When you think of your investment objectives, you’re probably considering your financial goals, the reasons you’re investing. This means when – and for what purpose – you will need your investment returns. However, financial advisors have a very different definition of “objectives.” When they use the term, they are referring more specifically to the categories of securities you want to purchase. For example:
- Clients wanting steady income will have an objective of fixed income.
- Clients wanting growth without declaring taxable interest or dividend income will have an objective of growth.
- Clients wanting to achieve the growth by holding an investment over a long period of time, (five to 10 years or longer), will have an objective of long-term capital gain.
- Clients wanting to achieve growth with more frequent turnover will have an objective of either short-term (under a year) or medium-term capital gain.
Unfortunately, each financial management firm, and often each individual financial advisor, may have different definitions of these investment objectives. What is long-term for one maybe medium-term to another, and what is income to one may be growth to another. Also, there is some debate as to what “income” refers to; for instance, whether it includes the dividend stream that can be expected from capital stock of a chartered bank.
Clarifying Your Investment Objectives
If you retain a lawyer or consult a medical doctor, you know your reasons. However, your reasons for retaining the services of a financial advisor are not always obvious. Your initial goals may, or may not, be reasonable, and the options available to you to reach your goals may not all be immediately obvious. Therefore, to ensure any investment recommendations are suitable for you, your financial advisor is duty-bound to clarify your investment objectives and to ask about your financial circumstances.
The first major consideration is what you want to accomplish with your investments, in other words, your ultimate goals. For example:
- Do you want to save for retirement?
- Do you want to pay for a new house?
- Do you want to finance a child’s education?
- Do you need cash for a business or personal project?
Your financial advisor must break down these goals into financial “objectives,” to ensure the investment choices you make will enable you to achieve your goals. It is for this financial expertise that that you hire an advisor, and that advisor has an obligation to provide it.
Your IPS Reflects Your Goals
Your financial advisor should clearly set out your goals in your IPS, to ensure you are both clear as to what the advisor will work to accomplish. The amount of money necessary to achieve your goals should be specified. Only then will the strategy recommended by the financial advisor make sense. The goal provides the context for the strategy. If you don’t have the one, you can’t reasonably be expected to have the other.
Your Goals, Your IPS and Your Discretionary Advisor
When you retain a discretionary investment advisor, it is understood that you will not receive calls to discuss each investment recommendation. The only time you can relate your goals to the progress made in your account is at your periodic client/advisor meetings. This is why it is essential to have an established IPS, so you can review with the discretionary advisor how the strategy is working, or whether it should be changed.
If you have suffered a loss in the financial markets, your advisor will likely say the investments were suitable for you and the markets simply turned out to be unfavourable. If there is no rhyme or reason for your investments, it will be impossible to determine whether the investments were, in fact, suitable for you.
Therefore, your financial advisor’s supervisor can and should review the IPS, compare it to the Know Your Client (KYC) information your advisor was required to gather, and decide on its suitability. The IPS will then enable the supervisor and you to determine whether the advisor has complied with your directions. Only if your goals are accurately reflected in the IPS, can you review your progress to ensure you are on track.
If you have become the victim of a discretionary advisor who has shown a lack of experience and integrity, you may have the right to receive compensation. For a free consultation to discuss your rights, please complete and submit our online form.