Failure to Launch The Plight of a Contrarian Minded Advisor
By: Darris Cameron
The other day, when reviewing a clients portfolio, the client felt it absolutely necessary to exclaim to me that it would be utterly unacceptable if the 2.5% of his portfolio tied up in Exempt Market Products (EMPs) would fail, or even not live up to their projected return. I found this interesting, as I know where the rest of his money is invested. Some of the assets are with my firm, but the most with other institutions which have absolutely failed him at every single step of his investing history. This got me thinking, why is it totally appropriate for his other, more seasoned investments such as mutual funds, stocks, bonds, GICs, and life insurance contracts to fail, but not his EMPs? Even this small percentage causes the investor more concern than the rest of his portfolio, it does not make any sense, and I am baffled. I was baffled, to be more accurate. After some thought, and a number of conversations with a few asset management teams I came to the conclusion that clients do not always act rationally, especially when it comes to investing. No matter how much education and due diligence you thrust upon a single person, group or entity, they may not accept that there are other possibilities in outcomes especially for contrarian strategies. For them, there are only two possible divergent outcomes: investment success or calling their lawyer. As a Financial Advisor, I find this bizarre... but understandable.
Here is why. I have stated previously in this publication in the article Death of a Salesman, we are embarking on a completely new enterprise with the new environment in the exempt market post NI 31-103. Advisors do not have access to the kind of information that is widely available in the public markets, so Advisors must work harder to understand each new investment. Advisors in the Exempt Market space cannot rely on the plethora of sales material resources of the mutual fund and insurance industry anymore to educate us freely. We must now ask for help. This is novel for the overwhelming majority of Advisors in this industry, we are not used to foraging for information, but we must, or there is most certainly trouble ahead for us.
Education and due diligence are vitally important tools for us in this industry. This young asset category of alternative investments has yet to spread its wings and soar to the great heights it is capable of because it is still misunderstood. It is unfortunately regarded by some misinformed individuals as nothing more than a bunch of Ponzi schemes, even though Advisors see successful yields of exempt market products at play every day with our clients. Examples are abound. Take the construction of Cross Iron Mills Mall in Calgary, or the sale and purchase of oil fields, the funding of solar energy farms in Ontario, or the funding of public television, and business loan financing for SMEs, these projects have all raised private capital exempt from prospectus and at some point, a number of investors got together and raised capital to allow for such projects to be fulfilled without the encumbrance of unnecessary, costly, regulation.
The fact that our Government recently created a regulated market in Canada does not change the reality that the private capital markets have existed since the dawn of currencies, and long before the public markets were ever conceived of, and people have earned and lost money on business ventures at regular intervals just like in any other investment market mankind has ever created. There is always a risk that money can be lost, both with public and private investments. In 2008, did you sue your stock broker when he lost half of all your money? Did you sue your Financial Planner, who invested your assets exclusively in mutual funds, at the bank when she failed to make a projected return? Did you tell your realtor to ‘call their lawyer’ when real estate tanked in your local market? The answer is no, and will continue to be no to those types of questions because we all understand that investments are risky, and that because we are familiar with the kinds of losses we see in these markets, and every single one of us has some sort of anecdote about that loss we actually don’t see it as something to raise our fists about, more to just shrug at, with a sigh of acceptance. In the public markets, loss is acceptable; even seen as a rite of passage by some.
In the event that our hypothetical exempt market investment into a land deal does not work out as planned, even though clients are warned of the possible risks, clients sign forms that explicitly state that it is possible to lose all of their money, we would still find it insufferable that this could happen, because it has not happened to every single adult person around us yet. We bring an extra level of emotion in this type of investment because we see it as a gamble, only because it is contrarian and the not mainstream experience.
We would never look at our investment into a ‘hot stock’ as a gamble because everyone is talking about it, it must be a winner. And if it is not, then, ‘oh well, can’t score if you don’t shoot.’ This is not the case with our Exempt Market; it is not mainstream and is held to a different standard. It is new, it is exciting, alluring, sexy, yet somehow intangible, just difficult to grasp, (even though in most cases we invest in dirt, brick and mortar) we put our money and hope out there, we mix in high levels of emotion because we are not being held up by the more familiar assurances and guide-wires of the banks and massive institutions. If we succeed, we celebrate and let out a sigh of relief...’thank god that worked.’ If we do not, and ‘our’ project fails, or returns less than desired, we will not stand for the injustice, because we do not understand how the world really works, and we refuse to accept what we do not understand. At some point in the future, we may see a level of acceptance along the lines we see in other investment markets, but it is going to take a lot of time, a lot of education, and a temperance that a new industry simply cannot withstand without the heat of the fires of general publics opinion and government assumptions about what it is we are trying to accomplish for the average person within this market. We are trying to provide diversity to portfolios that have none with non market correlated assets. Until the market matures, there will no place for failure. The public will not allow it; as this investment is not widely used in the retail public market, as it is with smart money, accredited investors, and pension funds. We must do our absolute best as the curators of this fresh industry to ensure we succeed, because failure is not an option at this point.