Did you know that November is Financial Literacy Month in Canada? This year, we’re taking the stage to talk about wealth management in Canada, portfolio diversification, human versus machine investing, and how advisors can build trust with new investors. As a young fintech startup, we at Mako think it’s crucial that advisors and investors have access to technology to make their lives easier, improve their experience, and help them feel confident amidst the rapidly changing financial and technology landscape. What does it mean to build confidence and improve literacy with finances? It means untangling complex topics and explaining them with as little jargon as possible. This year, we're celebrating financial literacy month by talking about some of the hottest topics facing wealth professionals and investors today.
Canada’s wealth is growing. There is more money, more investors, more opportunities, and more wealth management professionals working to pull it all together than ever before. We set out to summarize the state of wealth management in Canada, by featuring some key statistics shared in our video below:
Hi my name is Chandal, and I'm the VP of Marketing and Communications here at Mako Fintech. As part of Financial Literacy Month, we’re asking: What is the current state of wealth management in Canada? To answer this question we’re gonna review 8 key statistics, so let’s get started.
I’m Chandal on behalf of Mako Fintech wishing you wealth in 2022 and beyond. Thanks for watching!
Sources included in this section:
There’s no such thing as a perfect portfolio. In fact, the investment products included in any given portfolio is a very personal decision-making process. A diversified portfolio means that investors have access to a variety of investment products, effectively strengthening their ability to generate a return by not being too dependant on one investing strategy/product or another. There’s a lot to consider to create an effective portfolio, and those considerations can change depending on who you’re talking to. These days many are investing for more than a return, and there's been a rise in interest around impact investing, ESGs and more. We sat down with our President and CEO, Raphael Bouskila, to discuss effective portfolio diversification. Listen to the audio interview or check out the full transcript below:
CN: This is Chandal Nolasco da Silva on behalf of Mako Fintech and I'm speaking with our president and CEO, Raphael Bouskila. We’re going to be talking about portfolio diversification as part of financial literacy month in Canada and we'll cover three questions together, so let’s get started. Okay Raph, question 1, in your opinion what do you think it means to have an effectively and efficiently diversified portfolio?
RB: Thanks Chandal, I appreciate it. So I'm not a wealth manager. I've been an investment dealer before, and I've been chief compliance officer, so I had to learn the answers to these questions. And obviously I have my own money [invested], and I work with a lot of wealth managers, but you know all these answers are kind of disclaimed by the fact that I'm not a professional wealth manager.
So in my view an appropriately diversified portfolio should have enough exposure to different asset classes, that its able to withstand a wide range of market disruptions. Usually, it’s some kind of negative or positive event… they’ll affect different asset classes differently. So by having your eggs in different baskets you’ll be well insulated from major risk. For example, there’s some kind of change in the housing market… both by having some exposure to it, you won’t miss out on the opportunity to make money. But if it’s something negative, you’re also not going to lose all your money if all of it were in the housing market for example. So at a high level, a properly diversified portfolio should grow in a growing market and yet not be at risk of major losses in a declining market.
You asked also about an efficiently diversified portfolio, and I would say that that’s a portfolio that achieves those goals with a minimum of different positions. There’s a lot of good reasons to have fewer positions in your portfolio. Being less complex means a portfolio is easier to rebalance and administer. Every time part of your portfolio goes up or down, you're going to need to rebalance it a little to make sure that it stays with the right allocations and the fewer positions you have, the easier it is to do that..the less trading fees you incur doing that.
There is a tradeoff between being completely diversified and being efficiently diversified. If you were completely diversified then you’d have a proportional segment of absolutely everything you could invest in under the sun, like shares of palm oil futures or something like that. I don’t think everyone should have palm oil futures in their portfolio but I’m not a wealth manager. I think it comes down to your portfolio and how large it is (probably the Canada Pension Plan has a proportion of palm oil futures in it). You’re going to have to talk to your advisor and choose a degree of complexity that’s right for your portfolio.
CN: Let’s just take a step back - what does a typical portfolio look like and has that changed over time?
RB: Yeah, so I'm not entirely sure what a typical portfolio looks like these days because it's actually changed quite a lot over time. I think common wisdom used to be that the classic balanced portfolio was 60% public stocks and 40% bonds. These days that's ancient history. Most would say that the bond allocation should be a lot lower these days in this age of unprecedented low-interest rates. These days it’s the stock portfolio that’s been driving a lot of the growth. I think a well-diversified portfolio in the modern era should absolutely include exposure to all kinds of alternative assets (that aren't even really that alternative but still kind of fall out of that traditional bucket). So you know I mentioned real estate, private companies, maybe for example commodities or other types of investments. So I think that there are a lot of things that you can invest in and your advisor can guide you on what’s appropriate for you.
CN: Yeah that makes a lot of sense. Talking about alternative investments, we’ve heard a lot this year about ESGs, impact investing, alternative investments… do you think there’s more of an appetite today for these types of investments than in the last ten years?
RB: Yeah that’s a topic that’s close to my heart having previously started an impact investment company. It’s definitely been a gigantic increase in interest. I think when I started my previous company we were speaking to large wealth managers and having them say “we’re barely getting a grip on early ideas.” Like not including gun manufacturers or tobacco companies, and now these same companies are launching impact portfolios and marketing this aggressively. So there’s definitely been a seat change, it’s a real industry, and there’s a lot of studies out there and data showing that ESG or impact investing can equal or outperform non-impact investments. So I think it’s a huge part of the market these days. That said, one of the things that’s driving it is people’s interest in it. I think that one of the stories of the investment industry has been the personalization of it. People’s portfolios are being tailored to their own needs and circumstances. Impact investing is definitely a piece of that. People are environmentalists, but an institution is not an environmentalist. It doesn’t live and breathe the impact on the environment the way an individual does. The person who is active in the David Suzuki Foundation for example is going to be active as an impact investor and it’s appropriate for them to be.
If you want to learn more about ESGs we came across this helpful soundbite interview from Investment Executive, or you can check out Wealth Management Canada’s complete guide to ESG here.
Would you trust an algorithm with your money? Millions already do with consumer-first digital platforms like Wealth Simple, QTrade and more. The investing landscape has become very dynamic and EY captures the current state of affairs well here:
“Wealth and asset managers are experiencing a time of exponential change. FinTech disruptors continue to shift the rules, newer investors aren’t flocking to older channels and cost pressure is relentless. From data and AI, to tech platforms and partners, the questions have never been bigger, and the stakes have never been higher.”
To understand the pros and cons of algorithmic platforms versus working with an experienced financial professional, we sat down with Raphael Bouskila, Mako’s President and CEO. Listen to the audio interview or check out the full transcript below:
CN: In this segment, we’re talking about human vs. machine investing, which is a topic that's near and dear to our hearts. So we're going to be asking three questions under this topic and Raph I can't wait to hear your answers. Okay so question 1, what are the advantages of online and algorithmic platforms that take care of investing for you?
RB: Hi Chandal, thanks for taking the time again. I appreciate it. We're not in the robo advisory space ourselves. We have many clients at Mako who we help them with our technology to get better and more efficient, so know we know a little about the topic. Myself being a client to some of these firms, I have some personal experience, but just giving a bit of a disclaimer to my answers here in this segment.
That’s a great question. I think there's a lot of advantages and you gain a lot with an automated platform. For me, it's a lot easier to manage. I have some of my money in one of these platforms and I barely think about it. It's being rebalanced all the time. The costs are much lower in terms of expense ratio for the same kind of rebalancing. Again you're missing a lot with that, but on just the mechanical portfolio rebalancing you're getting a great deal there. I would say that two other advantages are up-to-the-minute reporting, so you always have that login where you can see your position, see how your portfolio is doing historically. And finally, this is an advantage for me and anyone who doesn't love doing taxes, but typically they’ll take care of your tax forms for you, and end up with much simpler tax forms, so it kind of works out what your cost basis was and how much you have to report.
CN: So let's talk about the other side of the coin then...what are the risks of not having a seasoned professional managing your money?
RB: I wouldn’t exactly phrase the question that way. You know it's more what’s the benefits of having a real wealth manager? Some of the clients of robo advisory firms may not even be aware that they're missing out. A wealth manager isn't just balancing your stocks and bonds, that's kind of the very lowest mechanical level of what you get out of the wealth manager. Really they're your advisor on your life. Intimately intertwined with you because you're thinking about retirement planning, on planning for college for your kids, when is the right time to buy a house, and when should you get life insurance, for example. An advisor can help you with all of those decisions and they can connect you with service providers like a mortgage broker when you may be in need of one. So I think that you get a lot of value out of having one of these advisers, particularly when you get to a stage in life when these kinds of services are more about the long-term and your life circumstances are far more critical.
CN: There are clearly pros and cons and two sides of the story depending on who you're asking. Like you said, what stage of their life they’re in ...but do you think the platforms that we’re seeing emerging like to Qtrade, Wealthsimple, and all the rest will ever become status quo?
RB: Yeah, I do actually. I think that similarly to how you know we’re using online platforms to automate everything for us (I can’t think of the last time I used to travel for example), everything you’re going to be trying to do with your money is going to be automated, and it’s going to be appropriate to be handled by one of these one of these platforms. In particular, for most people at an early stage in their lives that have few assets to manage, not a lot of complexity, not a very extended personal family circumstance, it’s gonna make a lot of sense to have a low fee robo worry about it. But at some point their life circumstances are going to get more complex and you’re gonna get married, or maybe you’re not, or you may have other objectives that you may want some advice on and at that point it may make sense to either supplement the robo advisory portion of your portfolio, or graduate to a more holistic wealth management view.
CN: Thank you so much Raph, these answers were great. It’s always insightful chatting with you so thanks for sharing those answers with us today.
RB: It’s my pleasure.
As new ways of investing and new types of technology emerge, advisors are trying to keep up with the preferences of new investors. We define “new” as the all-encompassing description of young, millennial, and/or Gen Z investors - a demographic that prefers frictionless technology experiences. Advisors who are trying to attract this type of investor should think about the experience they’re offering, and how they’re going to build trust with this new generation. We turned to our community of advisors to get insights on how to earn the trust of new investors. To kick it off let's hear from Sébastien St-Hilaire, voted as one of Canada's top wealth advisors in 2021:
“If you want to gain trust with new and younger investors, you need to pay attention to these 3 things from my perspective:
Go the extra mile. New investors may not have the financial knowledge or the financial maturity to avoid the pitfalls of investing. On the other hand, they know how to inform themselves, they are techno-savvy and have an infinite amount of information allowing them to do their own financial education. The place where advisers need to stand out is to go the extra mile when the time is right. Where the internet, the machine or the robot cannot compete with you. The time will come when you have to make a difference in the financial life of the new investor. If you miss your chance, it will be a missed date and a farewell.
Transparency and Stewardship. Likewise, investors have access to almost all information to understand and validate the facts and arguments of investment advisers. You have to be able to have an open-card game with new investors. Knowing your product is essential to our job, but explaining the product transparently to the customer is the most important. It goes a lot further than explaining the fees. You need to be able to explain what the investment portfolio will include and the reasons for including or choosing your companies in the portfolio. The agency theory is outdated for the new investor. They want to know what environmental and social impacts companies have on their community. Making money is great, but being also good is awesome.
Legitimacy. Basically, if you want to be able to gain the confidence of new investors, you have to be able to understand them and know their challenges, fears and ambitions. You can't help yourself if you can’t stay young in your head, maintain strong ties and a presence with this community. If you do stay young and maintain relations with them, you will gain the respect and legitimacy to gain their trust. The experienced financial adviser will never gain the trust of new investors if he enters into a dynamic of power or force. You have to enter into an equal relationship with the new investor.”
“In my experience, the most important factors in building trust with new investors is being authentic and transparent in your communication. There's an overabundance of information at the disposal of investors these days, so setting yourself apart and connecting with clients requires clear, genuine, and concise messaging.”
“New investors may not know what to expect from an advisor or they may be hesitant about the potential risks of investing. It is important to have a transparent discussion of an investor’s situation and goals, as this will help advisors to provide meaningful suggestions and identify areas of uncertainty. Take the time to discuss concerns and explain any of the areas that an investor is unsure about, which could include the relationship the investor will have with an advisor or firm, industry standards we follow, what resources are available, why we collect certain information, the securities being investing in, features of accounts being opened, or potential tax implications of decisions.”
We don't know Tony, but we thought this quote about technology was perfect to conclude our section about how advisors can build trust with new investors. From his article in Forbes, Tony says:
“(...) many neobanks are looking to scale quickly and gain as many customers as possible in the shortest amount of time. New technologies — artificial intelligence, machine learning and behavior and transaction monitoring — are avenues for building trust and fighting fraud.”
Image Credits
Feature Image: Unsplash/Towfiqu barbhuiya