(January 2008)  Aggressive strategies are not always detrimental when constructing an investment portfolio. The problem is most investors are unsure of what it means to have an aggressive investment strategy. How does this investment style impact returns and when should an aggressive investment strategy be adopted? Moreover, if you are an aggressive (or conservative) advisor, how can this impact the advice you give?

“If proper planning has occurred, the advisor should never have to be aggressive with the client’s serious money,” says Peter Merrick, CFP and president of MerrickWealth.com, a fee-for-service financial planning and executive benefit consulting firm in Toronto. “Where advisors might be aggressive is with a small portion of a client’s overall portfolio, like [putting] 5% in gold, for example.” However, Merrick emphasizes that a “trusted advisor should be the voice of reason for the client. Remind the client of the plan and keep them focused on their goals.”

Marc Lamontagne agrees with Merrick, but he also believes that if an advisor has an investment philosophy that is not aligned with the client’s investment goals, this should not have a bearing on the portfolio, at least in theory. An Ottawa-based CFP with more than 15 years’ experience, Lamontagne explains that every advisor is required to assess a client based on several different factors to help advisors ascertain the best investment strategy for the client based on their risk tolerance and risk aversion — a strategy that is separate from the advisor’s personal investment philosophy.

“It’s not unusual to see an advisor’s portfolio much more aggressive than a client’s portfolio,” says Lamontagne. “Part of the reason is we are more knowledgeable and have a good understanding of what the risk is and willing to tolerate much more losses than a client would.”

Some aggressive advisors, though, “tend to advertise their expertise by advertising their rate of return, as opposed to advertising a service or advertising financial or comprehensive advice,” says Lamontagne, citing advertisements from daily newspapers that boast a rate of return around 20%, as examples. “When you put that upfront, you are an aggressive investment advisor.”

However, some advisors who have aggressive investment strategies are not aware that their investment strategy is aggressive, says Douglas Nelson, a Winnipeg-based CFP. “Some do not truly understand just how aggressive [an investment vehicle] really is until they go through a market downturn.”

He also points out that some strategies, using options for example, are not inherently risky, but can be in certain contexts.

For that reason, Don McFarlane, CFP and an independent Assante advisor in Thornhill, Ontario, believes advisors need to be better educated about investment vehicles and the ramifications they can have on the client’s portfolio.

McFarlane recalls years ago, when he was first building his book, he received a call from a branch manager who suggested McFarlane put his clients in a particular segregated fund. He asked why and the manager’s initial response was that McFarlane would get a higher commission. When pressed further, the manager explained the fund had a longer deferred sales schedule that committed clients for an additional three years, and enabled the company to build in higher commissions.

“That’s not how I do business,” he says. “I could be a star in a hot market and push my clients into the flavour of the month, but I know, sooner or later, chickens come home to roost.”

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According to Nelson, the best-run advisor operations are those that clearly describe their investing style upfront. McFarlane is perhaps a good example: “I manage my own funds and most of the funds I recommend I hold in some form or another.”

Aggressive strategies

Merrick says there are five different ways an investor will look at maximizing their returns: Wealth preservation, tax minimization, creditor protection (if applicable), wealth accumulation and wealth distribution. “When you rate a client on their desire and they rate high on number four — wealth accumulation — you know their investment goals are more aggressive.” A client, then, is either aggressive or not, he says. An advisor may be able to adjust what a client is doing with their portfolio by educating them — teaching a client that GICs may not be the only method for investing money and securing the principal, for example — but they cannot teach a client to be aggressive.

Lamontagne believes the conflict between style and strategy really comes up when a client wants a more aggressive strategy than is comfortable for the advisor. “The problem with letting a client be in a more aggressive portfolio than an advisor is comfortable with is that ultimately the advisor is responsible for that portfolio,” he says. “When the client blows themselves up, the advisor will, eventually, be blamed.” Investors looking for consistent 12% to 15% rates of return “have unrealistic expectations,” he adds.