One of your most challenging tasks is differentiating the sales pitches aimed at you that have real substance from those that are full of hot air. To help in this regard, here are three common pitches or product features that are likely to be unreliable:

Stock-picker’s market. Since the turn of the century, we’ve often been told that we’re entering a range-bound market, so clients would be smart to choose stock-picking – rather than passive market exposure – to generate good returns. But I don’t buy it – and neither should you.

By definition, active management requires smart and successful securities selection, regardless of what the market does. But active managers didn’t deliver even in the secular equities bear that started in 2000, net of fees. When looking at 10-year periods during which stocks were flat, active managers did well before fees – supporting the notion of a stock-picker’s market – but retail fees consumed the outperformance.

Most financial advisors’ value-added isn’t from picking securities or smart managers. Rather, it’s from helping their clients design asset mixes that line up with the clients’ goals and objectives; minimizing wealth-destroying behaviour; keeping fees reasonable; and prompting clients to do proper financial planning.

Growth and income. Although it’s reasonable to structure a portfolio to generate income and grow in the longer term, sponsors of retail investment products have taken this pitch to extremes. Too many investment funds offering a high monthly distribution say that their fund offers both “cash flow and the potential for capital appreciation.”

The problem is that many “high-payout” funds – i.e., those paying out much more than pure portfolio income – set their distributions at a level that approximates their total returns. A fund’s total return is the total of income, price appreciation and the effect of compounding the income by fully reinvesting it.

If all of that is paid out in cash every month, then, by definition, there is zero growth potential remaining. It’s worse for funds that pay out more than their total returns in the form of cash distributions. Many large and popular funds fall into this boat – including many that aren’t labelled as T-series.

In theory, all of these products are fine; but too many are sold inappropriately. Some of your clients may be perfectly fine with taking an 8% cash distribution from their funds in exchange for seeing their capital drop by 2% annually. But they’ll be awfully grumpy if they realize this only after several years.

Low risk, high return. Today’s low bond yields continue to prompt advisors and clients to look closely at many products offering “low risk” with very juicy yields or otherwise high returns.

Here’s a rule to live by: if a product is offering a yield or return that is substantially higher than a guaranteed investment certificate or Government of Canada bonds, then that product also involves substantially more risk – without exception. You just need to uncover and understand the risks.

Salespeople are vital to the success of every business – and I wish I was better at sales. But the pitch will put all of the benefits front and centre while leaving you to flesh out all of the potential risks. Most structured products, hedge funds, private debt funds and the like are not appropriate for most clients. Use this mindset going in, so that any chosen product can be properly scrutinized.

Dan Hallett, CFA, CFP, is vice president and principal for Oakville, Ont.-based HighView Financial Group, which designs portfolio solutions for affluent families and institutions.

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