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COVID-19 may be receding into the past, but the world is entering a new era of interesting times.
Following the extraordinary events of the pandemic, the planet as a whole is going through easily the most challenging economic climate it has seen in recent history. Inflation levels have skyrocketed to multi-decade highs, interest rates are shooting up drastically from historic lows, and Russia’s ongoing aggression against Ukraine has ignited a new era of geopolitical tension that could strain or fracture trade relationships built up through globalization.
Both public stocks and bonds have been hit hard this year as economic risks and developments weigh on financial markets; the implications for portfolios, which have benefited from the euphoric post-pandemic bull market, have been sobering, to say the least. Despite those challenges, the 30 5-Star Advisors from Quebec and Western Canada recognized this year have been able to show exactly how they help clients achieve true financial well-being.
“Inflation and rising interest rates are making it very difficult for those who deploy the traditional 60/40 portfolio. People say, ‘stocks go down, bonds go up,’ but rising interest rates and inflation de-link that relationship”
Martin Pelletier, TriVest Wealth, Wellington-Altus Private Counsel
One of the biggest challenges for advisors today is to bring their clients’ return expectations closer in line with economic reality.
In its 2021 Individual Investor report, Natixis Investment Managers found that in the long term moving forward, financial professionals around the world expected client portfolios to realistically generate returns of only 5.3% above inflation. Meanwhile, individual investors’ long-term return expectations stood at 14.5% above inflation, and they had been rising every year since 2016.
Notably, the Natixis survey was released in June last year, months before inflation rose to stratospheric highs unseen in decades. Today, the most recent CPI print in Canada showed the highest reading in 40 years, and the Bank of Canada is aggressively trying to snuff it out through the use of supersized interest-rate increases.
“I’m sure in some cases, portfolios are lower today because of decreased valuations in both stocks and bonds,” says Joseph Bakish, wealth advisor, portfolio manager, and director of Bakish Wealth at Richardson Wealth. “Household debt, company debt, and government debt are all at elevated levels, and so I think we’ll be more sensitive to interest-rate changes than in the past.”
“Inflation and rising interest rates are making it very difficult for those who deploy the traditional 60/40 portfolio,” adds Martin Pelletier, senior portfolio manager and co-founder of Trivest Private Wealth at Wellington-Altus Private Counsel. “People say, ‘stocks go down, bonds go up,’ but interest rate hikes and inflation de-link that relationship.”
Given the much weaker forecast for public market returns in the coming months and years, it’s become a priority for advisors to moderate their clients’ portfolio return expectations from the heady rally years of 2020 and 2021. According to Bakish, those who prepared by discussing the cyclical nature of financial markets, along with the importance of sticking to their long-term asset allocations, should be well-placed to help clients avoid irrational investment decisions.
“It’s one thing to say rates of return are going to be lower going forward, but there’s also managing around whether markets could go down another 20%,” he says. “That fear is what I think will really matter as things normalize.”
Beyond providing lessons in behavioural finance, advisors should be able to communicate with clients in a way that recognizes their personal concerns and situation. As Darcie Crowe, senior investment advisor, portfolio manager, and founder of the Crowe Private Wealth Group at Canaccord Genuity, explains: “Good advisors provide clients expertise and advice. Great advisors deliver a highly personalized, thoughtful experience grounded in a deep understanding of clients and their families. The ability to listen, reflect and adapt to the unique demands and preferences of each client enables advisors to deliver greater value in a way that aligns with their needs.”
“The ability to listen, reflect and adapt to the unique demands and preferences of each client enables advisors to deliver greater value in a way that aligns with their needs”
Darcie Crowe, Crowe Private Wealth Group, Canaccord Genuity
To overcome the hurdles posed by challenging return prospects for traditional investments, Canada’s top advisors are elevating their portfolio management toolkits. Beyond long-only exposure to public equities and bonds, they’re finding ways to diversify their clients’ portfolios with alternative investments for better risk-adjusted returns.
“You have to look at the alternative strategies out there and understand those strategies,” Pelletier says. “There’s market-neutral strategies, there’s structured notes, risk-parity strategies, hard assets, commodities … Advisors who have expanded their traditional toolbox to include other risk management strategies beyond just long-term bonds have been able to protect clients’ portfolios very well on the downside.”
“Slower growth in the public markets could put a lot of pressure on the private markets as well,” Bakish says. “Portfolio manager and fund manager selection within the private markets is becoming very important now that growth isn’t a given.”
Beyond investment returns, advisors should be able to create value for clients through other avenues. As Pelletier observes, rising interest rates eat away at government’s ability to finance deficit spending, both at the federal and provincial levels. That raises the probability of higher taxes down the line, making tax planning a more important point of focus.
“A doctor doesn’t just look at one health issue. They assess your overall health and then they determine whether there’s a secondary illness accordingly,” Bakish adds. “It’s very similar in our profession; as advisors and planners, we need to do a general assessment, get to know our clients and their history, and then zero in on what needs to be done.”
“As investors look for a more personalized experience in working with an advisor, planning becomes that much more important,” Crowe says. “A focus on goals-based investing and cash flow planning, particularly with longevity concerns increasing, remains a priority in working with clients to deliver an all-encompassing experience.”
Advisors are also responding to a groundswell of client desire to not just do well with their investments, but also to do good. In its most recent Investor Opinion survey conducted last year, the Responsible Investment Association (RIA) found 73% of Canadian retail investors were “very” or “somewhat” interested in responsible investing.
However, there are still gaps to fill. Almost two-thirds (63%) of advisors surveyed by the RIA in its Advisor Opinion report published this year said that a minority of their clients (between 1% and 40%) hold RI assets. The top sources of concern expressed by advisors with respect to RI were greenwashing (81%), lack of standards (74%), and financial performance (69%).
“I think there’s a lot of important growth happening in ESG frameworks and rules to ensure everyone is on a level playing field,” Bakish says. “Greenwashing is a real problem that needs to be addressed because otherwise, it undermines the entire credibility of the ESG label.”
“If ever there’s a regulatory issue that comes up, an advisor must be able to show that all the necessary discussions and explanations have taken place concerning topics like risk tolerance and time horizons”
Joseph Bakish, Bakish Wealth, Richardson Wealth
Canada’s top advisors have also taken some of the COVID-19 pandemic’s harshest lessons to heart. Beyond embracing digitization, more advisors are looking for ways to insulate their practice from disruption through continuity planning.
“We have two portfolio managers on every single account, so there would be no problems at all with managing client portfolios in our relationships,” Pelletier says. “It’s our insurance policy; you don’t see its merit until actually something happens.”
From a more long-term perspective, he believes the most future-proof practices will be the ones that can keep their book of business to a manageable size. Aside from letting advisors deliver a high level of service for high-net-worth families, it puts them in a good position to engage in multigenerational planning.
Enhanced digitization also became a key initiative during the pandemic for advisors as clients looked to continue interacting with them through various electronic channels. Moving forward, technology will be embedded more deeply across the advisor enterprise, particularly as know-your-client and know-your-product obligations become more of a concern.
“Taking good notes and documentation will become extremely important. And now what will be required is an ability to access that very quickly on aggregate basis across your clients,” Bakish says. “If ever there’s a regulatory issue that comes up, an advisor must be able to show that all the necessary discussions and explanations have taken place concerning topics like risk tolerance and time horizons.”
To find the best advisors in Quebec and Western Canada, the Wealth Professional team undertook a rigorous marketing and survey process, leveraging WP’s connections to advisors across the country. Investors were asked to nominate their advisors and rate them on the basis of six key criteria: communication, portfolio performance, product knowledge, client trust, client knowledge, and customer service.
The most voted advisors that received an average score of 4 or higher were named 5-Star Advisors recognized based not on AUM but rather on the service provided to their clients.