Small investors take heed
Clients need to make sure their interests are aligned with financial advisors'

The tough markets of the last two years have left individual investors increasingly struggling to figure out whom to trust. Mutual fund managers, the auditing profession, corporate CEOs, and investment analysts, all have fallen into disrepute.

But Stephen Jarislowsky, president of Jarislowsky Fraser, is not only emerging from the difficulties suffered by other financial industry players with his reputation intact, his stature is actually increasing.

That's because Jarislowsky was one of the few high-profile money managers to refuse to get caught up in the boom, and one of the first to warn that valuations were getting ahead of underlying market realities. Now he is telling investors to be careful because the hard times may not yet be over.

"Long periods of growth are often followed by long corrections," said Jarislowsky in a recent interview. "During good times everybody gets greedy, and it can take a long time for things to get back down to reality."

Jarislowsky Fraser is one of the country's largest personal and institutional wealth management firms, responsible for investing about $29 billion in assets for pension funds, endowments and large private portfolios.

But don't go reaching for the phone just yet. The firm only accepts clients with at least $1 million to invest. "But we will also talk to you, if you have $200 million," he deadpans.

Jarislowsky is a journalist's dream. He writes for numerous publications (including the Gazette) knows the profession well, and is guaranteed to provide a good quote or two. The fact that he also knows his stuff, is icing on the cake.

Jarislowsky's complaints with the financial industry run the gamut. For one, he is disdainful of the expenses that many Canadian mutual funds incur. These fees, -- which are expressed as a percentage of assets under management called MER (or management expense ratios), -- typically run between two and three per cent, and are way out of line he says.

"If a mutual fund's real (after inflation) rate of return is 6.0 per cent, and its expenses are 2.5 per cent, then managers are eating up 40 per cent of the profits," said Jarislowsky. "That's not very fair."

Jarislowsky is especially disdainful of trailer fees, which mutual funds pay to referring stockbrokers year after year, even though they don't add any additional value.

"Investors need to make sure that their interests and those of their financial advisors are aligned," said Jarislowsky. "Individual investors are like rabbits in the meadow. If they don't watch out, they are going to be somebody's meal."

Indeed the investor's interest should not only be aligned with their financial advisors, but also with top managers of companies they invest in. For this reason, Jarislowsky pefers investing in companies whose managers also hold a big equity interest.

"If you have a newly hired CEO with only five or six years to build up his pension, or another whose family owns a big stake in the company, which do you think will be a better long-term manager?" he asks.

He cites the Westons (George Weston Limited) and the Thompsons (Thomson Corp) as providing examples of straightforward approaches to management by holders of significant equity in the companies they control. "They are rich enough," said Jarislowsky. "They can afford to be honest."

Jarislowsky is also concerned about the increasing complexity of financial statements, which are making it just about impossible for even top analysts, yet alone ordinary investors, to understand. He cites Enron as one company that Jarislowsky Fraser looked at but refused to invest in.

"We brought in a new client last year who had (Enron stock) in his portfolio. But we sold the stake almost immediately," said Jarislowsky. "If the organizational structure is too complex, it usually means someone is trying to hide something."

Jarislowsky saves his parting shot for government and banking forecasters who continue to predict a rosy economic future, calling them cheerleaders.

"They cut interest rates and stimulated extra car and housing purchases. But consumers can only buy so much," said Jarislowsky. "Forecasters would be better off being more realistic. That way people could better prepare themselves."


Photo Caption: According to Stephen Jarislowsky, relying on politicians and bank economists forecasts could cause investors trouble down the line.


Highlight this quote: "Individual investors are like rabbits in the meadow. If they don't watch out, they are going to be somebody's meal."


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