The traditional method of investing for individuals often involves building a portfolio of stocks, bonds, mutual funds, etc. with the help of a stock broker, financial planner or financial advisor. Changes to the portfolio require the initiative of the financial advisor or the client, and the client must approve each change. Depending on portfolio composition and when changes occur, each client benefits differently. Such a model of investing often involves transaction-based compensation for the financial advisors. When a transaction is recommended by financial advisors that get paid for each transaction, a client can never be entirely certain of the motives of the financial advisors. This model that has been used by full service stock brokers for dozens of years is obviously flawed and its popularity is steadily declining as individuals discover new and better alternatives. At Lycos Asset Management we offer the following two methods:
The first alternative is wrap accounts or managed account programs. These are usually asset-based fee accounts, offered by most stock brokers in Vancouver and elsewhere in Canada, fund companies, financial planning and wealth management firms. A much better method of investing than the traditional, these wrap accounts usually involve a stock broker, financial advisor or financial planner constructing a well diversified portfolio suited to the investor's needs and objectives, using internally or externally managed products (mutual funds, pooled funds, etc). This method lends itself for a better financial planning process as more time is devoted to financial planning than to executing transactions. Fund managers are then given a specific mandate to match their area of expertise. Asset allocation, i.e. what percent of the assets is to be allocated to different asset classes, such as stocks or bonds, is what influences both portfolio return and risk the most and is much more likely to be done properly using this method of investing. Fees here are asset-based, aligning the clients' interest with those of the advisor and the fund manager(s). Being a wealth management firm and financial advisors in Vancouver BC, we also offer such a service. In using such programs most stock brokers will pick external managers with good track records. That way the actual portfolio management is contracted out to people with superior skill. However, these financial planners, financial advisors or stock brokers are ensuring job security because if things do not go as well as expected it is somebody else's fault and not theirs. We on the other hand use funds that we manage, the various classes of the Lycos Value Fund. We are not afraid to take responsibility for our decisions and be held accountable if things don't work out. Our minimum portfolio size for this type of service is $100,000.
Despite all of the advantages of managed account programs, they are still package solutions. Fund managers cannot possibly know what a client's circumstances are, and decisions they make are for the benefit of all clients, which are not necessarily the best decisions for every client. That would require a totally custom solution, which is what Separately Managed Accounts are. Usually offered by Investment Management firms like Lycos Asset Management, they are the highest level of service available to investors. Here, a dedicated portfolio manager, trained in investment analysis and portfolio construction, having full discretion over portfolio management decisions, constructs and maintains the best possible portfolio for a particular client's investment objectives, risk tolerance level, liquidity needs, tax situation and any other special circumstances that would make the investment objectives unique, or place unique constraints on the portfolio. Such a service was in the past was reserved for the ultra high net worth individuals. Lycos Asset Management now offers this service to British Columbia residents with a minimum of $500,000.
Asset-based compensation ensures that the client's and manager's interests are aligned. A drop in the market value of the portfolio means a pay cut for the manager, which is something that we will try very hard to avoid. We will also help you with defining your objectives and therefore our mandate, which we will formally document in an Investment Policy Statement. If we exceed your return objective, we will charge you a performance fee, usually equal to 20% of the excess return over your objective. For example, if your return objective is 8% and we achieve 9%, a performance fee of 0.20% will be earned.
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Constantine Lycos, CFA