April 12, 2022

Personal finance is broken, and Camber is here to fix it!

Financial planning can make all of the difference



(Originally posted in 2020)

There has been an interesting trend in personal finance over the past decade as investors have shifted their focus from actively managed funds to a passive approach. Historically, investors have associated the value that a Financial Advisor provides with the advisor’s ability to deliver above-market returns. But, what happens when the research uncovers that advisors are unable to add value here? What value do they bring? Why should you still pay for an advisor? These are all excellent questions! Join us as we walk you through the major problems facing investors when it comes to personal finance and how Camber has entered the market with the sole purpose of being the change the industry is calling for.

What is Happening in the Investment Industry?

When investors are choosing where to allocate their investment dollars, they have two distinctly different paths that they can walk down. On the one side, investors can choose to take an active approach, which attempts to beat the market; and on the other, they can choose to capture what the market has to offer in a strategy known as passive investing.

Historically, investors have chosen to walk down the active management path. They have deemed that the promise of higher returns is worth the increased cost and risk associated with chasing those returns. However, this trend is reversing, and today the financial industry is experiencing one of the most telling shifts ever witnessed in personal finance. Over the past decade, there has been a dramatic flow of funds that have moved away from high-fee actively managed investments towards low-fee passively managed solutions.

Since 2010, the US market share of active funds has fallen from 80% to 61%. This drop has been entirely absorbed by passive funds, which rose from having a 20% market share in 2010 to a 39% market share in 2020.[i] Passive funds have also outpaced their active counterparts by a ratio of 4:1. In Canada, this trend is also occurring but at a slower pace. Over the same ten-year period, passive funds experienced a 280% growth rate, compared to a 143% rate for active funds.[ii]

Why is this Flow of Funds Happening?

As funds continue to flow from active investments to passive investments, the questions we need to ask is, why is this flow occurring? The answer to this question is simple; active fund managers have a terrible track record when it comes to being able to do their job -beat the market consistently. Take a look at the 2019 SPIVA Report where Canadian Equity Fund Managers prove that only 12% of them were able to beat the market. Instead, according to a report issued by Morningstar, the majority of active managers destroyed wealth, as shown by the yellow highlight in the chart below. The more concerning thought is that these results were generated by the largest investment houses around, with all of their resources and dedicated teams. If these negative results are the best that they can do, you can only imagine what a local stockbroker or your brother-in-law’s stock advice will yield.

There exists a counterbalance within markets that make them work. This same force makes them illogical and complex, which causes your intuition and natural response to fail. The easiest way to think about it is to envision backing up a trailer for the first time. When you want to go left it goes right and vice versa.

But, what does this mean for your portfolio? Ultimately it means that you are in fact off the hook and that a simple solution has the highest odds of producing the best results. The less you or anyone else does to your portfolio, the better it will perform. Yes, we are aware that this is counterintuitive to normal human behaviour. Normally, if you want to get better at something in life the answer is to work hard.

Yes, that means that investors will not increase their results by watching BNN or CNBC, following Jim Crammer's recommendations, reading research reports, investing with expert hedge fund managers, getting in and out of the market based on world events, saying the words “this time is different”, or listening to advise from their rich uncle. Again, the less you or anyone else does to your portfolio, the better the results will be. This should come as welcome news, as it means that you can focus on what is important to you like spending time with your family, building a business, or chasing your dream.

Why Should I Still Pay an Advisor?

Ultimately, the “money management” aspect of wealth management also known as the “finance” part of personal finance has been commoditized. So, this leads us back to the million-dollar question: why should I still pay an advisor?

For a financial advisor to remain relevant and be able to justify the fees they charge you, they need to create value by managing the things that they can control. This means that a great advisor can create value for you outside of trying to beat the market. Even Vanguard, the world leader behind the do-it-yourself investment movement has confessed that advisors can add tremendous value. This value is created by focusing on the personal side of personal finance. An advisor can help redirect your focus on areas of your financial life that are in your control and where you can impact positive change. For example, monitoring: spending, savings, tax efficiency, and investment fees. A financial advisor will building you a custom financial plan that helps prepare you for a range of possible outcomes and helps to align your wallet with your goals and objectives.

The godfather of financial planning Michael Kitces outlines his estimation of value add in the table below.

What are the Challenges?

Providing a strong financial plan based on your needs is not always as easy as it sounds. There are a number of challenges that advisors face when constructing these strategies. We have outlined the biggest three below:

  • Accurate data collection - In the same way, a medical professional requires all of your symptoms to make a complete and correct diagnosis; financial professionals need all of your financial data to build you an accurate plan. However, there is one key difference between medical and financial information; financial data is episodic, hard to obtain, and people are disorganized and lethargic when it comes to financial management. This combination makes gaining accurate data collection a real challenge for financial planners.
  • Gamification - While the Fitbit made it fun for people to hit their 10,000 step goal and compound that good behaviour, finance needs to do the same thing as it relies on the same principles of compounding. People would rather discuss things out of their control like what stocks to buy or how to time the market than things they can control like investment fees, tax, and asset allocation. We need to make the variables in our control fun to achieve!
  • Effective communication – In Canada, financial planning software can do detailed calculations, but the output is dated. This often results in a communication breakdown. If clients cannot make meaning out of the data, what good was all that work! At Camber we envision a world of real-time updates, easy to understand data visualization and interactive user interfaces.

This is Where Camber Steps In!

Our mission is to capture market returns efficiently according to the significant amounts of academic evidence available while protecting our clients from all of the short cuts, anecdotal stories, and Fear of Missing Out (FOMO) floating around. Simply put, our role is to help our clients understand that all the things they have been told by the media and old school stockbrokers do not work and instead educate them on how managing the things that they can control and adding value through a modern approach to financial planning can make all of the difference.

Our solutions include:

  • Client data gathering - We have found an easy, fast, and interactive way to make the process fun. By only asking for what we need, we can save our clients time.
  • Assumption engine - During the first phase, we only ask for the data we feel you will know off the top of your head. For the rest, we usually start by making assumptions based on large data sets from Statistics Canada. Our goal is to increase a client’s accuracy over time, but this is a great way to get the process started.
  • Modern display - We have designed the Camber Dashboards to display a client’s information in a modern and interactive format.
  • Process management – A successful financial setup hinges upon execution. We have developed a workflow tool for clients to automate, organize and complete all those critical financial tasks.
  • Educational content – We are constantly working on creating new educational content designed to add transparency to an industry that has for too long lived in the shadows.

[i] Kerzérho, Raymond. “The Passive vs. Active Fund Monitor.” (2020) PWL Capital Inc.
[ii] Kerzérho, Raymond. “The Passive vs. Active Fund Monitor.” (2020) PWL Capital Inc.