#143 Beware the Narwhal

In financial slang, a Narwhal is basically a Canadian Unicorn. A Unicorn may be more familiar term, though predominantly an American one, describing a large start-up company with shockingly high valuation. It is fast, trend-setting, and sexy. Companies like Uber, Airbnb, and Snapchat are some of the more recognizable Unicorn names.

The fact that Unicorns are mythical creatures is telling in itself. Like most other companies, Unicorns are valued based on the potential for future earnings. But unlike most other companies, the vast majority of Unicorns suffer from a significant lack of actual profit.

It’s funny then, that as whispers of a Unicorn bubble gain their foothold, becoming a Unicorn is still a primary goal for many start-up companies – if for nothing more than the credibility and status that the title demands. We have Unicorns in our industry as well. Start-up advisors with their eyes focused on becoming the star of the industry and envy of their peers; a smooth-talking DiCaprio in a Narwhal suit.

The defining characteristics of Unicorns elicit emotional responses – like what my mentor Brad Brain would call “financial pornography”. Unicorns come into existence very quickly, they challenge our way of life, and they are very much in vogue – the darling of their closest circles.

I don’t want to be a Unicorn. Or a Narwhal, for that matter. Want to know how come?

Because I choose sustainability over earnings.

One of the traditional business models in the mutual fund industry pays the advisor an up-front commission for new investment purchases. In this model, the advisor receives about five times as much income in the first year than they would in a model that favors ongoing management. And while sale-side commissions can help advisors reach Unicorn status quicker, they pit immediate earnings against reoccurring revenue. I don’t want to be a unicorn. I’m in it for the long haul, and focusing on sustainability will help me get there.

Because I choose value over emotional appeal.

You know what’s fun? Stories! Stories are fun! And stories make investments easier to sell too (that’s why principal protected notes still get sold, despite being condemned by a great many reputable advisors). I’m currently reading Stephen King’s Bazaar of Bad Dreams and am caught right up with it. The difference is, when I read King, I know it’s not real. And at any time, I can set my book down and leave. Unicorns, on the other hand, don’t know they’re not real. I don’t want to be a Unicorn. I want to be more than just a good story. I want to be boring. I want to be consistent. And I want to add tangible value through the work I do. Stories may be fun, but value is worth coming back for.

Because I choose education over prestige.

In mythology, Unicorns are portrayed as elegant creatures of divinity. They are symbols of purity and enrichment. Their hearts are pure, and their tears can heal your sorrows. But while each advisor will have a different philosophy from the next, it’s important realize that no advisor has special insight into the markets, access to special products that the rest of us don’t have, or the ability to consistently generate 12% rates of return in a 1% interest rate environment. I have no special or magical abilities, no illusions of grandeur. What I do have is a choice. A choice to dedicate myself to a higher level of education (scooping up designations along the way) so that I can better apply my knowledge, creative energy, and compassion through my work. I don’t want to be a Unicorn. Because I don’t believe in Unicorns. But I do believe in me.

Unicorns have great and exciting things to offer. And while I have a bit of an ethical rift with their motives, there’s nothing inherently wrong with working with them. But investors need to be aware that the pages in this story book are turning. It may now be prudent to prepare yourself for the return of Unicorn to the world of myth.

The first stages of remythizing Unicorns have already begun. The next will commence in July 2016, when investors will see a couple new lines on their statements. One will show dealer compensation (Advisor compensation often – but not always – makes up the majority of this), and the other will show rates of return. I’m not super-thrilled about the rates of return disclosure because I believe it will take the emphasis off of long-term goals-based planning. But I am a huge fan of the fee disclosure because transparency puts all cards on the table, and gives the clients opportunity to determine if the service they receive is worth paying for.

Justifying their value is a challenge I hope many Unicorns will be able to overcome, but that’s potentially just the tip of the storm. Something that our Commonwealth friends have worked through in the past few years is the outright banning of commissions. In that environment Unicorns, who depend on a high-commission environment to survive, may thus find themselves on the brink of extinction.

The statistics are significant. According to a presentation by Shawn Brayman, CEO of PlanPlus, at the 2015 IAFP symposium, when the U.K. banned commissions in 2008, 20% of advisors left the business (87.5% were from banks). When the Netherlands banned fees and demanded higher competency in 2013, 80% of advisors failed their wealth exams and 65% left the business. Australia has seen similar statistics, and now word has it that they are first country moving to limit commissions produced from the sale of insurance policies as well.

How does this bode for Narwhals in Canada? It’s hard to say. But if our worldly peers can be offered as a guide, it’s of interest to note that the average population to advisor ratio in the developed world is approximately 2000 : 1. In Canada It’s currently 400 : 1, suggesting a significant over-abundance. If regulators move to ban commissions and push Unicorns back into the world of mythology and Canada moves to the developed world average, we’d be looking at a potential 80% industry attrition.

So what can you do to limit your exposure to the Narwhal Bubble? The most important step is to get your financial plan updated. This will give you insight into how you’re investments are doing relative to your goals, put a timeline on any maintenance that may need to be done, and help you remain grounded during any transitionary period. The second step is to set yourself up on a low-maintenance path. Word from overseas is that Financial Planners who survived the culling are overwhelmed with demand from orphaned clients. If you’re currently dependent on regular trading or are always looking for the newest trend to invest in, make sure you’re prepared to adopt a buy-and-hold strategy while capacity readjusts itself. And finally, be aware of the services you’re receiving and the fees that you’re paying. If you can understand an advisor’s business model and the value they add to your plan, then the relationship should hold strong, even though the method of compensation might change.

The majority of bubbles can only be defined in retrospect – after the crash. Currently, much of the advisory industry appears to be over inflated and fragile. Every bubble eventually finds its end, so pursue Unicorns only with great caution. They may be coming with an expiry date.

If you have questions on establishing a formal written financial plan, or for more information on the value of advice, speak with a Certified Financial Planner today.

Written by Meagan S. Balaneski, CFP, R.F.P.

Meagan S. Balaneski, CFP, R.F.P CERTIFIED FINANCIAL PLANNER® Advantage Insurance & Investment Advisors Investment Funds Representative Manulife Securities Investment Services Inc.

The opinions expressed are those of Meagan S. Balaneski and may not necessarily reflect the views of Manulife Securities Investment Services Inc.

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