Tuesday, March 24, 2020

Investment Time horizon- simple concept but…

Investment objectives are the result desired by the client from investing and should relate to the type of investments that will be purchased by the client. Be sure to articulate the time horizon in your statement of objectives. Time horizon is a critical parameter in the Know-Your-Client (KYC) process.

Time horizon is the period from now to when the client will need to access a significant portion of the money invested. It can be defined in absolute terms or in ranges that provide for a sufficient number of categories to assess the suitability of the products sold or investment strategies used. In principle, time horizon seems to be a simple concept. However, it gets tricky, because investment horizon can fluctuate based on evolving financial interests and other variables and an account can have more than one objective.

It is important to determine your time horizon before deciding what type of assets you should have in your portfolio. If you do not need your money for a long time, for example, decades, you can own a riskier mix of investments compared to a person who needs money within the next few weeks or months. Time horizon is not the only deciding factor, but it is a key one. It must be considered alongside and in concert with return expectations, cash flow needs and other factors. A longer time horizon means investors have more time to allow compounding of returns and ride through volatile markets assuming they have the financial capacity and risk tolerance to do so. During the 2008 financial crisis, many investors bailed out when markets tumbled because of fear or urgent need for cash for daily living expenses.

In many cases, an investor will have multiple goals with multiple time horizons at any given time. For example, you may have a Registered Retirement Savings Plan (RRSP) with a 30-year horizon, a Registered Education Savings Plan (RESP) for a child in grade school, and an open non-registered account to save for an upcoming vacation. You may even have multiple time horizons during retirement. You’ll need some short-term, lower-risk investments to generate income as well as longer-term higher-risk investments designed to provide growth and keep you ahead of inflation. To avoid misunderstandings, ensure your advisor understands your full time horizon profile. Be sure to update your profile as your situation changes.

Investment Firms distinguish between short-, medium- and long-term time horizons. Short-term investments are generally considered to have time horizon up to three years. The investor tends to have a low risk tolerance and should invest in guaranteed securities, such as GIC’s or high-interest savings accounts.  Medium-term investments cover the period from 3 to 10 years.

Long-term investments are more often designed to be held for 10 or more years. With this time horizon, investors typically include a higher percentage of riskier, more volatile investments. For those investors with Registered Education Savings Plans, the time horizon is the point at which the child needs to enter university. In this case it is important to update time horizon at various points prior to university entrance especially those years immediately ahead of the planned use of the funds. Think of COVID-19’s abrupt impact on an education portfolio.

It is essential to understand the time horizon definitions used by your Firm before ticking off any time horizon boxes on forms.

The majority of advisors would suggest average 30-years-old investors to have asset allocation of a portfolio more heavily weighted in equities than that of someone who is close to retirement. Investor age is not the sole determinant of the duration of time horizon. For example, a middle-aged investor wanting to save money for a down payment on a house in one year would be investing with a one-year time horizon, even though her/his retirement is years away.

Some Firms define long term time horizon as greater than 3 years, making the recommendation of a purchase of a DSC mutual fund with a 6 year redemption schedule unsuitable.   As another example, where a minimum time horizon has been established as a guideline for recommending leveraging, the time horizon on the KYC should be able to support that this criteria has been met.

A client with a long term time horizon, significant net worth, and income level may be able to withstand fluctuations in the market over the long term, which could lead to the conclusion that the client is medium to high risk or should invest a significant portion of his or her portfolio in riskier investments.  However, if the client is unwilling or unable to accept that level of risk or is not comfortable with investing in risky or volatile investments, the KYC form should reflect the client’s decision and not the advisor’s opinion of what the client’s risk profile should be.

Be realistic. If you plan to retire at age 55 this may mean you will need to
significantly more risk for the potentially higher returns. If you are
seriously ill or at an advanced age, your time horizon likely shouldn’t be long

Never sign an incomplete KYC Form: A pre-signed form may allow an unscrupulous advisor to unduly increase your time horizon. Because every investment recommendation and every investment decision is based upon information contained on the KYC forms, any inaccuracy in the information necessarily taints a recommendation or decision made based on that information. Further, the uncertainty about time horizon impairs a Firm’s ability to ensure that all recommendations are suitable for you. An incorrect time horizon can lead to unsuitable investment recommendations and undue losses. In the event of a complaint, the Firm may point to your signature and deny your claim for restitution.

Think liquidity and cash flow: Your portfolio may have multiple time horizons and it needs to provide liquidity and certainty of liquidity to meet these liabilities as and when they fall due. This is particularly important for RESP’s and for retired people drawing cash for living expenses.

Joint Accounts: For joint accounts, certain KYC information, such as age and investment knowledge, is collected for each individual account holder. Annual income and net worth are typically collected for each individual or on a combined basis, as long as it is clear which method has been used. However, Investment objectives, risk tolerance and time horizon relate to the account and not each individual. That will influence the construction of the portfolio.

Now is a good time to revalidate your time horizon(s) and other critical KYC parameters with your Firm.

Friday, March 20, 2020

Investor ALERT: When you receive a letter from your dealer....


Investors receive many documents from their investment dealers.  Not all documents are of equal importance.  INVESTORS BEWARE: some documents are Red flags and investors should review these documents with special attention and care.

The problem – Red flags

We often read something like the following in regulatory sanction decision documents:

“On November 14, 2017, the Member sent a letter with a 3-year transactional summary to all clients serviced by the Respondent. The Member requested that the clients review their transaction summaries to ensure that the trading activity was completed as directed and to report any inconsistencies by December 14, 2017. No clients have reported any concerns.”

What this text is literally saying is that no investor reported any concerns about any transactions that were made in their account. It could simply mean that investors didn’t respond or did not understand what an inconsistency means. It could be a red flag.

The above quotation, or similar wording, can also be interpreted to mean:

“We asked clients to review their transaction summaries and check that they had in fact approved these transactions and all these clients failed to raise any concerns.  As a result we interpret the investors non-response as saying, “yes, we had approved  all transactions in those summaries. “.

The investor’s dilemma

An investor cannot be sure exactly what the wording in the regulatory sanction decision document actually means.

It could mean that a recipient of such a letter from their dealer is not aware that the dealer is investigating her/his advisor or that regulators are investigating the dealer and /or advisor.

It could be the investor didn’t understand the red flag when they received this document from their dealer, or was simply too busy to respond or didn’t think it was important to respond.

It is our experience that retail investors do not fully appreciate why the dealer sent them the letter.

We anticipate that many investors will receive similar Red flag documents in the weeks, months and even years to come.  When a down market occurs, problems with advice and investment advisors are more likely to come to the attention of investment dealers and, as a result, these types of letters are more common.

Any letter received from your dealer requesting you to review your account is a huge Red flag.

When an investor receives a document like this, it is entirely reasonable to assume the dealer or regulator has uncovered some wrongdoing or suspicious acts by the advisor or the dealer.

The dealer is asking you to identify any questionable transactions and given you 30 days to spot and report them. If you don’t report anything, the dealer may assume you are comfortable with the transactions. This could be used against you in the event you file a complaint in the future.

When you receive such a letter

These types of letters should be considered as warnings that the people you trust with your nest egg have very likely done something wrong including one or more of the following things:

 Broken a dealer rule or securities regulation

 Bought or sold something without your permission

 Changed information about you ( KYC) that permitted ( and could permit future mis-selling) an unsuitable transaction

 Forged your signature on a document

The advisors’ errors or wrongdoings could have resulted in you owning an unsuitable investment, paying commissions for trades you didn’t need to make or even signing you up for an investment loan you neither want nor need. Many investors are not aware of such errors and wrongdoings.  Often the advisor’s error is explained away as “its just the markets”.  Investors should look further into the cause of their financial losses.

Recommended Investor Actions

First review all documents that suggest you may be approving past actions and decisions by your financial advisor’s action.

In effect, there has been a breach of trust. You and your investments were and may still be in harm’s way.

Not only should you carefully review your account and question the dealer directly why you have received this letter, you should also request a meeting with your advisor and their immediate supervisor.

Recommended reading : Investor’s Guide to Complaints https://static1.squarespace.com/static/58350df5b3db2bbc30614fbf/t/5b2444c86d2a734942edff91/1529103562413/Complaints+Process+for+Retail+Investments+in+Canada.Handbook.MBC+FLAG+2018.pdf

Saturday, March 14, 2020

ALERT: Things to do and not do in the COVID-19 investing environment

·       Update your KYC profile especially risk capacity/tolerance ;time horizon; objectives

·       Avoid being sold mutual funds based on the Fund Facts Risk rating –these ratings are flawed

·        Do not let yourself be sold DSC mutual funds- liquidity essential in turbulent times

·       Avoid “advisor” recommendations to borrow for investing

·       Establish an emergency fund or add to it if you have one 

·       Do not loan money to your “ advisor “

·        Do not effect any transactions on the side with your “ advisor”

·       Think at least twice before being sold  a “ hot” IPO  

·        Consider equity crowdfunding at your own risk and peril

·        Negotiate lower fees for advice and seek out lower cost products that meet your needs 

·        Avoid internal bank “ ombudsman “ ; escalate complaint directly to OBSI

·       Stay away from “Free lunch” educational seminars -can be bad for your financial and physical health

·       Assume your “advisor” is influenced by biased dealer compensaion ; do not assume she/he has your Best interests at heart- be constructively critical

·       Check your Account statement for unusual transactions -respond immediately to any transactions you do not understand or do not agree with.

·        Establish a Trusted Contact Person with your financial institution.

·       Ensure you have a Power of Attorney in place in case you are ill for an extended period of time

·      And last but not least , have an up-to-date will just in case the worst happens. 

Please forward to family, friends, and colleagues.

Caveat Emptor