Let’s face it, designing an investment portfolio is not something many people want to talk about at the dinner table. However, many people, in my experience, also feel uncomfortable with how their money is invested and always wonder if it is “in the best place”. It is likely because that for many Canadians, investing is something that is not easy to understand and they don’t have the time to address it. There have been a host of changes and new product developments over the past few years which doesn’t help the situation.
Therefore, a lot of faith is put into the advisor’s advice with very little knowledge of the options themselves. However, we feel that it should be simpler for Canadian investors to understand what they have and easier to identify the right questions to ask. The more that investors feel like they are armed with information, the more peace of mind they should have when things get tough.
We developed the Four Quadrant Portfolio Design™ to identify the key elements we believe you should address in your own planning or to discuss with your advisor.
In the first quadrant you will find the STRATEGY component. This refers to the amount allocated to each individual investment or product. This investment strategy should, at a minimum, align the investors tolerance for risk, their time frame for investing, level of diversification, use of asset classes and rebalancing strategy. A separate strategy document is often recommended.
The second quadrant is PRODUCT SELECTION. This refers to the types of products you will use to meet your portfolio strategy objectives. There are a range of options available in the marketplace today for investors to choose from. These include Mutual Funds, Mutual Fund Portfolios, Exchange Traded Funds, individual equities and bonds, as well as exempt market products. This goes hand in hand with the types of investments or "asset classes" that you want to use in your investment strategy.
The third quadrant is OVERSIGHT. This refers to the level of attention paid to the portfolio on a regular basis. Oversight will largely depend on your portfolio strategy and the amount of rebalancing and risk management required. It is simply important to understand what kind of oversight is required, who will do it and how often, to make your strategy work. If a lot of oversight is required, you can choose whether to do it yourself or hire a professional money manager or advisor. Often times, portfolios are left unmonitored for years while many changes develop in the investors life or in the industry.
The fourth and final quadrant is FEE STRUCTURE. It is very important to know your options around fees. Fees can be broken down into many different categories such as those to pay professional money managers, those to pay your advisor for advice and those for administration costs. This one is last for a reason because it must align with the three other quadrants. If it doesn’t, you may need to change something. For example, if you decide you do not want to implement your own investment strategy and provide ongoing oversight, you may have to choose a higher fee option in order to pay a third-party manager or advisor to do this for you. You also have options as to how to pay fees to an advisor. Today, these advisory fees can be “unbundled” or untied to any investment you hold and typically include additional negotiated services such as financial planning.
If you would like more clarification or would like to add anything to this article, please let us know.
Susan Brown CLU®, FEA, CFP®, RRC®, CIM®
IA Private Wealth ǀ Propel Financial Life Management
Insurance Advisor ǀ Propel Insurance and Advisory Inc.
T: 403-616-7699ǀ firstname.lastname@example.org