The Value of Professional Investment Advice, with Salman Ahmed
Welcome to The MapleMoney Show, the podcast that helps Canadians improve their personal finances to create lasting financial freedom. I’m your host, Tom Drake, the founder of MapleMoney, where I’ve been writing about all things related to personal finance since 2009.
Are you managing your own investments through a robo-advisor or online broker? If so, how’s it going? While I’m a big believer in do it yourself investing, it’s certainly not for everyone. If you’re second-guessing your abilities to manage your own portfolio, or you could use some advice on how to do it better, this episode is for you.
My guest this week is Salman Ahmed, a portfolio manager with Steadyhand, a Canadian investment firm with more than $800 million in assets under management. Salman joins me to discuss why professional investment advice remains so important in our world of low fee, do-it-yourself investing. He also has some advice for the DIY crowd.
According to Salman, a balanced portfolio has returned between 7-7.5% over the past 30 years. While this is a solid historical return, it’s not the return that most investors have realized over the same time period. In fact, some studies suggest that the average investor has only received 2-3% over the same period. This can be attributed to something called the ‘investor behaviour gap’. For various reasons, emotions included, investors tend to buy high and sell low, which greatly impacts their returns over the long term.
Salman explains how getting the right professional advice can help an investor keep their emotions in check, and make better decisions. He has advice for do-it-yourself investors too, including writing down your investment goals, understanding your ideal asset mix, and making sure your portfolio is properly diversified. He even shares a helpful tool that he himself uses, called a ‘decision journal’. To find out more, make sure you listen in to my full conversation with Salman.
It’s December, and RRSP season is right around the corner. With an RRSP from our sponsor, Wealthsimple, you can get a bigger refund AND save on investment fees. MapleMoney readers get $10,000 managed for free when they open a new account or transfer their RRSP to Wealthsimple. To open your RRSP, head to Wealthsimple today.
- Characteristics of a do-it-yourself investor
- Investors gravitate to professional advice during times of market stress
- The average investor tends to buy high and sell low
- Understanding the investor behaviour gap phenomenon
- Things to consider before investing for yourself
- The importance of proper diversification
- Always track your performance when you’re buying and selling stocks
- Don’t become a DIY investor just to save on fees
MM076 Salman Ahmed (Transcript)
Are you managing your own investments through an online broker? If so, how’s it going? I’m a believer in do-it-yourself investing. It’s certainly not for everyone. If you’re second guessing your abilities to manage your own portfolio, this episode is for you. My guest this week is Salman Ahmed, a portfolio manager with the Canadian investment firm, Steady Hand. Salman joins me to discuss why professional investment advice remains so important in today’s world of low-fee, do-it-yourself, investing.
Welcome to the Maple Money Show, the podcast that helps Canadians improve their personal finances to create lasting financial freedom. It’s December and RSP season is right around the corner. With an RSP from our sponsor, Wealthsimple, you can get a bigger refund and save on investment fees. Maple Money readers get $10,000 managed for free when they open a new account or transfer their RSP to Wealthsimple. To open your RSP today, head over to maplemoney.com/wealthsimple. Now, let’s chat with Salman.
Tom: Hi Salman, welcome to the Maple Money Show.
Salman: Thanks for having me, Tom.
Tom: We were talking before we started recorded about how I am a fan of do-it-yourself investing but that I realize it’s not for everyone. There’s a lot of behavioral issues that can affect someone when they don’t have someone else working with them. What’s the difference between a do-it-yourself investor and someone who might need some help?
Salman: I think one of the main differences is a do-it-yourselfer has the time and willingness to spend time learning some of the nuances you need to know and educating themselves on what’s important before they start doing it themselves. Whereas someone who might need help is someone who would be the opposite. They might lead a busy life, might not have the time, or simply doesn’t have the confidence to go about trying to sort out what they need to do to get their investment portfolio or finances in order. I think time and the willingness is very important.
Tom: A lot of my investments are with Questrade. I used to find it very exciting to pick out my ETFs and rebalance and everything like that, but as I’ve gotten busier, I have found the rebalancing schedule is getting a little behind. I don’t get to it as often as I should. So I get the busy part of it for sure.
Salman: Yes, people lead busy lives. They’ve got families. They’ve got careers. And we find many clients who are actually retired want to spend more of their time doing stuff they dreamt they’d doing when they were retired. That might be traveling or spending more time with their grandkids. But there is still a significant number of Canadians who have the time and resources to dedicate to doing it themselves. And there are resources out there for them to get educated and do it. But I think your experience is probably pretty representative of a lot of the folks we talk to where they want to do it themselves, but they still want a little bit of help. It might be as simple as tools or some nudges along the way to make sure that they keep on track.
Tom: One of the things I find too, with anything in life really is that it’s nice to have a sounding board. If you’re doing it yourself, you might know everything. But if you don’t have someone to talk to, it can affect things too. Do you find that as well?
Salman: Yeah, we do. Especially when there are times of market stress. That’s when we find clients are leaning on a professional or someone who might be might be more involved in looking at what’s going on daily to give them that counsel. And to be honest, a lot of time that counsel is as simple as asking a few questions. One; why was this money invested in the first place? And in most cases, that’s to invest for retirement or fund retirement or fund a purchase down the road. Has that changed? No. When we get started we discuss there are going to be times where markets are volatile where they’re going to go up and down. Has your expectation of that change? No. Then why should we be doing anything different? This is a time to stick to your plan. And that’s often just a reminder that investors might need. But it’s important because there’s a lot of information being thrown at them. And one of the things I’ve experienced with clients is just a simple sense of being overwhelmed. Our industry, the investment industry is fantastic at long investment terms, jargon, and performance of product. I don’t have to tell you that stuff but investors don’t know how to navigate that. And they feel overwhelmed. They don’t know where to start. When I don’t know where to start, I just say, “How do I do that? I’ll leave that for later.” That’s where council helps as well. Those are the times we find that having someone to talk to or just bounce ideas off is really helpful.
Tom: I mentioned I find myself getting behind on the rebalancing. But when it comes to these market fears, personally, I’m pretty good at just ignoring that. Mainly because I don’t have the time anyway. It kind of works out well in that sense but it doesn’t surprise me to hear you say that’s one of the worst times. I always try to remember that a lot of people are a lot more emotional with their money than I am. I go strictly by the numbers. Like when it came to paying off my debt. I paid off the highest percentage first, not the lowest balance which is common with debt snowballs. So I’m very numbers-based. I do realize though, that probably the majority of people are more emotional with it. When you’re seeing your investments drop as you’re looking toward retirement it could be easy to freak out and want to pull all that out.
Salman: Yeah, this bears out in a lot of academic studies and other research that’s been done on investor behavior. Fund performance, let’s say over the last 20 years of a balanced portfolio—Or 30 years, in fact, the balanced portfolios is 7 to 7 1/2 percent. That’s a pretty good return. The average investor gets far less than that. Some studies say they get 5 to 6 percent less. So they might be getting 2 percent. Their average portfolio return may be 2 percent. Some say the gap is more like 1 percent. But there’s still a gap. And some of that goes towards fees for sure. But there is that investor behavior gap. That is a term that’s being attached, the behavior gap, which is a challenge investor’s face. It happens because investors tend to buy high and sell low. And there have been other studies that have been done on how investors rate their risk appetite depending on what the market environment is. During a bull market like we’ve had over the last 10 years, investors might rate their risk appetite has being pretty positive. They want to take risk on their portfolio. But in times of market downturn, those same investors will become very risk averse. And that’s some of the challenges of point-in-time risk estimates. Some of the things other behavioral economists have been working on is to understand how we can better assess investors risk appetite through a market cycle. Education can be a big part of their experience but also a portfolio that tries to deal with that might have an examiner pinpoint a portfolio that tries to deal with that change in emotion depending on where we are in the market cycle.
Tom: We talked about how people want to pull their money out when the markets go bad. But there’s also the other side of that, too where they think now that the market’s down they’ll just wait until they see it’s at the bottom. That doesn’t always work out that way either. Then all of a sudden you’ve missed those gains again when you’re a year behind from the low kind of thing.
Salman: You don’t have to go too far back to experience some of this. In November 2016 when Donald Trump was elected US president a lot of investors in Canada, in the States, and other parts of the world called up their advisors and said, “I want out in the market. This is a bad situation for the world. I went out.” And the Dow (I think) is up 50 percent since then. Those investors would have missed out on a lot of those gains but hopefully they were working with a profession. The professional would have been able to suggest to them that these may be uncertain times, but their portfolio has diversification and say, “We’ve got a plan set out for you. Yes, your portfolio might fluctuate, but you’re still saving.” So there’s all these things in an investor’s arsenal that can help them in these times. Sometimes you just need someone to point those out which can be helpful.
Tom: How do you guys keep investors stable? Because ultimately, if they really want to pull their money out, they still could, right? How does that conversation look?
Salman: Well, to be fair, the study is about the behavior gap. Those include assets driven by advisors. So it’s not investors that are only falling victim to the behavior gap. It’s also professional advisors. We’ve spent a lot of time thinking about this and I don’t think there’s a perfect way to do it but first, it comes down to incentives. Our industry is very commissions-driven. Advisors and investment professionals get compensated by bringing assets in the door and then by retaining those assets. What we’ve done is we don’t pay any commissions. We don’t set any sales targets because we want our professionals, our advisors to be really focused on providing that client with service. And that is important. The second part is communication. We are transparent and communicate quite a bit with our investors. We try to write in a very jargon-free way which I wish a lot of other investment firms would adopt because we find investors want that. They don’t want to hear that noise and those fancy terms. They don’t understand them and they feel overwhelmed by them, as I mentioned earlier. So we write in very plain, English terms. There are times where there is a technical piece where you might have a few more investment terms in there. But in general, we try to limit it to the extent possible in uncomplicated investment language. And the last thing is that we just try to stay accessible. We track how often our advisors pick up the phone. Our goal is to be able to have a competent investment professional pick up the phone (when you call) and be able to address your questions. And 98 percent of the time on the first couple of rings, someone picks up who is able to talk to them. There is nothing worse than you being really worried about what’s going on in your portfolio, calling your advisor and not getting through. Or being told that you have to wait for a couple of hours to be heard. We want to avoid that. Those are the type of things we try to do; provide transparent communication and accessibility. Managing incentives has helped too. We track our dollar-weighted returns. This would just be how the average client performs versus how our funds perform. Our clients don’t have a behavior gap which is great because that’s how we measure our success. We didn’t just name the firm, Steady Hand, for fun. It’s really what we want to deliver. So those are the ways. It’s not perfect. We still get calls from clients who are concerned and want to know what’s going on in their portfolio. We’ve built up a lot of technology to service our investment professionals so when that person does call, it doesn’t take long for advisors to look up the pertinent details in their accounts and address it. We’ve done a lot of thinking about this and what we decided a while ago was that our interface was always going to be human. We were going to have a ton of technology. The co-founders of the firm, Neil Jensen, has a technology background and he has very successfully built technology firms in the past. There is a lot of tech running our firm but what clients see and are able to talk to, will be human.
Tom: You mentioned the behavior gap. Can you just explain that term for any listeners that might have heard that one?
Salman: Yes. The behavior gap is the difference between what your fund might do (and what the market might do) and what your portfolio performance does by comparison. So let’s say the market is up 10 percent. If you were invested in the funds you should also be up 10 percent. But your returns might be different because you may have pulled money out or added money at different points over that five year period. Your returns might be lower or higher depending on when you added the money. If you added a dollar on day one and you stayed invested throughout that five year period, at the end of the five years you would have had 10 percent, per year, on average. But if you put in 50 cents in year one, then pulled out 25 cents in year two, then added $5 in year four, depending on what the market was doing, your returns will be different. The difference between what your portfolio does and what the market does (or what your funds do) is what’s known as the behavior gap. People have started talking about it a lot more because it’s a challenge that the industry faces. People in this industry collect a lot of fees. But are they delivering the goods? Are they able to help their clients through those ups and downs? Because that is one of the main reasons you’re hiring a professional. You’re not sure what’s going on the market so you’re having someone help you along the way. But if that individual is falling victim to the same biases of buying high, selling low, then maybe they aren’t doing a good job. You might not be getting your money’s worth. Now, there’s some very legitimate reasons where there might be a behavior gap, too. There are times where people get a big inheritance or big bonus or something. They invested at one point in time right before the market falls or right before the market jumps and that can change your return. But that should be explainable by and advisor or professional to their investors.
Tom: Yes, getting a lump sum of money isn’t as much of a problem as your own emotions getting in the way. Obviously, you don’t want it to cut in half the next week. But at least that’s new money. And it’s not just you getting in your own way.
Salman: And there are times where you get your transfer… We find that sometimes where new clients are coming in and they’re transferring from one institute to us. It just so happens that we get that transfer in on the second the market falls 3 percent and then the second chunk comes in three or four days later and then the market has done something else at that point in time. And that will cause some fluctuation. Those things happen but the biggest part of this is your gut, your emotions, and whether you’re keeping that in check—and the professional you’re working with is also keeping that in check. It’s hard to do that. Your incentive as investment professionals is not to get fired. And how do you not get fired? By being mediocre? When a client calls in yelling about their fears, some professions might find it easier to appease that client by saying,” Yeah, okay. You’re right. I don’t know what’s going to happen in the market so let’s put you in cash,” whereas the right thing to do would be to go back to why the money’s invested and build a portfolio with that in mind and keep that consistent throughout. Unless, of course, goals or personal situations change.
Tom: Yes, there are some people that can do the DIY investing. But at the same time, you had mentioned to me previously about these large institutional investors that you’ve worked with or were tracking for you. Can you go into that a bit and what you saw there?
Salman: With my journey through the investment industry, I cut my teeth at a large consulting firm. My job was to help large institutional investors. These would be pension plans, foundations, and investors with hundreds of millions and often billions of dollars to invest on behalf of their pensioners. Or on behalf of the university in some cases. That was my responsibility. The investment committees at these big institutional investors was comprised of former finance ministers, former CEOs, CFOs, bankers and the who’s who of the professional world. But when 2008 struck, these professionals were doing the same types of things that a less knowledgeable investor might do. They were second guessing their decisions. They forgot why the investments were made the way they were. During 2007 in the peak of the global real estate boom or a bubble, we had tons of inquiries from these pensions to get into real estate. When that started to fall in 2008 and 2009, those very clients were saying asking to get out of real estate. That’s when the light bulb for me went off. I came to the conclusion through that if these professionals—the people “in the know” are having trouble in times of stress, then what chance do my parents have or regular mom and pop have? My mom and dad were asking me the same questions; why their portfolio was down X percent? They thought they had good funds, blue chip names in their portfolios and they had gapped down. Low and behold, at an 8 a.m. meeting with this multibillion dollar pension plan, the investment committee was asking the same question. That was the light bulb for me to see there was an opportunity here to offer education and information to the average investor. And after that I’ve chartered my own career to be more focused on the individual investor rather than institutions. Institutions have tons of help. They have the budgets to go to those big consultants who hopefully will guide them through those times. But the average folks in Canada might not. Services that they get, unfortunately, are very expensive products in Canada. And they might not be built in their best interests. So it’s important for Canadians to have an alternative. And that’s my background.
Tom: Another thing I found with going against DIY (which normally I’m in favor of) is that a lot of people do it without any kind of plan. They just buy Apple stock today and tomorrow they’ll buy an ETF because that’s a little better. There’s no financial plan. Do you through what someone’s investing for and what stages of life they’re looking at?
Salman: Yeah, for sure. We go through quite a bit with them to establish what their goals are and why they’re invested. And also for understanding what their experience might be and what their financial situation is. You pointed out that you paid off your student debt because of the interest rate. You acknowledged it. You educated yourself and wanted to address that. We get a lot of young clients that come to us and say, “I want to invest money, I’m saving now,” and when we scratch the surface we find out they might have a few thousand dollars in credit card debt. And that’s a certain return. That’s a 20 percent return right off the bat. Those are the kinds of things that we’re exploring when we talk to our clients. And we also have clients that have an interest in doing it themselves. And those are the clients that want to give us a big part of their portfolio, because they like that professional management and knowing that someone’s looking after it. But they’ll carve out a part of their portfolio they’ll manage themselves and we encourage that. That’s perfectly fine. But what we do encourage through that process is to write down your goals. Why are you investing? Understand your asset mix; your mix of stocks and bonds because that’s really what’s going to drive the risk balance in your portfolio. Make sure you’re diversified across regions and sectors. In Canada, it’s easy to just think about dividend stocks. We find that a lot because Canada is a bit of an anomaly in the world where dividend stocks have done so well for a long period of time. But that doesn’t seem to be the case across the rest of the world. Well, not always in the rest of the world, I should be clear. But just not to get sucked into that “home bias” where you’ve got most of your portfolio just in Canadian companies. There is nothing wrong with Canadian companies. But Canada’s a very small part of the global economy so understanding that and having that conversation is important. Also important is tracking your performance. That hasn’t been easy until recently. Discount brokers and others have gotten better and through regulation have been forced to provide better disclosure on that. That’s where we find that investors sometimes don’t track as well. They might be buying and selling companies and they might remember the one that did really well. I bought Apple when it was whatever at the time. Now it’s tripled since I bought it. But the two energy companies they had in their portfolio have gone down 70 or 80 percent since I bought them. You want to remember the good ones and you want to remember the ones that sucked too. But it’s important to track that as well to know how you’re doing and understand where you might be making mistakes. When people are buying ETFs or building ETFs for quotas we just advise to make sure that it’s low-cost and to diversify because most of the ETF launches and most of the ETFs out there are actively managed funds with a higher fee associated with them so they might not be delivering the same experience that investors are expecting or are often written about by those trying to educate investors on how to build ETF portfolios. So it’s important to keep that in mind. What we do at Steady Hand as investment professionals and managers is try to keep a decision journal. When we’re making any changes to our proposed buys, we make those decisions by looking at what the thought process was and why it differs from previous decisions. And we suggest investors do the same thing so you know why you’re keeping track of exactly what you’ve decided to do.
Tom: That’s a good idea. I love the journal idea. Something similar I do is, if a stock is dropping, just look at it again. Would you buy it at this new lower price? It seems to be an easy way to make up for some of that fear when the stock is dropping. Say if suddenly it’s cut in half on bad news, just look at it freshly. If you would still buy it, then buy it. Because now you’re going to have more of that stock at a better price. You want to make sure there’s a really good reason for that and it’s not because the company is truly about to fall apart. If it’s just a blip, there’s a chance to get it on sale.
Salman: That’s a great thing to do before you invest too. Let’s say the stock right now is $50. If it falls to $25 because the CEO decided to leave or missed a few quarters of earnings, do you still have the confidence in this company to recapture your position at that point in time when it’s lost $20 or $25? That’s a great mental check. But it’s also easy to do when you’re buying a company versus when it’s already fallen that level. It’s hard to be a contrarian. It takes that it takes a lot of nerve because everyone, by definition, is telling you not to do what you’re planning to. It’s fair to wonder as well, “What have I missed? What has the market understood that I haven’t?” Those are all fair and good things to consider before you make any investment decision.
Tom: I think one of the things for people to keep in mind is; do-it-yourself can be a great way to save on fees. That’s one of the known things. You can’t know results of the market but you can at least save on fees. But, you shouldn’t DIY just to save on fees. Like you mentioned at the beginning, you have to have the time or the knowledge. It can’t just simply be not wanting to pay that two percent mutual fund and going the DIY route. In the end, the results may not be there if they don’t go into it knowing what they’re doing.
Salman: Well, if the funds are charging you more than two percent I would argue that you shouldn’t be doing that anyway, unless you’re getting some extraordinary service for that level of fees. And service at that field level should include some very comprehensive planning, some very good advice and accessibility which I don’t think you would get much in Canada, I’m afraid to say. But I agree. There are a lower fee options out there. I think we are one. And there are others too but it’s a lonely space. And it’s becoming a more lonely space too as time goes on because there are a lot of pressures on investment companies. Scale is important and to get scale people have to limit the kind of service they’re providing because they’re pushing down costs. But there are some more affordable options out there for investors that are looking for a little bit more counselor or advice. We tell all our investors that if you want to do it yourself, try. Read the right people; understand with what folks are talking about. It’s a bit more involved. And maybe if you want, start with a small part of your portfolio to see if you’re comfortable doing it and build it out. In our experience, that is a small part of who we speak to, for sure. But it exists and it’s important. I think it’s important for professionals like me to tell people if they’re interested and they can do it themselves, they certainly should go about trying. But like you mentioned, also have the discipline to write down why they’re doing what they’re doing and have those goals established; track their performance, and keep track of why they’re making those decisions. But if you can’t, there’s a few of us out there that have a very affordable fee and can provide you that accessible advice we think a lot of Canadians are looking for.
Tom: This has been a great look at this middle road where you don’t have to go high-fee or do-it-yourself. Can you let people know a bit about Steady Hand and where they can find you guys?
Salman: Sure. You can find us on steadyhand.com. We service clients in B.C., Alberta, Saskatchewan, Manitoba, and Ontario. We’ve got offices in Ontario but our headquarters are in Vancouver. And like I said, if you reach out to us, there’s easy opportunities to book a call or meeting with us if you’re interested in getting to know us. We pride ourselves on the things I talked about; transparency, low fees, alignment of interests. We’re big believers in investment professionals being aligned with who they’re working with. We invest alongside our clients. We pay the same fees as our clients and want to be our clients “steady hand.” That’s where the name comes from. We want to be the people our clients can lean on when they have life events, in times of market stress, if you’ve got an RSP that needs to become a RIF, or you’re just trying to figure out the difference between an RSP and TFSA. Those are all things that are very valid questions for investors and things that we deal with on a daily basis. It’s our bread and butter.
Tom: Perfect. Thank you for being on the show.
Salman: Thanks a lot, Tom.
Thanks, Salman, for sharing some of the pitfalls DIY investors need to be aware of and showing us the value of sound professional advice. You can find the show notes for this episode at maplemoney.com/salmanahmed. I want to take moment to thank you for listening to the Maple Money Show. I appreciate your support in helping us continue to grow. If you have the Apple podcast app on your phone, can you pull up Maple Money and give it a quick rating? Even better, leave a review and let everyone know what you think of the show. Anyone who leaves a review in December can enter a draw to win a signed copy of the book, Love Your Life, Not Theirs, by Rachel Cruze. Head over to maplemoney.com/review for instructions on how to enter. Don’t forget to tune in next week as Brynne Conroy joins the show to discuss the many outside factors that can affect your finances.