There are hundreds of wealth management firms operating in Canada, with every website looking the same. We’ve all seen the stock photo of the couple on the sailboat. And most of the information presented also sounds the same. In a nutshell, they all explain that they invest in quality businesses with a strong management team. Add to that, anyone can put together a great marketing presentation.

There are plenty of benefits to hiring a wealth management firm. Studies have certainly shown that clients significantly outperform when working with a wealth manager. A 2019 Vanguard study even found that clients with a strong wealth manager receive on average a 3% increase in the value of their portfolios annually.

Ultimately, however, it can be difficult to truly determine who does what and how one firm differs from the next one.

Evaluating a wealth manager: the  4P's of manager research

Evaluating Wealth Management Firms and Managers

Institutional investors such as banks and pension funds employ manager research teams. These teams identify best-in-class investment managers. Furthermore, most institutional investors rely on service providers who supply them with in-depth information about asset managers. As you can imagine, this process is expensive, salary-wise, and time-consuming. That doesn’t mean, however, that private investors can’t apply some of the same techniques in order to evaluate wealth managers.

Canada’s wealthiest families do just that. Working with investment consultants and multi-family offices, these investors apply similar techniques when it comes to evaluating, selecting, and monitoring portfolio managers in charge of managing their wealth.

At Wealth Management Canada, our investment experts rely on 10+ years of experience conducting wealth manager research on behalf of individual investors and institutional investors. Let’s take a high-level look at the process by highlighting the four main categories we review.

Related Reading: When Should I Hire A Wealth Manager?

The 4P’s of wealth manager research

You may have heard the reference to the 4P’s of manager research. These are People, Philosophy, Process, and Performance. When evaluating a wealth manager, these are the key areas to think about. The 4P’s can be dissected further, but for the purpose of this introduction, we’ll focus on these high-level categories.

1. People

Investment staff and the overall organization structure are the key ingredients that determine the success of a wealth manager.

One of the first things to look at when selecting a wealth management firm is the individuals managing the portfolios. You need to determine the quality of the investment team – i.e. how confident are you that they are above-average investors and that their investment skill will result in the expected performance over the long term.

It’s also important to understand the operating culture of the firm. This gives an insight into the financial stability of the organization, overall team dynamic, succession planning, etc.

2. Philosophy

Discipline, confidence, and conviction in one’s investment philosophy is critical when evaluating a wealth manager. The goal is to identify companies that believe in and follow your investment philosophy, even in times of underperformance. Think of investment philosophy (or investment style) as the set of guiding principles that determine what type of securities the portfolio manager will focus on in their research and include in the portfolio.

It’s important that the investment philosophy is clearly stated, and convey to us what inefficiency in the market the wealth manager seeks to exploit. For example, let’s say we’re evaluating a manager who focuses on investing in large-cap, value companies in Canada and they hold Enbridge. We want to know what the portfolio manager thinks they know about Enbridge that the rest of the market is not considering, which will result in a positive return for the portfolio.

3. Process

The process is simply the execution of the wealth manager’s investment philosophy. When evaluating a firm’s process, we look at everything, including:

  • How they conduct research
  • How/why a stock makes it into the portfolio (buy decision)
  • How/why stock exits a portfolio (sell decision)
  • Risk management techniques
  • How the portfolio is constructed so the resulting portfolio is well diversified

What we want to see is a disciplined and repeatable process.

Related Reading: Asset Management vs. Wealth Management: What is the Difference?

4. Performance

Performance is the wealth management firm’s report card. What is the end result of their investment philosophy and process? How well did they do compared to their peers or the broader market? There are two ways of looking at performance:

  • Annualized Returns: show the smoothed out, average return the portfolio has delivered each year. For example, if you see a 3-year return of 4% that means that the portfolio has grown, on AVERAGE, 4% in each of the last three years. However, the actual returns in each of those years may not have (and most likely were not) exactly 4%.
  • Calendar Year Returns: show the ACTUAL return for each year. With the above example, the investor can see the pattern of returns over time which, when averaged out, produced the 4% return over 3 years.

It is important to look at both of these. The annualized returns help us evaluate the portfolio manager’s long-term performance, while the calendar returns give us the detailed story of how the manager arrived at those long-term numbers.

Related Reading: Top-down and Bottom-up Analysis: Two Complementary Investment Approaches

In Summary

Manager research is similar to putting together a jigsaw puzzle. The 4P’s all need to fit together so we can get a full picture of a wealth manager.

We take great pride in the manager research process at Wealth Management Canada, and we are patient in our search for the best wealth management companies in Canada. The process is both an art and a science, involving both qualitative and quantitative research.

While performance is ultimately what we’re after, we understand that performance is the result of the first 3P’s – the people, the investment philosophy, and the investment process.

We’ve all seen the disclaimer “past performance is not an indicator of future outcomes.” There’s a very good reason for this: No one can guarantee future returns. However, we believe that identifying excellent investment teams, with good investment philosophies, and disciplined processes gives us the best probability of good future returns.

Read More: How to Choose a Wealth Management Firm

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