Counselling - WHAT IS INVESTMENT COUNSELLING?

Investment counselling is the provision of portfolio management services for different types of clients such as pension funds, other institutional portfolios and private individuals. Our examination of the industry will be limited specifically to the private client area.

Private clients have traditionally had their investment needs met by retail brokerage firms and by fixed term deposits offered by banks and trust companies. Trust companies also had investment departments that were dedicated to managing estates and trusts. In addition, a few very wealthy families had access to investment counselling firms that managed pension funds.

Over the past twenty years, the investment market place has changed dramatically, often leaving confusion in a client's mind about the differences between firms. As more and more Canadians have accumulated liquid assets that need to be invested, the competition by financial services firms to attract these dollars has increased. With the growth in mutual funds, more investors than ever before have been able to experience the benefits of professional management, and with the changes to government regulation, greater numbers of firms are able to offer professionally managed products and services to these individuals. Here, then, is a description of the advantages that investment counselling firms offer.

The primary role of investment counsellors is to meet the unique investment needs of each client. Individual client objectives for income and growth can vary widely. Therefore, the first step in the investment counselling process is to meet with each client, determine the nature of his or her objectives and develop a portfolio structure that will meet these requirements. Typically this process is documented and results in the creation of an investment policy statement for the client. Often the portfolio manager will work in conjunction with a client's accountant, lawyer, financial planner or other consultants to come up with an investment plan that addresses all aspects of his or her unique situation.

The responsibility for selecting the proper securities to meet each client's needs rests solely with the designated portfolio manager, who is given complete discretion by the client to trade securities on his or her behalf. The discretionary nature of the investment counselling option is a distinguishing feature of the industry. For some clients, relinquishing control is initially difficult to accept, but given the education and experience required to qualify as a portfolio manager and the high standards of professionalism that govern the industry, it is more readily accepted over time. Investment counsellors report regularly to their clients on the investments held in their account and the market value of those financial assets. If a client is not satisfied with the services provided, he or she can easily move their funds elsewhere.

Investment counselling is a fee for service business. Fees are calculated as a percentage of the market value of the portfolio being managed. Most investment counsellors have a predetermined fee schedule that reduces as the size of the portfolio grows. By comparison, fees for investment counselling services are considerably lower than the alternatives of using mutual funds or the services of a traditional stock broker.

Funds which are invested by investment counsellors are held by an independent custodian, usually a trust company. The value of a client's investments are based on the underlying securities held in the portfolio. As an example, a portfolio may hold Government of Canada bonds. These bonds determine the portfolio's value, and are not affected by the financial health of either the custodian or the investment counsellor. Cash flow into and out of the account, other than for the purchase and sale of securities, is controlled by the client at all times. Fees for custodial services are either billed separately or are included in the investment counselling fee.

Investment counsellors do not receive any compensation or commission for buying and selling securities. Being free from this potential conflict of interest means that the investment counsellor is rewarded only for managing the portfolio in accordance with the client's objectives. For many investors, this freedom from a transaction bias is the most attractive feature of the investment counselling option.

Investment counsellors are regulated by the provincial securities commissions which govern the distinct qualifications for education and experience the individuals and firms within this industry must meet to become registered. In contrast, brokerage firms and their employees are regulated by the IDA (Investment Dealers Association) and operate under their own set of standards and self-regulations. Although mutual fund dealers are currently regulated by provincial securities commissions, their association, the Investment Funds Institute of Canada (IFIC), is moving to self-regulatory status through the IDA.

Additionally, one attribute which differentiates the majority of investment counselling firms (and all those listed in this brochure) from other money management organizations, is the membership of most of their employees in AIMR (Association of Investment Management and Research), the highly respected international organization which supervises the strict ethical and professional standards of this industry. Many portfolio managers carry the Chartered Financial Analyst (CFA) designation which is awarded by AIMR. The CFA designation is recognized internationally as the highest standard of education in portfolio management.

The following chart demonstrates the relationship between clients and their investment counsellor. Investors who use the services of an investment counsellor find that the money manager manages the custodial relationship and manages the execution of security transactions. Many clients will use the services of a consultant or trusted advisor, such as an accountant or lawyer, to assist in the selection and ongoing monitoring of the manager.

• INVESTMENT SERVICES PROVIDERS
• INVESTMENT PERFORMANCE
• WHO SHOULD USE AN INVESTMENT COUNSELLOR?
• PORTFOLIO STRUCTURE OPTIONS
• INDEX MANAGEMENT
• RISK TOLERANCE