How Not to Invest

This post is written by guest blogger Peter McMurtry. In this post Peter asks, Are Your Investment Advisor’s Cookie Cutter Asset Mix Recommendations Hurting Your Performance?”

CookieCutter $  Most retail clients are very aware that “asset mix” is the single most important variable in investment performance, but they would be surprised to learn that their advisors largely do not make pro-active investment decisions. Active asset mix investment decisions based on projected returns for each asset class are the exception, not the rule.

It’s all About Compliance
Compliance departments have become so important that they frequently override any actual active asset mix decisions that are made. The analogy is comparable to the medical community in the US that is afraid to perform procedures that are in the best interests of the patients for fear of being sued.

Clients are becoming much more investment savvy than ever before and are more impatient with legal jargon combined with flip marketing phrases. What the clients need, and want, is real advice that can benefit them. What they don’t need are simple strategies that protect their advisors’ interests only. I have seen retail client portfolios with the same asset mix throughout an entire economic and stock market cycle without any recommendations provided whatsoever. This is not investment  management, but purely sales tactics and adherence to strict compliance rules.

Cookie Cutter Investing
Whether your monies are managed by a bank branch, broker or financial planner, your asset mix selection will be a choice of four or five cookie cutter pie charts with titles like Income; Income and Growth; Growth; or Aggressive Growth. Each of these options usually offers a range of minimum and maximum levels of cash, fixed income and equity weights.

Despite their apparent interest in your risk tolerance and time horizon, these categories are essentially created by investment companies’ compliance departments to ensure that they are not sued by any disgruntled clients. Their asset mix selection is solely based on assessing a client’s tolerance for market volatility combined with a review of the age and time frame before any income needs become the number one priority for the client.

100 Minus You
Another traditional asset mix strategy still used by many advisors is to subtract 100 from your age, and this will determine your equity weight exposure. Many years ago I began to manage my grandmother’s monies when she was in her mid eighties. If I had chosen to use the 100 less her age strategy, my grandmother’s stock exposure would have been a maximum of 15%. I decided to actively pick her asset mix and maintained an even balance between stocks and fixed income for the remainder of her life until she went into a nursing home at the age of 103. By maintaining sufficient equity exposure I was able to grow her capital at the rate of inflation and this greatly helped to finance her nursing home expenses when she needed it at the end of her life.

You Deserve Better
Both large institutional pension investment managers and investment counsellors have traditionally actively managed their asset mixes for their clients. It is unfortunate that this is not the norm for retail clients managed by bank branches, brokers and financial planners.

This lack of flexibility, combined with frustration over high management fees and poor performance, are the main reasons that the discount broker industry has flourished in recent years.

Retail clients deserve the same benefits from active asset mix strategies that large pension funds continue to receive, regardless of the type of organization managing their monies.


Peter McMurtry, B.Com, CFA is an Ottawa-based financial writer with 30 years experience in the financial services industry. Peter has worked, in both Canada and Bermuda, in  capacities including Investment Analyst, Portfolio Manager and Financial Planning.
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