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THURSDAY,OCTOBER24,2019 | THEGLOBEANDMAILO B11

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REPORTONBUSINESS |

T

he aggravating gamifica-
tion of investing is most ap-
parent at times like now,
when earnings season is in full
swing. Investors – the majority of
whom are well aware that quar-

terly profit reports are just a snap-

shot in time and only marginally

relevant over the usual long-term

investment time horizons – get

caught up in the hype of “beats”

and “misses” as if they’ve just

watched an Olympic gymnastics

performance and are waiting for

the judges’ score.

The continuing S&P 500 report-

ing season provides a good exam-

ple of how deceptive the empha-

sis on profit results versus expec-

tations can be. Optimists will feel

vindicated because, with 124 of

498 index companies having re-

ported as of midday Wednesday,

aggregate earnings so far have ex-

ceeded forecasts by 3.3 per cent.

But it’s far more important that

quarterly profits are coming in 2.1

per cent below 2018 levels.

The U.S. market is on pace for

the first year over year decline in

earnings since the second quarter

of 2016. This adds credence to

strategists such as Morgan Stan-

ley’s Mike Wilson, who believes

we are close to the end of the cycle

and a bear market is set to begin.

Next to this, the fact that analyst

consensus estimates slightly un-

derstated profit growth is far less

significant.

This is not to suggest that noth-

ing can be learned from quarterly

earnings season – there are clear

trends that indicate both risks

and opportunities. For example,

U.S. multinationals sensitive to

the global economy are suffering

this quarter as a result of the U.S.-

China trade battle. On Wednesday

alone, Caterpillar Inc. and Texas

Instruments Inc. posted extreme-

ly disappointing profit numbers.

It’s easy to see why an investor

might feel a rush of adrenalin just

before one of their biggest stock

holdings reports results. At the

same time, however, they should

ensure that they keep short-term

business performance in a broad-

er context, and that the excite-

ment they feel is not the same as a

casino gambler.

Whysmartinvestorsignoretheearnings-seasonhype

SCOTT
BARLOW

OPINION

INSIDETHEMARKET

W

hen the billionaire mon-
ey manager Ken Fisher
shocked a closed-door
conference of financial profes-
sionals in San Francisco earlier
this month with lewd com-
ments, he unleashed a storm of
controversy – one that small in-
vestors may want to follow, not
just for its scandalous appeal,
but for what it says about the in-
vestment business in general.
Mr. Fisher said winning a cli-
ent’s trust is a lot “like going up
to a girl in a bar” and then ex-
panded on the analogy from
there, according to CNBC and
Bloomberg. He has since apol-
ogized for what he acknowledges
is “language [that] has no place
in our company or industry,” but
clients ranging from the New
Hampshire Retirement System
to Fidelity Investments have
yanked more than US$2-billion
from Mr. Fisher’s namesake com-
pany in recent days.
These clients are apparently
surprised to discover that Mr.
Fisher is capable of bad judg-
ment. Ordinary investors may be
just as disturbed by what his
comments imply about the

money-management business in

general.

It’s an industry that, in one

way or another, is trying to se-

duce you – just as Mr. Fisher says.

The key to arriving at a mature

relationship is seeing through

the patter. Every fund company

can trot out attractive, well-edu-

cated people with well-re-

searched insights about the mar-

ket. But you should look beyond

the superficial charm.

More often than not, this will

result in disappointment. The

performance of most actively

managed funds consistently lags

passive market benchmarks, es-

pecially as you look at longer pe-

riods. In Canada, more than nine

in every 10 funds underperform-

ed their respective benchmarks

over the 10 years to the end of

2018, according to S&P Dow

Jones Indices.

In the United States, similar

long-term trends hold true. Even

the endowments of Ivy League

universities, managed by teams

of highly paid professionals,

have failed to keep pace with a

simple 60/40 portfolio of 60 per

cent U.S. stocks and 40 per cent

U.S. bonds over the past decade,

according to research firm Mar-

kov Processes International.

One simple lesson to take

away from this is that indexing

should be the default strategy for

most small investors. Unless you

have a strong view of where the

market is going next, or a com-

pelling reason to believe in a spe-

cific money manager, putting

money into a low-cost, widely di-

versified index fund makes

sense. No, it’s not going to work

all the time – no investing strate-

gy does – but it is hard to shrug

off the long-term evidence of su-

perior performance.

If you do decide to invest in an

actively managed fund, you

should keep in mind exactly

what you’re betting on. A good

guide to reasonable expectations

is the most recent investors’ let-

ter from John Huber at Saber

Capital Management LLC in Ra-

leigh, N.C. Mr. Huber, who has a

devoted following in the value-

investing world, runs a firm

modelled on Warren Buffett’s

original investment partnership:

It holds a highly concentrated

portfolio of businesses he strong-

ly believes in.

In his letter, Mr. Huber says he

is often asked what his edge, or

advantage, is. “Institutional in-

vestors seem especially interest-

ed in this question, and the edge

that they are almost always look-

ing for is some form of informa-

tional edge or insight that the

rest of the market isn’t aware of,”

he writes.

The problem, Mr. Huber says,

is that such edges don’t exist any

more. Oceans of financial and

corporate information are avail-

able to any professional investor.

Legions of professionals pore

over that data, looking for rea-

sons to buy or sell. Nobody

knows more than anyone else –

at least, not legally. “I’ve observ-

ed over the years that whatever

information an investor believes

to be unique is almost always

understood by many other mar-

ket participants, and thus is not

valuable,” he says.

The only sustainable edge, Mr.

Huber argues, is maintaining a

different time horizon than the

overall market. Much of the

money-management industry is

focused on generating short-

term results. If an investor is pre-

pared put up with bad patches, it

is still possible to beat the mar-

ket over the long term. “The

price of gaining this edge is the

volatility that could occur in the

short term,” he writes. “You have

to be willing to accept the possi-

bility your stock will go down be-

fore it goes up.”

This seems reasonable. How-

ever, there are two issues to pon-

der. One is that you won’t know

if you’re right for some time. The

other is that active management

is usually sold on the basis that it

can reduce volatility, not amplify

it. If you’re prepared to put up

with that volatility and uncer-

tainty, active management may

be for you. Otherwise, you might

want to spend a few minutes

pondering Mr. Fisher’s analogy.

Howtolookbeyondthemoney-managercharm

IAN
McGUGAN

OPINION

ISTOCK

INSIDETHEMARKET

A

new rule from FP Canada
that requires candidates
looking to earn the certi-
fied financial planner (CFP) des-
ignation to have completed a
postsecondary degree is stoking
division and debate among fi-
nancial professionals.
Making a university or college
education mandatory for those
seeking to become CFPs is the
first step in raising the financial
planner profession to a higher
standard, similar to that of doc-
tors and lawyers, says Cary List,
chief executive of FP Canada. But
while some financial planners
are lauding the move, others de-
nounce it as elitist and prohib-
itive.
“Financial planners are deal-
ing with their clients’ futures and
livelihoods,” Mr. List says. “When
you look at other professions
that are less high risk with lower
stakes that require a degree, it
was hard to argue why we
wouldn’t go in this direction.”
Once the change comes into
effect in April, 2022, applicants
for CFP certification must hold a
degree from an accredited col-
lege or university.
It streamlines FP Canada’s
prerequisites with other Cana-
dian financial planner certifica-
tions, such as the Institute of Ad-
vanced Financial Planners’ regis-
tered financial planner designa-
tion, and FP Canada’s partner in

Quebec, the Institut québécois

de planification financière

(IQPF), both of which require ap-

plicants to have university de-

gree.

The move is part of a series of

changes to the program that FP

Canada announced late last year,

which includes a new certifica-

tion for financial planning for cli-

ents with less complex needs,

known as the qualified associate

financial planner, that will not

require applicants to have a post-

secondary degree but will re-

quire them to have a postsec-

ondary diploma.

When assessing whether to in-

troduce the requirement, FP

Canada said that it surveyed aca-

demics in the field, financial

planning firms and CFP program

providers in other countries. The

organization also surveyed its

membership, which showed lit-

tle opposition to the move, Mr.

List says.

FP Canada also looked at how

many of its members have post-

secondary qualifications and

found that two-thirds of all CFPs

have a degree; that number in-

creases to more than 75 per cent

for CFPs who have received the

designation during the past five

years.

“A degree has become table

stakes for any professional ser-

vice. There would be more crit-

icism of us if we didn’t bring our-

selves up to the standards that

other professions, organizations

and other countries are at,” Mr.

List says.

But some financial planners

say that they didn’t have an op-

portunity to provide input on

the change or express concerns

that could make the profession

inaccessible for some and under-

mine the qualifications of others.

Robert Adams, financial advis-

er and CFP at Manulife Securites

Inc. says that of the six CFPs in

his office in Surrey, B.C., four do

not have degrees as they having

previously worked in the restau-

rant, carpentry and fishing in-

dustries.

Rather than requiring a post-

secondary education and poten-

tially precluding people who

want to build a second career as

a financial planner, like his col-

leagues, FP Canada could instead

increase the number of courses

required to obtain the designa-

tion or make the exam more rig-

orous, Mr. Adams says.

“It’s elitist. You’re getting peo-

ple who have a degree sitting

around a table and saying that

they should raise the bar. [They

say] that a degree shows maturi-

ty and an ability to analyze re-

ports,” he says. “But I don’t think

that it’s necessary to have a de-

gree to be good at this career. If

you can learn the material and

pass the exams, why does it mat-

ter if you have a degree prior to

that?”

The new requirement could

also disadvantage rural commu-

nities that typically have one or

two local financial planners who

may not have moved away for

postsecondary studies, Mr.

Adams says. Although more

than half of Canadian adults had

either a college or university de-

gree in 2016, most of those grad-

uates lived in large urban areas,

according to data from Statistics

Canada.

Brad Brain, a CFP at Brad

Brain Financial Planning Inc. in

Fort St. John, B.C. who also holds

an undergraduate degree in eco-

nomics from the University of

Victoria, says the change will be

ineffective because it ignores the

need for regulation on who can

call themselves a financial plan-

ner. With numerous designa-

tions available, an aspiring finan-

cial planner without a postsec-

ondary degree could obtain a dif-

ferent certification to enter the

industry.

“FP Canada is exacerbating

the problem. There are too many

designations in Canada right

now,” he says. “So, if there’s

somebody who doesn’t want to

go back to school, they don’t

need to get their CFP. They’ll just

go get other letters to put after

their name.”

Quebec is the only province

that regulates the title of finan-

cial planner and the IQPF is the

sole organization permitted to

offer a financial planning diplo-

ma. (Ontario has also introduced

a law that will require those who

use the title to have obtained a

financial planning credential

from an approved credentialling

body, but that rule has yet to

come into effect.)

A lack of standard education

contributes to client confusion

around certifications and gaps in

proficiency among financial

planners – and the change to the

CFP requirements should inspire

universities to create dedicated

programs, says Jason Pereira,

partner and senior financial con-

sultant at Woodgate Financial

Inc., a financial planning firm

under the IPC Securities Corp.

umbrella in Toronto.

Some financial professions,

such as accounting, require that

an aspiring accountant complete

an undergraduate degree in that

field of study. Without a similar

undergraduate degree for finan-

cial planners, many industry

professionals may lack knowl-

edge or skills that are not cov-

ered through certification cours-

es, says Mr. Pereira, who teaches

a financial planning course at

York University’s Schulich

School of Business.

“The CFP only goes so far,” he

says. “It’s a good introduction,

but to get a strong level of profi-

ciency you have to study beyond

that. Think about the things that

aren’t taught in the CFP that ad-

visers deal with all the time: the

psychological side, behavioural

finance, the crisis counselling

that we get into with clients and

the entrepreneurial side of run-

ning your own business.”

Special to TheGlobe and Mail

Sentimentsplitonnewdegreerequirementforfinancialplanners

STEFANIEMAROTTA