Starting early is a big key to successful investing
But financial advisors often shun clients with small portfolios

Valerie Lonergan is young, university educated, and making her first real money since graduating from Concordia University's communications program. So you would think that she would be the ideal client for a financial advisor. Think again.

"Most of the brokers I have spoken to will not sit down with me unless I have a minimum of $50,000 to invest," Lonergan said. "Which clearly at age 24 I don't have."

Lonergan's problem illustrates the Catch-22 situation facing many younger Canadians. While most financial advisors agree that starting an investment plan early is crucial, few are willing to spend time with low-wealth clients. And those that will, are usually either rookies, or commissioned salesmen strongly motivated to push their own products.

Lonergan, who works as a project development director at Seville Entertainment, a film distribution house, has fairly straightforward goals. She wants to start saving money to buy a house. But she also wants to build a cash reserve to give her the option of taking a sabbatical to write either a novel or a film script.

"I am currently living rent-free with a friend," Lonergan said. "So if I am going to put some money away, now is the time to do it."

But when she went to her local Royal Bank branch, Lonergan was given conflicting information on who to turn to for investment advice. First she was told that she needed at least $50,000 in her portfolio to qualify for a meeting with a financial planner from the bank's brokerage arm. Then, the clerk who initially tried to pass Lonergan along to another department called her back to say that she could handle the dossier.

A spokesperson for RBC Dominion, the Royal Bank's brokerage arm, confirmed that some clients would be better getting their financial advice from the 1,500 financial advisors that work in the bank's branch network.

But while the big banks are increasingly staffing their branches with financial planners and other wealth management professionals, service quality is uneven. Branch level planners often cannot devote the time required to deal with complex cases that advisors from their brokerage arms do. The result is that those with smaller portfolios have to put up with a lessor degree of service.

According to "Jay," a veteran investment advisor with the brokerage arm of one of Canada's big six financial institutions, the big investment dealers' policy of steering lower wealth clients elsewhere is "well known," in the industry.

"You need a certain-sized portfolio to make it worthwhile for the professional advisor to spend time with a client," Jay said. "Younger, less experienced advisors getting started will sometimes take on lower wealth individuals, hoping their portfolios will grow. But for an established investment advisor it's a money losing proposition."

On the face of it, there are numerous places that younger Canadians can go to for financial services. But none provide the perfect solution.

Mutual fund and insurance salesmen often call themselves financial advisors. But they are paid on commission, and the solutions offered are inevitably tainted by their desire to make a sale. And while just about anyone with $1,000 can open an Internet trading account, the investor is more or less on his own.

Fee based financial services would seem to be the solution, because advice given is not skewered by the desire to close a sale. But these services can be costly and are often tailored to high-wealth investors too. One provider, Kerr Financial Corporation charges between $3,500 and $10,000 for its services.

For those who can't afford the fees, Kerr Financial markets its own interactive personal financial course, which is distributed on CD-Roms and costs about $60.

According to Brenda Shanahan, one of the firm's senior financial planners, people who are starting to invest, need to learn investing basics themselves. "Just like you would learn how to manage your health or car, you need to learn about finances," Shanahan said.

And that's what Lonergan is doing. "I've read several books," she said, pulling a copy of Smart Women Finish Rich, from her desk. One example from the book that particularly impressed Lonergan demonstrates how by starting early, a woman who invests a small amount for just eight years can do better that one who starts a few years later but saves for forty years.

"It's a very good example," Lonergan said. "But who would give me that information if didn't go out and find it on my own?"

 

 

Sidebar: Due to the effects of compounding, starting to invest at an early age can yield impressive results. Two examples dramatically illustrate the point.

Example #1: Susan who is 19, invests $2,000 a year for eight years in a tax deferred account she believes can generate 10% a year in returns. After that she will longer put any money into the account, but will rely on her portfolio to grow from earnings and capital gains. By the time she is 65, Susan's initial $16,000 would be worth $1.02 million.

Example #2: Kim plans to wait a little longer to get started. Beginning on her 27th birthday, she will invest $2,000 a year, also hoping to generate 10% a year in return. But unlike Susan, she will continue putting money into her retirement account at that rate until age 65. In this scenario, during the 39 years she will invest a total of $78,000. But it will be only worth $805,000 when she retires.

In other words, Suzan has invested only about one fifth as much as Kim. But because she started earlier, her retirement account will be $215,000 larger.

Source: Smart women Finish Rich, by David Bach, Random House

 

 

Photo Caption: Like many investors with portfolios of less than $50,000, Valerie Lonergan is having trouble getting financial advisors to pay attention to her.

 

Diekmeyer can be reached at peter@peterdiekmeyer .com

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