The value of independent financial advice

hockey

Certified financial planner and president of De Thomas Wealth Management Tony DeThomasis explains the difference between a financial planner and a money manager—and why understanding the difference is key to financial health.

Early in April, MoneySense did a Q&A with Tony DeThomasis, president of De Thomas Wealth Management. De Thomasis, the author of Finding a financial advisor that’s right for you believes it’s important for Canadians to have a holistic approach to their finances. Sure, investment returns are important but so are other concerns like estate planning, insurance reviews and understanding your personal tax situation. MoneySense writer Julie Cazzin asked De Thomasis several questions and here’s what he had to say:

MoneySense: What has changed since your start in the financial planning industry 40 years ago?

Right now, being a money manager is very, very competitive. That wasn’t the case 40 years ago. In the 1970s if you wanted to have your money managed you had just two options: hiring a stockbroker, or investing on your own in a handful of mutual funds. At that time money managers came to be seen as superstars and they were very well-respected—John Templeton, Bob Krembil (head of Chiefswood Holdings Ltd., Peter Cundill (who founded the much-respected Cundill Value Fund in 1974) and Peter Lynch (manager of the Magellan Fund at Fidelity Investments between 1977 and 1990 where he averaged a 29.2% annual return), to name a few. The word spread of their unique talent in growing investment returns and the rest is history.

At the same time, the mutual fund industry was exploding to the plethora of funds we have today. Too many people got into the money management business. Today we have over 5,000 mutual funds, segregated funds, and private pooled funds—and they are not all good quality investments.

I like to compare what’s happened in the investment and financial products industry to what happened in the National Hockey League (NHL) when it went from just six teams in the 1950s to 30 teams today. What happened to the quality of the teams? The quality of the games? It slowly went downhill. Plus, the odds of any one NHL team winning a Stanley Cup also went way down. It’s important to think of money management in the way same—the quality of money managers went down and the odds of you picking a winning financial product on your own also decreased, the more investment products that were introduced.

MS: Are there any solutions to this?

Yes, but first it’s important to understand what investors need and want. First, investors and the media in general always confuse the terms ‘financial planner’ and ‘money manager’. They use them interchangeably and assume they’re the same thing. They are not. I chose the profession of being a financial planner, not a money manager like Cundill, Templeton or Lynch. I simply knew I was not as good as they are at picking investments and managing people’s money.

So when it comes to helping people with their finances, I see my role as being more like that of a General Manager for a hockey team—that is, to bring together the best people and to build the best portfolio management team possible, no matter if it’s finding the best index fund, dividend fund or small cap fund manager out there for my clients. Then I tie all this investment advice into a financial plan that may include an estate plan, a retirement plan, an income tax plan and/or an insurance plan.

Sure, some people will want to do all of the investing themselves but others will want an investment manager to do it all for them. The final decision is theirs but they need to understand the approach.

MS: What is the specific job of a financial planner?
The financial planner’s job is to build a great portfolio and financial plan— not just buy a financial product. For instance, by bringing together several good mutual funds you can build a very cost-effective, well-diversified and well-managed portfolio of indexed mutual funds or ETFs. That portfolio could include a great value style global mutual fund such as DFA Global Equity Portfolio F (MER 0.55%), a great dividend mutual fund such as Purpose Core Dividend Fund (MER 0.55%), a great global bond fund such as PIMCO Income Fund Class D (MER: 0.79%), a great global small cap fund such as Mawer Global Small Cap Fund (MER: 1.81%) or a great all-cap fund such as EdgePoint Global Portfolio Series F (MER 0.95%).

As in any great hockey game, a player may get hurt (disability), burned out (near retirement) or the game has changed (faster game, less hitting) and that player can no longer compete, and that’s when a change has to be made. If you think back you will remember great fund families like Altamira, AIC, and Global Strategy. They were once great mutual fund families that simply burnt out. It happens—and that’s why you never, ever want to give all your money to one money manager, which is why I choose to become a financial planner—a GM simply has a much longer lifespan than a coach or a hockey player. Why? Because building a good long-term portfolio is just part of the job—the other part, as I’ve said, includes bringing together experts in insurance, income tax, estate planning and retirement so the complete financial picture is visible and these individual experts can bring their expertise to help grow and protect your money in all stages of your life. That’s what I pride myself in doing.

MS: How do you narrow down the products and mutual funds you select?
There are some general rules of thumb. They are: try and keep the fund management expense ratio below 1%, find a mutual fund manager who also owns all or part the fund company, and then finally, interview the fund manager yourself so you can discover their investment style. For instance, do they invest in large companies or small companies? Do they gravitate to growth companies or value picks? Like a hockey player, a money manager cannot be good in every position—they may be a great left wing player but a terrible goalie so you need to mix and match to suit their talents.

MS: Any other words of wisdom?

It is extremely hard to know and plan for what will happen over the next 10 or 20 years. But after more than 35 years in the business, I do know one thing for certain: as we get older there will be a point in time when we all will need help with our finances if we want to do things right. You will either seek advice from close family members or friends, or you will get professional help. It is much easier to start early and build trust and a rapport with someone you have known and worked with over the years then it is to start fresh at age 70 when you’ve built up a sizeable amount of assets and then have to trust someone with it. Building that relationship with a professional you trust is always best done sooner rather than later. Believe me, you will be thankful you did.

MS: Thanks for your time Tony.

You can read Tony’s book here. You can reach Tony DeThomasis at [email protected]