Portfolio Second Opinion: A Case Study

Welcome back to another case study! If you’re new here, our case studies involve mushing together similar client stories, scrubbing away any identifying details, and sharing how we’re helping Canadians in various financial situations with cash flow, retirement planning and more. This month’s case study features Isaiyah, who came to Spring for a Portfolio Second Opinion. 

Let’s bring you up to speed with a quick recap. In previous months, you met:

• Terri who struggled to save with variable income 
• Baby and Johnny who tried desperately to pay down their line of credit debt with no success
• Zoe, a retired woman who recently became a widow and received a large lump sum payment
• Troy and Annie who wanted to renovate their home and save for retirement and build their childrens’ RESPs

Now that you’re all caught up, let’s meet Isaiyah.

High Portfolio Management Fees

For 18 years, Isaiyah’s portfolio was managed by the financial advisor at her bank. When she came to Spring Plans seeking a Portfolio Second Opinion, Isaiyah expressed that she was becoming increasingly aware of the yearly fees she was being charged. She was worried about the impact of this on her overall financial well-being, and as a result, she began to question the value she was receiving from her (now) former advisor. She has recently embraced the challenge of being in control of the investments she holds in her Registered Retirement Savings Plan (RRSP) and Tax-free Savings Account (TFSA). 

The assets under management (AUM) fee Isaiyah was charged had been declining somewhat and she was paying 2% of the value of her portfolio to her advisor each year. She was assured this was a very competitive rate, however, when calculating what that meant in terms of the actual dollars she was paying, something didn’t add up. Was she really being charged tens of thousands of dollars each year for investment management and financial advice? For the amount she was being charged, shouldn’t she receive some sort of financial plan or estate plan, or at the very least, be meeting with her advisor more than once per year? Isaiyah felt like something was missing, and while she had confidence that her investments were being managed properly, there was a gap between the value she felt she was receiving compared to the amounts she was paying in fees each year.

Increasing Financial Literacy & Leaving the Bank

Like a growing number of Canadian investors, Isaiyah began the work on her financial literacy and investor education through reading a number of articles and online blogs. This provided her with enough confidence to ask the right questions and understand what options existed for her. Investing her money with an automated investment management service called a Robo-advisor was something she had read about but did not feel like it was the right fit for her. While she was attracted to creating her own portfolio of low cost index funds utilizing a “couch potato” (passive) investment strategy, Isaiyah worried that the responsibility for managing her entire portfolio might be too overwhelming. 

One other option she considered was investing in low-cost, “D” series mutual funds, which are actively managed investment products issued by a Canadian investment management company. These funds could be purchased through an online brokerage account and the cost to own this type of investment was around 1%, which was half of what she was currently paying!

Isaiyah decided on a hybrid approach. She would invest her RRSP funds in the “D” series mutual fund and the money held in her TFSA would be invested in a portfolio she created of low-cost index funds. She felt the inclusion of the “D” series mutual funds in her overall investment strategy provided the right mix of an actively managed portfolio (which provided her peace of mind) and a passive investment approach (which benefited from very low investment fees).

After settling on an asset-allocation which she felt was reasonable for her risk tolerance, Isaiyah purchased the index funds and “D” series mutual funds in their respective portfolios. Over the last three years she has enjoyed the challenges of monitoring her index fund selections at the same time as she has enjoyed increased confidence through owning a professionally managed fund.

As the financial markets continued to fluctuate throughout 2019, Isaiyah understood she might need to make decisions about her overall investments but felt she did not have all the information she needed to properly rebalance her portfolio. She knew tech companies like Amazon, Apple and Facebook had done well since she started her hybrid approach, but just how much of those kinds of companies did she now own in her portfolios and which ones? Were there any industries held in her portfolio that were missing? Was she too concentrated in a certain geographic area? Was her asset-allocation still reasonable?

In any portfolio strategy, whether taking a passive or actively managed investment style, investors need to be aware of not just what’s going on in one specific portfolio, but what’s happening overall. Isaiyah reached out to the team at Spring and expressed her concern over this exact issue. While she felt confidence in her individual portfolios and investment selections, she was concerned she was missing the big picture and limiting her ability to make great decisions.

The Portfolio Second Opinion

The Portfolio Second Opinion (PSO) is a service Spring introduced in late 2019 to respond to clients looking for a deeper understanding of their investments and what they actually own. Think of a Portfolio Second Opinion like an x-ray for your portfolio. Just like most x-rays, the PSO process is fairly straightforward for investors, especially those like Isaiyah, who have their money in a few different accounts and who hold different types of investments.

After analyzing her investments, we were able to answer all of Isaiyah’s questions. 

• As she suspected, she was heavily invested in tech companies with almost 50% of her total investments in that sector alone
• Additionally, her portfolio held a disproportionate amount of investments in U.S. based companies (80%) which was a risk which we discussed at length
• Isaiyah’s portfolio had no holdings in utility, health care and real estate firms, all of which we believe form part of a balanced portfolio
• Isaiyah’s asset-allocation was now significantly higher than she had thought, with her equities making up 73% of her portfolio, which was higher than the 60% she had set as a target for her investment objectives

While we could not provide specific buy-sell recommendations on each security in Isaiyah’s portfolio due to regulations around this type of advice, the information in the Portfolio Second Opinion provided her with the details she needed to better coordinate her DIY investment selections with her actively managed ones. In meeting with Isaiyah, we identified what adjustments would need to be made moving forward, if she were to maintain her overall portfolio with more balance. 

• The index funds she selected had a heavy weighting towards U.S. tech companies which added to those types of investments, also held in her “D” series funds
• Reducing those index funds and replacing them with ones that complemented her other funds was her first priority
• Adding more fixed income investments to her portfolio by selling some of her equity holdings would help rebalance her portfolio to an asset-allocation which was much closer to the 60% equity/40% fixed income level she desired

The changes to Isaiyah’s portfolio and recommended fixes are not uncommon for many investors. As we age and include investments from different previous banking relationships, jobs or partners into our overall portfolio holdings, it can often be the case that things don’t end up aligning properly over time. When this happens, investors will benefit from a comprehensive review.

If your investments have become more complex over time and you’re not sure what’s where and what you own, the Portfolio Second Opinion may be a great option to give you the clarity you’re looking for.