Alan Acton
Alan Acton is a financial adviser in Ottawa and can be reached at alan.acton@actonfinancial.ca.
Column: Financial Adviser
Be wary of investment advertisements
Posted Date: April 09, 2012
In February, a client showed me a newspaper ad from an investment firm that showed a 47-per-cent return on their client accounts in 2011. “Let’s buy some!” she declared enthusiastically.
Although it would seem easy to jump on the bandwagon and get a great return just from answering an ad, think again. Professional marketing departments cherry-pick portfolios with great returns hoping to quickly increase firm assets. They know that it is human nature to look at short-term investment returns and that people tend to believe historical returns will continue into the future. However, this is rarely the case.
Usually when a specific investment achieves a drastically different return from the broad market, they are highly concentrated in one specific asset or asset class. The investment fund in the advertisement above was probably invested heavily in gold or risky corporate bonds, and maybe even borrowed money to further juice its performance.
Don’t get me wrong, I don’t think having gold or corporate bonds in your portfolio is a bad strategy, as long as it is not the majority of your assets. Exposing yourself to risky assets in small doses is not a bad plan, however a big mistake that investors make is “putting all of their eggs in one basket” and having the majority of their portfolio focused in one sector of the market.
Most of the time, the hot investment of the previous year turns out to be the dog of the current year. As a rule of thumb, if your retirement account is considering an investment strategy that has an expected return of more than seven per cent, you could be taking too much risk.
Companies publish these ads because they know we are wired to be more sensitive to short-term than long-term gains. The ad executives know this, and that is why you see so many ads touting shorter-term performance. One-, two-, or three-year returns dominate investment firm ads, with the firm selecting the best one or two portfolios to publish that year, sometimes choosing from hundreds of funds to find the few that performed well over that time period. If done well enough, it can result in millions of dollars of new deposits for the firm.
There is one sure thing in investments: low levels of risk are associated with low potential returns. High levels of risk are associated with high potential returns. You cannot break this relationship, not ever. Risk can mean not only loss of capital, but complete loss of your investment.
The truth is that you should not pay any attention to investment industry ads. Prospective investments should be thoroughly vetted before considering putting your money there. And remember there is no “free lunch” in investing. A high return goes hand in hand with high risk, even though sometimes the risk part of the equation shows up later. If you cannot understand a prospective investment, or if your investment adviser cannot explain the investment strategy in plain language, you should probably steer clear.
In February, a client showed me a newspaper ad from an investment firm that showed a 47-per-cent return on their client accounts in 2011. “Let’s buy some!” she declared enthusiastically.
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Traditional money managers bewildered by volatile stock markets
Posted Date: January 09, 2012
Headlines like: “How Europe is preparing for a debt disaster,” “The coming economic crash,” and “U.S. and U.K. on brink of debt disaster,” have caused financial shock waves felt around the world. The origin of the current crisis, the economic and political mess in Europe, has sent equity markets plunging worldwide. This has left many professional money mangers scratching their heads on how to allocate their clients’ money, and is even forcing some former “stars” right out of the business.
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It’s not all high-level securities fraud
Posted Date: October 10, 2011
High-profile securities fraud cases like Bernie Madoff often get a lot of media attention, while the examination of financial adviser negligence gets overlooked. According to the Investment Industry Regulatory Organization of Canada, there were a total of 99 enforcement actions against financial advisers in 2010. Twenty-seven per cent of decisions against advisers were classified as due diligence/suitability and misrepresentation violations. In addition, a considerable amount was won in civil suits against advisers in 2010.
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Financial advisory fees must be transparent and justifiable
Posted Date: July 11, 2011
There was a time when brokerage commissions were regulated. Until 1983, when you called your stock broker to execute a trade, she charged fixed commission rates. It was obvious to clients how much they were paying for financial counsel. Fees or commissions for financial planning services, such as asset allocation advice or retirement income projections, were uncommon.
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If it’s a ‘sure bet,’ it’s probably not
Posted Date: April 11, 2011
Investment scams and frauds don’t just happen to the unskilled or unwary investor. Research by the Canadian Securities Administrators, a council of provincial securities regulators in Canada, shows victims of fraud are just as likely to be older, knowledgeable investors, homeowners, well educated, and high-income earners who are confident in their own ability to make investment decisions.
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Portfolio endurance in retirement
Posted Date: January 10, 2011
The need for retirement planning doesn’t end with the onset of retirement. A new retiree’s focus shifts from building wealth to managing and preserving it. One major challenge is to make the investment portfolio supply cash flow for the duration of life — and through different economic and market conditions.
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Retirement income requirements not always onerous
Posted Date: July 12, 2010
I read with great interest the C.D. Howe Institute’s recent paper, “The Piggy Bank Index: Matching Canadians’ Savings Rates to Their Retirement Dreams” by David Dodge, Alexandre Laurin, and Colin Busby. It highlights the challenges faced by individuals who are attempting to save enough for their retirement. These difficulties are intensified by relatively low contribution levels for registered retirement savings plans, and low investment returns.
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Should you incorporate your legal practice?
Posted Date: January 11, 2010
In 2001, many provincial governments changed their incorporation laws to include professionals. Since then, lawyers have been eligible to incorporate their legal practices in Ontario.
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Saving taxes through income splitting
Posted Date: October 12, 2009
Each year, the Federal Government of Canada collects close to $100 billion from individual tax payers; this is the government’s single biggest source of revenue.
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Retirement plan accuracy: overstated rates of return and false hopes
Posted Date: July 13, 2009
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