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Prudent Investor Update,  January 10, 2018

Who does what? Investment dealers/brokers vs portfolio managers

When prudent investor standard comes into effect, investment professionals will see new opportunities in the municipal sector. If you don't already, you may get calls from people offering their services.

The marketplace for investments services and advice is complex, with many service providers promising to do everything for clients.  However, the investment industry is basically comprised of two main types of service providers when it comes to implementing investment strategies – investment dealers (brokers) and portfolio managers. There are also additional experts such as Actuaries and Investment Consultants that advise clients, but do not implement the advice.  One Investment Consultant Kelly Rodgers outlines what you need to know about two types of service providers:


Investment dealers or brokers can trade securities and provide underwriting services. While primarily known for serving individual investors, many dealers also have institutional desks to serve organizations like institutional clients and pension funds. Banks are a prominent provider of these services through their wholly owned subsidiaries – think CIBC Wood Gundy or Scotia McLeod. As Investment Dealers they can provide advice as well as execute transactions. They are also custodians of the asset, meaning they hold their customers’ securities.

Dealers are self-regulated by the Investment Industry Regulatory Organization of Canada (IIROC). They offer multiple product lines and are compensated based on sales revenues. As a result, there is greater potential for conflicts of interest stemming from different commissions earned on different products. As well, the duties around reporting and compliance may not be as thorough as portfolio managers.

Portfolio managers

A portfolio manager is tasked with managing an organization’s full portfolio on a day-to-day basis, following an approved investment policy. They manage investments for institutional investors such as pensions and charitable endowments.

Portfolio managers must meet high standards of fiduciary duty and loyalty to the customer.  They report quarterly on performance and compliance to demonstrate that they are properly following the investment policy. In Ontario, they are regulated directly by the Ontario Securities Commission.

Portfolio managers are compensated based on a tapered management fee schedule in which the larger the account, the lower the fee percentage. While the large banks do provide these services, most portfolio managers are independent firms.
The One Investment Program uses two portfolio managers (MFS Investment Management Canada and Guardian Capital) that have proven track records of delivering strong results within the municipal regulatory context.  

Some institutional investors will hire a consultant to conduct the Request for Proposal for a portfolio manager and monitor their work on an ongoing basis. This may be useful for municipalities that don’t have staff capacity for this type of work.

The upshot

Many companies and individuals say they offer the full range of investment advice and services. When considering an investment professional, it is critical to know what they are registered to do, and to understand how they are paid. The first step is to go to the Canadian Securities Administrators website and look up the firm and/or the individual. This website will tell you what category they belong to, as well as any disciplinary actions.

Top 5 Rules for Investment Advice

  1. Know who you are dealing with. Do the research on any prospective firm and visit regulator websites to ensure you are dealing with a reputable investment professional.
  2. Look for the track record. A portfolio manager should provide a composite of their actual account performance that has been externally verified. Don’t accept historic ‘simulated returns’ or models which are generated by a computer model.
  3. Going “local” may not always be best. While working with someone in the community may seem attractive, a local investment dealer may not always have the level of expertise and knowledge needed for a municipal investment portfolio. Qualified portfolio managers are often located in Toronto or other major financial centres.
  4. Know your investment objectives. Use the municipality’s asset management plan and budget projections to understand the timeframes and financial need, to form the bases of an investment policy.
  5. Take your time. Most importantly – don’t rush. With regulations on municipal investments changing, it is better to wait and see how the Province will introduce the prudent investor standard for municipalities. The One Investment Program is looking at a variety of options as well so that it can offer the benefits of prudent investor to all municipal governments – even ones that don’t qualify on their own.