I just had my annual audit from my investment dealer. It’s a routine procedure.
These mandatory compliance obligations have to be done, but they are not much fun. For half a day, it was “show me your notes for this transaction” and “what’s your process for this hypothetical scenario”, with the auditor looking for anything out of place. Even the tiniest detail can be questioned.
One of the things that gets looked at is something called “Know Your Product.” As a Portfolio Manager, it is my responsibility to make sure I recommend the best investment options for every individual client.
I can’t simply say “this investment fund is the best.” I have to show my work. Why did I recommend this product? What alternatives did I compare it to? Let’s see your analysis. Where is the documentation?
I am getting grilled. I have to justify all the decisions I have made, not only on the investments that I recommended, but also the rationale for not recommending the ones that I passed on.
In the middle of this, I had a moment of introspection. When I was asked how I make my investment recommendations, I realized that my better answer to the auditor’s questions is not simply comparing the MER on mutual funds and recommending the cheapest product. Of course, we do all that mundane stuff too. And I know that was the type of answer that the auditor was expecting to hear.
But the real thing that guides my hand - my truth, my north star, the inuksuk that guides me across the barren tundra – is something that is much more principled. For me, the foundation of the Know Your Product process is my investment philosophy. It’s how I look at what makes for a good investment. It’s what has often kept me from doing dumb things with money.
My investment philosophy is not the topic of this column though. The topic is why you want to have your own process. If you don’t stand for something, then you may fall for anything.
What got me thinking about this was when I realized that ESG investments have fallen off the radar. Nobody really talks about ESG these days, when it wasn’t that long ago that ESG was the fashionable investment topic.
ESG stands for environmental, social and governance. The idea is that people can invest according to their values. Sounds good, right? Is saving the environment important to you? We have an investment for that!
I am not saying that the ESG concept is bad, but the implementation of the concept did not live up to expectations. For one thing, the investment performance was not always satisfactory. But maybe worse was when the marketing departments took over and tried to brand just about everything as ESG.
My cynicism peaked when I was at an investment conference and we were discussing a “Low Carbon Exchange Traded Fund.” What a great idea, eh? You can save for retirement and fight global warming at the same time!
The problem was, this “Low Carbon” investment contained oil companies. Their justification was that these companies produced less carbon than their peers, so they could be included in a “low carbon” fund. Personally, I think that if you are going to brand yourself as low carbon, maybe don’t include fossil fuels in your asset mix.
Why do people do things like slap a “low carbon” label on a fund that holds oil companies? The answer is not complicated.
Because it will sell.
There is a seemingly insatiable demand for innovative investment products. People are always looking for something that will grow faster, be less volatile, produce more income, have better guarantees, and smell spring-time fresh. So, naturally, there are going to be products that promise more and more and more.
Problems happen is when this search for a better mousetrap turns curiosity into gullibility. New investment thesis are rolled out all the time. Why? Because someone will buy them.
It’s not just the amateur investors that can regret chasing the newest trend. The Ontario Teachers Pension Plan, a major player on the Canadian investment landscape, just announced that they lost $7 billion in 2025 investing in private equity.
There is no shortage of ideas that seem to sparkle. ESG. Private equity. Private credit. Cryptocurrency. Dividend aristocrats. Real estate investment trusts. Silver. Marijuana stocks. Meme stocks. Blackberry.
There are lots of good stories out there. But that doesn’t mean that they are going to be good investments. That flash that you see in the pan may not be a golden nugget after all.
Stand for something, or you may fall for anything.
Brad Brain. CFP, R.F.P., CIM, TEP is a Certified Financial Planner in Fort St John, BC. This material is prepared for general circulation and may not reflect your individual financial circumstances. Brad can be reached at www.bradbrainfinancial.com.
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