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Investment Counsellor, isn't that a fancy name for stock broker?
Sort of, but not exactly. Both the Counsellor and broker can buy and sell stocks for you, or even buy mutual funds. As the name indicates the mutual fund dealer can buy or sell only mutual funds. There are two types of brokers, advisory and discretionary. As the name indicates the advisory can advise on investments but needs the clients okay to purchase a security. The discretionary broker is closer to a counsellor in authority and can make decisions based on guidelines given by the client. The Counsellor is regulated by the Provincial Securities Commission, or in my case the Ontario Securities Commission (OSC) and a broker is governed by the Investment Dealers Association. There are also Mutual Fund Dealers that are restricted to selling mutual funds, they are also regulated by Provincial Securities Commission.
How do you get paid?
Counsellors charge a fee for service. This is usually a flat fee, expressed as a percent of the portfolio. I charge a 1% annual fee of assets managed. This gets charged on a monthly basis. On large portfolios the fee might be reduced from this level at the counsellors discretion. It doesn't hurt to ask for a discount. Some counsellors might charge more. The advisor broker gets paid by commissions, and trailer or service fees from products that they sell. The discretionary broker gets a fee for the service and commissions for execution of trades. Mutual fund dealers get commissions from product sales and trailer or service fees paid by fund companies. This trailer is part of the Management Expense Ratio (MER) of the mutual fund and is routinely more then 2%! The source of compensation can create a conflict of interest.
What do you need to call yourself a counsellor?
The OSC requires a certain level of training before they allow an individual to call themselves an Investment Counsellor/Portfolio Manager (IC/PM). They require Level 1 of the prestigious Chartered Financial Analyst (CFA) program, and 5 years of experience in research or portfolio management. The discretionary broker needs the same levels while the advisory broker needs the Canadian Securities Course and the Conduct and Practices Handbook. The Mutual Fund Dealer needs one the Canadian Securities Courses, Canadian Investment Funds Course or Principles of Mutual Fund Investment.
Why would I want to use an investment counsellor?
There are a number of reasons. You are hiring the investment counsellor as your investment
professional and you are depending upon their expertise to meet your financial plan. You want to be
sure that there are no conflicts of interest, that the professional you are using is making the
recommendation because it is in your best interest. The counsellor, broker or dealer all say that
they are set up to meet the unique needs of each client and work with the investment plan that has
been agreed upon. The mutual fund dealer does it by selling mutual funds. The broker may or may not
use mutual funds in addition to stocks and bonds. The counsellor will likely use stocks and bonds,
whatever is in the best interest of the client. Some investors are uncomfortable with the
"discretionary" element of the counsellor. Others embrace this discretionary ability, due to
training and experience of the counsellor, and don't have the time or want to be bothered with every
little detail.
The "fee for service" is one of the most attractive features to differentiate counsellors from
brokers and mutual fund dealers. I have outlined the pay structure for a counsellor above. If the
amount under management goes up the counsellor earns more, if it goes down they earn less.
Counsellors do not receive any compensation or commission for buying and selling securities. Being
free from this potential conflict of interest means that the counsellor is only rewarded for
managing the portfolio. This freedom from transaction bias is a very attractive feature. Since the
counsellor is not compensated by buying/selling fees they usually use a discount broker for purchase
or sale. This can save the investor hundreds of dollars on each transaction.
