Finances And Friendship

Kelly Osbourne has it right when she says: “I guess I have friends around me but when you’re paying them, can they ever really be true friends?” Lawyers, accountants and financial advisors are expected to offer friendly and cheerful service. But it’s wrong to think they provide their service because of friendship. If in doubt, try suggesting that you’d like to continue using their service, but you’d like to stop paying for it!

Few things are more important than good friends and we are fortunate if we have three or four true friends who will stand with us during good times and bad times. But we should distinguish between the true friend who will look after us if we are in need and the service provider with whom we’re ‘friendly’ while working together for our mutual benefit.

We expect some enjoyment from good long-term business relationships and for this to happen the prerequisites are positive results, mutual respect, understanding, fairness, honesty, maybe some common interests and for the person providing the service, income commensurate with the service provided.

It’s wrong to think that you can be unfair or take advantage of another person and justify it by saying “it’s not personal—it’s only business”. On the other hand, it’s also wrong to delay replacing a service provider who is unable (or unwilling) to deliver the service you need. This delay happens because of the mistaken belief that you are involved in something more than a business relationship. You owe loyalty to family, friends and community. To business associates, you owe respect, honesty, and fairness.

I met with a retired gentleman recently who has outgrown the services that his financial advisor provides. This individual is now an informed investor and he realizes that a number of important steps are missing from his wealth management process. His portfolio should be in a well-diversified ‘goals-based’ asset mix, he should have a financial plan, he should be following a disciplined investment process (which is more important than trying to try to find the best investment product). His portfolio should be re-balanced on a disciplined basis, he needs an Investment Policy Statement (IPS) that provides enough details to hold his advisor accountable and he needs a quarterly performance report that shows performance compared to the agreed-upon goals. He should be paying attention to income tax. He should be able to measure if he is receiving value for the fees he pays, he should be working with a fiduciary and finally, he should be using suitable investment managers that provide both the return and risk characteristics necessary to achieve his investment goals. However, this gentleman is reluctant to move his account because he feels a sense of loyalty to this financial advisor with whom he’s had a 20-year ‘friendship’.

It’s often hard to decide before we understand what the real cost is. But when the cost has been quantified, the investor can then make an informed decision. For example, on a $1,000,000 portfolio, if we assume that wise portfolio management would help an investor attain their goal by adding 1% per annum, then over the next 20 years, wise portfolio management would be expected to make an after-tax difference of about $250,000.

When the potential difference has been calculated, the investor should follow the path that is expected to deliver the greatest satisfaction. In this case, the choices are

(1) avoid making a decision and continue with the existing relationship

(2) make a change and give the additional $250,000 to family or charity, or spend it, or leave a larger estate.

Just as good parents are fair and logical and they are also emotional when it comes to the well-being of their children, wise investors need to follow a disciplined investment process. They need to be logical and fair in their dealings with their advisor and they should not let their emotions get in the way of making fair and logical decisions about the business of managing an investment portfolio. In other words, wise investors should be like ‘Mr. Spock’.

No one enjoys conflict and no one wants to tell someone they like and respect that they’re going to take their business elsewhere. It is important to realize that in some situations it’s just not possible to avoid disappointing someone. Either you disappoint the service provider (who does not provide the necessary service) or you disappoint your heirs or the charity that would eventually receive a larger share of your estate—or you disappoint yourself if you eventually need to cut back on your living expenses.

Ask yourself, who is going to look after me in my old age, will it be my family or community or will it be my financial advisor? If there is a duty of loyalty to anyone, it should be to the people who will look after you and/or be your advocate when you are unable to look after yourself.

We know financial advisors sometimes accept a large up-front payment when they move to a different investment firm. If they make this change it is only after doing an analysis and concluding that it is in their best interest to make the switch. (It may also be in the client’s best interest—but the switch is never made if it is not in the advisor’s best interest to do so). If advisors switch companies when it is in their best interest to do so – and they ask their clients to go through the aggravation of following them to the new firm, why would a client not move to a new firm when it is in the client’s best interest to do so? If a client becomes aware of services that are necessary but unavailable with the existing advisor—the client should be fair and honest in their dealings with the advisor—the first priority should be to look after themselves and their family.

If the advisor does not offer to provide you with the services you need (for example, a proper goals-based performance report or an IPS that is in sufficient detail to be able to hold the advisor accountable), why should you put your advisor’s interest ahead of your interests or the interests of your family? Why do you feel a loyalty to support the advisor when the advisor does not give you the tools necessary to manage your portfolio wisely?

In some cases, the most important issue is educating the next generation about wise investment management practices. If the wealthy investor stays with a firm that does not have a business model designed to minimize conflicts of interest and does not provide the wealth management techniques mentioned above—how will the children learn how to manage the money wisely? Over their lifetimes, the difference between wise money management and poor money management could be staggering.

If your advisor does not provide the wealth management techniques mentioned above—you should ask yourself why. Does the advisor believe that a benchmark performance report or a detailed IPS is not important? If this is the case you should have concerns about the advisor’s experience. Or maybe the advisor just has a different business model. Then you have to ask yourself —is the advisor’s business model designed primarily to suit the needs of the advisor or primarily to suit the needs of the investor? What about transparency—particularly with regard to fees and costs? If there is less than complete transparency—do you owe more than fairness and respect —do you also owe loyalty?

I’ve never heard of a single firm that has the best Canadian small cap manager, the best Canadian large cap manager, the best global small cap manager, the best global large cap manager, the best corporate bond manager, etc. If your investment advisor recommends an investment portfolio where each investment mandate is managed ‘in-house’—you must ask yourself if the business model is structured primarily to suit the needs of the firm or the needs of the investor.

Although the investment process is more important than the product/manager selection, there is an additional benefit when the counselling and product selection firm is separate and independent from the people/firms selecting the stocks and bonds. This additional benefit from the separation of duties is the counselling firm can proactively negotiate fees and replace managers when it is in the investor’s interest to do so. When the manager is ‘in house’ or an affiliate, and passing judgement on their own performance, that’s less likely to happen.

What would Mr. Spock do? Our unemotional Mr. Spock would realize that in a case where the investment portfolio is not being wisely managed—someone is going to be disappointed. If you move your account, your advisor/investment manager will have a lower income and less money to spend. If you don’t move the account your children, your heirs or your favorite charity will have less money to spend. You can delay the decision but unfortunately, you cannot avoid causing someone to be disappointed.

Warren MacKenzie, CPA, CA is a Principal and Stewardship Counsellor With HighView Financial Group. Tel 416. 640.0550.