You'd likely avoid eating at a restaurant if you knew the chef chose not to taste the meals they had prepared. After all, the chef is the one person that knows what exactly went into the meals preparation. The same concept should apply when it comes to investing. Yet a study done by Morningstar in 2008 found that in 2005, 47% of U.S. stock mutual funds reported zero investment by the portfolio managers managing them.
Unfortunately, there is no such data for investment advisors. Based upon my observation, I'd guess a fair number of advisors would likely be in the same boat, having entirely different investment portfolios from those of their clients. If you know your advisor is not buying the investments they are recommending to you, you might want to ask yourself, "should I be buying them?"
Like a cook that won't taste their own cooking, I'd suggest avoiding the advisor or restaurant all together. The only possible reason one would not "eat their own cooking" is that something must be wrong with the recipe, or in the case of investing, the portfolio. At Endeavour Wealth Management we believe it's important that our interests are exactly in line with the interests of our clients. What better way to do this, than to own the exact same investments as our clients?
By aligning our interests, clients are better able to trust our recommendations. Clients need to know that the investments we recommend are not investments that will put them at risk of being unable to retire or force them to go back to work. If we're recommending an investment, it's because we believe that this is one of the best investments our clients can own at that time. If it's a good investment for the client, it should also be good for us. So, we should probably own it too.
It also shows confidence in our homework and our process. No advisor or money manager can predict where markets will go in the near term. Through good research, and solid investment processes, long term success is a lot more predictable. By owning the same investments as our clients, it shows we are confident in our research and the process that's being used to select the investments.
Advisors who own the same investments as their clients are a lot more likely to have a thorough understanding of those investments, with a much better grasp of the appropriate times to buy or sell. Over time that should lead to better performance. We take this process one step further when we select the individual companies we own. When investing, we look for managers who have significant portions of their wealth tied to their companies' stock.
In one particular company we own, the president/founder doesn't even pay himself a salary. Rather he's rewarded when the stock price increases, as his net worth is tied directly to the stock's long-term performance. We like this because managers who are in 100% alignment with the interests of their shareholders, are likely to handle the company assets much more intelligently with their shareholders in mind (they are of course one of them). You likely don't have to worry about a CEO siphoning corporate dollars out of a company, when you know that his or her family's well-being depends on the stock doing well.
Before closing I should note portfolios will never be entirely the same. Each client has different individual goals, different tolerances for volatility, and different time horizons (same goes for financial advisors personal finances). Clients who are less comfortable with volatility or whom rely on their portfolio for income will likely have a larger percentage of their funds in less volatile assets like bonds. Clients who are comfortable with fluctuations and who do not rely on their portfolio for income (like me), will hold a higher percentage of stocks.
Although the percentage of stocks to bonds in the portfolio will be different, the actual individual positions would be nearly identical. The stocks you own are the same stocks I own. For our conservative clients, I'm happy to share that your bond holdings are the exact same as those of my 78-year-old grandmother. Helping our clients to manage their money is a responsibility we take very seriously. There is no rule that requires advisors to own the same investments they recommend to clients (though maybe there should be).
At Endeavour Wealth Management our success comes from our unwavering belief that the interests of our clients must always come first. Furthermore, we believe that in order to develop a truly trusting relationship, advisors' interests must be aligned with those of our clients. We don't believe any of this is possible, if we're not willing to "eat our own cooking."
- Brandt Butt, CIM
Brandt Butt is an Investment Advisor at Endeavour Wealth Management with Industrial Alliance Securities Inc, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.
This information has been prepared by Brandt Butt who is an Investment Advisor for Industrial Alliance Securities Inc. (iA Securities) and does not necessarily reflect the opinion of iA Securities. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered. Russel Kinnel. Do Managers Eat Their Own Cooking? Morningstar FundInvestor, 2008.
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