Different levels of advice for wealthy investors

Brokers have an advantage over mutual-fund advisors of being licensed to sell a larger range of investment products including exchange-traded funds, individual stocks and bonds, as well as mutual funds. Many brokers make good use of the dramatic growth in ETF choices, typically using them alongside other products. But this freedom sometimes results in controversy when brokers occasionally sell complex, structured products with high fees.

You can generally find good brokers to take you on if you have several hundred thousand dollars to invest, although some brokers set their minimums at $500,000 or even $1 million.

The minimum requirements to be licensed as a broker are fairly basic. But many have additional credentials, particularly the Chartered Investment Manager (CIM) designation, but also the Chartered Financial Analyst (CFA) designation or financial-planning designations.

What you pay: Brokers typically charge a fee of 1% to 1.75% of assets per year, although some still charge the traditional commission per trade instead. Accounts much over $1 million often pay less. (The fee doesn't include the management-expense ratios of the ETFs and mutual funds. Brokers generally sell F-class mutual funds with no embedded trailer fee if you're paying a fee as a percentage of overall assets.)

What to look for or avoid: The brokerage channel is gradually transitioning away from just being one that provides non-discretionary advice and requires the client to approve all trades, to also offering discretionary management, where they make all the day-to-day decisions subject to the client's overall direction. Roughly one-third of brokers are now licensed to offer discretionary management, says Sjogren.

Non-discretionary works well for clients who like to make all the day-to-day decisions themselves while using the broker as a sounding board, but can be problematic if the client also expects the broker to be intimately familiar with all aspects of the client's portfolio. A broker typically has around 200 client accounts, which makes it difficult to stay on top of the details of each portfolio if they're all different. And when the broker thinks it's a good time to buy or sell a holding common to many portfolios, the broker must contact each client individually to implement that change -- an enormously time-consuming task.

Discretionary direction, usually set out formally in an investment policy statement (IPS), is more efficient because it allows the broker to manage accounts with similar profiles in a similar way. The same portfolio adjustments can be done easily in accordance with the policy statements for similar accounts at the same time without the need to contact each client. The brokerage channel also provides leeway for small firms to pursue distinct innovative approaches. One such firm is PWL Capital, which provides discretionary management while following a classic passive approach, primarily using broadly based ETFs. "It's a straightforward approach but it takes discipline to execute it properly," says PWL Capital president Brenda Bartlett. Fees depend on account size and service needs, and range up to a maximum of 1% of assets per year.

PWL Capital has a long tradition of integrating financial planning with investment management and gets closely involved in related issues like tax-loss harvesting and determining a tax-efficient withdrawal strategy in retirement. "We look after everything financial for the client," says Bartlett. "It goes way beyond structuring the portfolio."

One knock against brokers has been that generally they require a few hundred thousand dollars in assets -- and sometimes much more -- for them to take you on. That leaves a gap between no advice (filled by discount brokerages) and full-service advice (filled by conventional brokerages). Robo-advisors have narrowed the gap with a discretionary approach. But the industry is also trying new non-discretionary approaches.

For example, Bank of Montreal's adviceDirect assists online-brokerage clients with at least $50,000 in assets (while charging 0.75% of assets per year over $100,000, with a $750 yearly minimum). The service provides a sounding board to clients who want to make their own investment decisions, provides continuous monitoring of client portfolios, and offers advice for getting back on track if the portfolio diverges from stated goals. There is no one-to-one relationship with a broker, but instead clients have access to different licensed advisors through a call centre (although effort is made to route clients who call in to familiar advisors when possible). Silvio Stroescu, head of online investing at BMO Financial Group, likens this service to that of an investment "co-pilot."

Investment counsellors take a team approach

Investment counsellors are a well regarded option for managing your money if you have a large amount to invest and want discretionary management. With 4,800 advisors (also known as portfolio managers), this investment model is offered by distinct divisions of each of the six major banks, by boutique firms and by institutional money managers that also handle pension funds. You can find good investment counsellors if you have $500,000, but many require at least $1 million or sometimes more. The discretionary approach requires a high level of expertise: it is very common for advisors to have the CFA designation.

What you pay. Investment counsellors typically charge 1% to 1.5% of assets per year, but often less for extremely large accounts. This generally makes them competitive in fees with brokerage firms, and substantially cheaper than the total fees for mutual funds that come with advice.

What to look for or avoid: While most investment counsellors use various types of active funds, the use of passive ETFs is beginning to make inroads.

HighView Financial Group is an investment counselling firm in Ontario which considers itself agnostic in choosing between active investments and passive ETFs for client portfolios. HighView vice-president Dan Hallett says the firm views itself as the “portfolio architect” and selects what it regards as the best external manager it can find for each broad asset category in their portfolios. In practice, most of the funds it uses are active, but it also uses passive ETFs. “You just do what makes sense, either passive or active,” says Hallett. “Truly passive will be your default unless you find a compelling reason to do something different.”

Increasingly, investment counsellors are competing with brokers that follow a discretionary approach. But the two approaches are distinct. With a brokerage firm, the individual broker is usually making the decisions, whereas investment counsellors adopt a firm-wide team approach.