Tag Archives: wealth management

3 rookie mistakes that seasoned investors still make

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By Neville Joanes

(Sponsor Content)

We’ve all been enjoying the bull market. But getting a historically respectable 6 per cent return, or even doubling it, can feel underwhelming when the economy is roaring ahead and the Nasdaq has gone up 30 per cent.  From what I see, the difference between the big winners and the also-ran-investors often comes down to whether or not they let their biases cloud their judgement. Even experienced investors are not immune.

It’s such a big problem that an entire field of study has sprouted out of this: behavioral economics. Economist Richard Thaler won a Nobel prize for his work looking at how these biases operate among humans in a supposedly rational market.

Here’s a roundup of the worst mistakes I see again and again from DIY investors (which is why a lot of these people would be better off with a set-it-and-forget-it strategy).

Running with the herd

If you want an above-average return, then don’t rush into what the crowd is doing.

Probably the most outrageous example of this mistake is to be found in the irrational exuberance over Bitcoin. Just $1,000 worth of Bitcoin from a few years ago would be over $1 million today. If you threw caution to the wind and invested in this years ago, then you have certainly seen the kind of ROI that Wall Street hedge fund managers can only dream of. But all those gains are in the past, to the benefit of the early adopters.

The vast majority of investors have arrived late to this party. Most of the large gains have already been captured. And while there may be more growth yet to come, experts say that Bitcoin eventually seems destined to repeat its bust cycles of 2011 and 2014. The herd is about to race off a cliff. Usually, by the time your neighbor next door is jumping on the bandwagon, it’s already past time to get off.

Recency bias

We all know that past performance is no guarantee of future returns. And yet, it is basically human nature to ignore that knowledge.

In life, recency bias is actually a useful rule of thumb a lot of the time. Your friend who always shows up late will show up late again. The restaurant you liked years ago, but whose quality keeps declining will continue to suck, in new and intolerable ways.

For investing, recency bias can really do harm. We see a line graph showing a steadily-rising return, like with the Nasdaq: well, why wouldn’t that trend continue? Because it can’t. Over time, as an asset rises in value, we can expect it to fall back down to the mean.

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Robo-Advisers disrupting wealth management industry but Service could determine how much

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Male hands on the keyboard in front of computer screen with financial data and chartsAs my article in the print edition of Monday’s Financial Post goes into in some depth, the recently released DALBAR study on North American robo-advisers highlights several challenges the pioneering industry faces with new customers, or in poaching them from the established wealth management industry.

See the headline Service ‘gaps’ in robo advice: Dalbar study (page FP1). You can find the online version here under the headline ‘Robos are getting a pass’: Study points to gaps in automated investment advice.

Many older and wealthier clients may get “poached” from the traditional wealth management industry, whether retail mutual funds, banks, investment counsellors, full-service brokerage or other segments. Of course, in some cases, robo-advisers are landing “new” money from young people who may never have invested before. Millennials are a big focus of some robo-advisers (such as Toronto-based Wealthsimple).

Last Tuesday, the Hub ran a blog outlining the major points issued in the Dalbar press release, and we also published reaction from three Canadian robos: JustWealth, NestWealth.com, Wealthbar and the aforementioned Wealthsimple. See Becoming a Robo-Advisor Client may be challenging, Dalbar finds.

The 126-page study — which not all robo-advisers have seen — contains plenty of information that couldn’t be summarized in the FP piece. It begins by noting that these services are “one of the fastest growing segments in the wealth management space” and that they have “managed to capture significant share of wallet from the established wealth management providers in … a short period of time.” The report mentions that Wealthsimple has grown to $500 million in assets from a standing start in 2014.

The report has a relatively small sample size: 45 mystery shoppers  (15 US, 30 in Canada) were asked to sign up to various Robos. Almost half of them were in their 30s. To assess risk, Dalbar directed these mystery shoppers “to ask for high returns in a short time period to test risk response mechanisms.”

Below, I present some more highlights that have not yet been covered:

Robo firms covered in the Dalbar report

First, the report looked at five American robo-advisers and ten Canadian ones (interesting that there weren’t more US ones!)

The US firms were Betterment, Charles Schwab, Future Advisor, TradeKing Advisors and Vanguard. (interesting that the oft-cited Wealthfront is not in: Dalbar told me it was based on what clients chose.)

The Canadian firms were (in the order Dalbar listed them): BMO SmartFolio, Invisor, JustWealth, Modern Advisor, NestWealth, Questrade Portfolio IQ, RoboAdvisor Plus, Smart Money Capital, Wealthbar and Wealthsimple.

Why clients chose particular services

Asked why clients chose a particular service, 100% of Betterment clients cited convenience while 100% of Vanguard clients cited reputation. WealthSimple clients cited equally (25% each) advertising, convenience, executive team and reputation. Interestingly, 75% of BMO clients cited its bank affiliation, and 25% its reputation. Invisor was a 3-way split between advertisements, executive team and product selection. JustWealth was an even 4-way split between advertisements, reputation, convenience and — this is interesting — being the “first to return my initial contact.” The latter point also accounted for 25% for NestWealth, Wealthbar and Modern Advisor. For NestWealth, the other three reasons, all an equal 25%, were convenience, platform offered and reputation. For Questrade  Portfolio IQ it was 67% convenience and 33% reputation.

Reasons for Choosing vary with Client income levels

The report broke clients down into three clients with annual incomes that I’ll call low, medium and high: $60,000 to $75,000, $75,000 to $100,000 and $100,000 to $150,000 or more.

For the low-income clients, Convenience was most often cited, 30% of the time, followed by Platform Offered (26%) and Reputation (17%) and Pricing (9%).

For the middle-income clients, Reputation was most important, at 38%, followed by First to Return Initial Contact at 19%, executive team at 13%, and equal 6% allotments for Advertisements, Bank Affiliation, Convenience, Platform offered and Pricing.

For high-income clients, Reputation was most important in 33% of cases, followed by even 17% allotments to advertisements, bank affiliation, convenience and executive team. Remember these are small sample sizes, but none of the high-income clients even cited pricing, platform offered , product selection, or First to Return Initial Contact.

Motivations for trying a Robo-Adviser

Curiosity seemed to be a major driver for wanting to check out a robo service in the first place, Dalbar found, followed by lower fees and convenience. Not surprisingly, lower costs dominated for the high-income group, 83% citing it, followed by 17% time saving. For the middle-income group, 44% just cited the desire to try new technology; this was also cited by 30% of the low-income group. The two lower-income groups were also influenced by the fact robo-services let you start investing with relatively small amounts of money.

Cross-border differences in account opening times 

Time to open an account varied from five to more than 30 minutes in Canada. Canadian users needed up to six times more time to open than their US counterparts. 75% of US robo users needed just 10 or 15 minutes to open an account, while 70% of Canadian robo users needed 15 to 60 minutes.  Most Canadian users felt it took “too long” to open an account and US robos were perceived as being much easier to work with than their Canadian counterparts.

Dalbar singled out NestWealth as being most consistent, with most clients able to complete a risk assessment questionnaire in 15 to 30 minutes. US robo firms were faster but mostly because the questionnaires were shorter.

Aman Raina’s robo-experience

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When a Business Owner gets cancer

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josh-patrick
Josh Patrick

Good piece in the New York Times today about what happens when the owner of a small business gets cancer. It’s written by the business owner himself: Josh Patrick runs a small wealth management and consulting business and like many personal services business that sell time rather than product, it pretty much depends on the owner for revenue.

He learned he had non-Hodgkin’s lymphoma, in 2008. (He is now 62).

Mr. Patrick struggled first with the decision about whether or not he should share the knowledge of his cancer with clients. He did and despite his fears to the contrary, none of his clients left as a result of this disclosure. One client even pre-paid, although Mr. Patrick still had to downsize his operation. He had a few employees: one of whom volunteered to leave while another agreed there would be no raise for a year.

Importance of providing clear instructions to spouse

Once it was clear he would be undergoing a (dangerous) stem-cell transplant, he made sure his wife had the paperwork on the life insurance, names of clients and where they could go for alternative service, and how to wind down the business if it came to that. All business owners should have a such letter for their spouse, he says.

After the nine months of treatment, he realized his hopes to immediately resume operating the business at full speed were a tad optimistic. Suddenly, health had become a priority over the business and he realized it would take a few years before his energy levels returned to the point he could work as hard on the business as he had before the cancer revealed itself.

Not coincidentally (given the wide publicity that comes with a story in the Times), his business — Stage 2 Planning Partners — focuses on retirement planning for business owners.  I dare say he’s now busier than ever.