When an investor decides to entrust the day-to-day management of their portfolio to Bellwether, it is extremely important that the parameters by which the portfolio is to be managed are established and documented at the outset. The management of our relationship with a client is defined within a document called an Investment Policy Statement (IPS). The IPS captures the key elements that shape our recommended investment solution. In effect, it acts as both a blueprint and a report card that will be reviewed annually. In developing an IPS, we must gain a clear understanding of a number of factors related to the client including:
- Time Horizon – Often our clients have multiple time horizons related to the various goals they wish to achieve. This metric is defined once we have gained a clear understanding of their goals and objectives. Frequently there are long term goals such as retirement or the funding of an estate as well as short term goals such as a major purchase or the education costs of a child or grandchild.
- Ability to Tolerate Market Volatility – This factor assists in understanding how well a client can “stomach” the short term swings that typically occur in the equity markets. We are trying to determine to what degree a client can tolerate a short term decline in their portfolio and still sleep at night. It has been our experience that investor’s perceived tolerance tends to rise in bull (up) markets and fall dramatically in bear (down) markets. We attempt to see through these trends and define a true tolerance for market volatility.
- Investment Experience – Perhaps the best means of assessing a client’s true tolerance for market volatility is to look at their past experiences and reactions to both bull and bear markets.
- Cash Flow Requirements – Many of our clients wish to receive income from their portfolios to supplement their other income sources. In the current low interest rate environment, this need has become even more important. This factor can have a significant impact on our asset mix recommendation.
- Investment Restrictions – Restrictions on the types of companies/industries or specific investments may be placed on our management of a portfolio. The reason for these restrictions varies but can include: pre-existing low cost base investments; corporate and industry exposure through employment; and moral, ethical or religious concerns relating to certain companies or industries (e.g. Drugs, Alcohol, Military, and Gambling). These restrictions need to be documented and can typically be accommodated.
- Tax Implications – Minimizing the tax that an investor pays is perhaps one of the most common requests that our clients make. The advantages of Canadian corporate dividends, capital gains and tax loss selling are some of the factors we consider in all of our taxable client portfolios. In addition to considering tax minimization in the asset mix recommendation of the investment policy statement, we also look for opportunities to structure the client’s financial affairs to reduce their tax bill (e.g. income splitting opportunities).
- Asset Mix Recommendation – Finally, once all of the previous factors have been addressed, we must then strike a balance between them to determine an optimal asset mix that will help to ensure the client’s objectives are met. Often there are trade offs as these factors can be conflicting (e.g. cash flow requirements versus an objective to build an estate). This is where our years of experience is particularly important in striking that balance.
- Regular Review – Since client circumstances change from time to time it is important to review the IPS at least annually to ensure that it is accurate.
Bellwether clients also receive:
- An analysis and recommendations regarding wealth planning strategies that can be implemented to enhance the accumulation of wealth.
- A transition plan regarding how best to transfer existing investments to their Bellwether accounts;
- Quarterly account statements and portfolio performance;
- Informative quarterly reports, which include our current investment strategy;
- On-line access to the custodian accounts; if desired; and
- Regular meetings with their Portfolio Manager.