timing.”

A peek inside a pro portfolio


Madeline Woodhead
Profession: Wealth advisor, ScotiaMcLeod
Age: 55
Thoughts on risk: “I’m expecting in 10 years I’ll still be here, by choice. So I’ve got at least two potential corrections I could live through. I’m willing to take on that risk, because I’m going to have earning years in there.”
Madeline says: “I’m not invested in ETFs. In clients’ portfolios, we’ve been using ETFs for special situations. But usually, if I’m putting European exposure in a portfolio, I would rather use a good European mutual fund that is managed actively.”

Better perspective

Advisors also outsource their own funds to gain more objectivity.

“I’ve often seen advisors take more risk in their own portfolios than they would for their clients, in part because they’re more sophisticated; they tend to have more risk tolerance,” says Cromar, who himself maintains a conservative, passive portfolio.

Read: Email Your Clients: Best of Advisor to Client 2014

“But, in many cases, they probably take too much risk.”

Woodhead agrees. “I’ve got more than 1,000 shares from my Employer Share Ownership Program. Would I ever let a client be that concentrated? No. But I love the dividend,” she laughs.

She adds, “If I were talking to a client, I’d say, ‘Come on, look at how much of this stuff you have. Let’s look at your goals and objectives. Is this the best choice for you? Let’s look at selling some of it.’ But did Madeline do that? No.”

A peek inside a pro portfolio

Tom Trainor
Profession: Managing director, Hanover Private Client Corporation
Age: 10+ years away from retirement
Thoughts on risk: “First, we look at financial capacity, which incorporates their financial profile, how much someone’s spending and how much longer they’ll be working. Then, we look at emotional tolerance for risk. You can never increase the equity weight of a portfolio above the financial capacity for risk; you can only decrease it.” He tells clients he’s at 100% equities because of his knowledge and the fact that he’ll be working at least 10 more years. Exposures are through ETFs and managed product.
Tom says: “We start with the global equity weighting, and then we tilt toward value and slightly smaller caps. The only area with overweighting is Canada, which has a 4.5% global weighting. That’s reflective of a small home country bias for the benefit of our clients, but we’re looking at going down to market weight. We also hedge off most of the currency exposure.”

Tom Trainor, managing director of Hanover Private Client Corp., agrees advisors don’t always serve themselves best.

“We usually model client portfolios, but I haven’t done that for myself, having done that for enough clients,” he admits. Still, his portfolio survived the crisis, so he’s confident it’s well-structured (see “A peek inside a pro portfolio,” for Madeline, Tom and Tim). What’s more, “there’s a lot of liquidity in our portfolios, so I could sell off if push came to shove.”

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Unlike his clients, though, Trainor also has an experimental portfolio. “If we see a new investment we like, I’ll often invest in it first to see how it handles different market cycles. It’s like a firm’s R&D fund, but it’s in my name. We’re not going put these investments in client portfolios until we know the product.” For instance, he put in a few long-dated options several years ago.

He’ll allocate up to 5% to this portfolio, but nothing’s in it right now.

The Horwood process

Every investment John Horwood buys has to fulfill five criteria. They must be:

  1. Scarce. The investment or fund cannot be widely available.
  2. Symbiotic. It has to be something he’d invest in alongside clients. He also prefers funds in which portfolio managers place significant amounts of their own money.
  3. Smart. The portfolio managers must have a vetted, successful process.
  4. Small. “Rarely can you get huge strategies that are successful,” he says. “And we’ve seen that larger funds find it more difficult to outperform the benchmark.”
  5. Scalable. “We want to offer them both to accredited and non-accredited investors.” Most of the Horwoods’ clients, and their entire team, are accredited.

Each investment also goes through a tax screen. “The investment portion of the team reviews each of our preferred strategies on a regular basis,” says John. He also holds weekly meetings with portfolio managers, “where the whole team is invited to ask questions, and listen to how they’ve done.”

Adds Rebecca, “Anyone on the team can bring a new investment to the group for review, but everyone works on the due diligence.” John makes the final decision.

How clients react

The Horwoods make a point of telling clients they own similar investments, but they also say, “Yes, we will buy it; but we may have to buy it later if there’s no capacity within the original issue.”

And, says John, “if I was recommending something that I wasn’t invested in personally, then I’d explain why not.”

He says that could happen with money market funds and traditional bond investments. “If we’ve got clients who need to keep money in a money-market fund for a house or business purchase over a short period, that would be a divergence [from our portfolio] because we wouldn’t hold our money in an obligation like that. But we’ll do the same amount of research.”

Woodhead understands clients want to know what their advisors hold, but she says the information may ultimately be irrelevant. Her needs are usually different than clients’, so her owning something doesn’t mean they should, too.

When they ask, “Do you own this?”, she tells them, “I’ll give you the answer eventually.” First, she says, “just as I did for you, I did a financial plan for my husband and me. He wanted to retire before he was 65, so he’ll be doing that. And I knew I was going to work until I was at least 65, so we needed a strategy and solution that mirrors those two goals, and the tolerance for volatility that each of us have.” She’ll then detail her holdings if asked, adding no client has questioned why she owns a managed solution. “The thing they find most interesting is that I, too, have a financial plan.”

In fact, only her husband asked why she switched. “I said, ‘Tim, this increases my sleep factor. This is one more thing that I don’t have to be thinking about.’ ”

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She admits she pays marginally more than if she managed the money herself. She pays the same fees as her clients, and “the sleep factor is worth the money. Knowing we’re getting consistent, active management of sectors like international equities or high-yield bonds—that’s worth it.”

Those asset classes were absent from her portfolio prior to the switch.

No matter how advisors manage their own money, explaining the process to clients can show how you add value. While it may seem to you as if you’re just following rules, to them it’s a window into how you look after their interests.

A peek inside a pro portfolio


Tim Woodhead, Madeline’s husband
Profession: Correctional officer, bagpiper
Age: 63
Thoughts on risk: “He does not like volatility at all. He says he gets that all day at work. He doesn’t want to see it in his financial life.”
Madeline says: “Tim’s performance is better than when I managed it, but I don’t think that’s necessarily reflective of my skill. But, now he’s got better diversification, and I monitor the portfolio managers.”

by Melissa Shin, deputy editor of Advisor Group

Originally published in Advisor's Edge

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