In reading articles about investing or the financial services sector, stories about the challenges created by new and pending regulations are everywhere. But having reviewed many portfolios designed by financial advisors recently, I’ve found that some older problems continue to linger in many client accounts.

The culprit: messy and scattered investment fund portfolios. This will add to already significant headwinds facing many financial advisors.

From the late 1990s through the early 2000s, most of my days consisted of repairing messy mutual fund- and ETF-based portfolios. The worst that stands out was a portfolio worth something like $150,000 spread across 43 deferred sales charge funds from a handful of fund families. I designed a plan to consolidate and reorganize this portfolio into about a dozen funds without triggering any transition costs – while reducing fees by 50 basis points annually.

Although I’ve never seen another portfolio quite like that one, others I’ve reviewed in recent weeks aren’t much better.

I’ve seen a lot of 15-fund portfolios of late – many with ETFs, segregated funds and mutual funds with various sales charge options.

I know when I’m looking at a well-designed portfolio. The role of each holding or portfolio segment is obvious. All accounts that are being invested to fund the same goal look very much alike. (Not a bad thing, by the way.)

An example of what I’ve seen lately is the use of several distinctly different balanced funds. I wasn’t always big on balanced funds, but I came around more than a decade ago. These one-decision funds have a way of inducing positive investor behaviour. And they are well suited to novice investors, those with small amounts of money or those who simply want to invest the bulk of their savings in such a fund for simplicity.

But I don’t get why a seven- figure portfolio needs to hold five or six balanced funds in addition to many other stock and bond funds and ETFs. That asset mix defeats the purpose of the balanced fund while adding unnecessary complexity and cost.

The portfolios I’ve reviewed recently landed on my desk specifically because they’re problem portfolios. So, I doubt that these are representative of how most advisors are building portfolios. But the fact that I’m seeing portfolios with five dedicated Canadian stock funds suggest that this overlap is more common than I realize. Making a case for holding more than two Canadian stock funds, I think, is hard.

But it’s also a little puzzling to see portfolios with a handful of funds to cover Canada’s investable universe of a few hundred stocks, and just as many funds to cover the many thousands of stocks that trade globally outside of Canada.

Excessive cost almost always goes hand in hand with the messy portfolios I’ve seen. Although Canadian mutual funds’ asset-weighted management expense ratios have long hovered around the 2% per year mark, these portfolios carry fees well north of 2.5% annually.

That’s a tough level to justify for most portfolios, but it’s unacceptable for seven-figure portfolios. And as newly mandated fee disclosures don’t show total costs, we often are the first to show all-in fees in dollars and percentage terms.

Advisors clinging to these value-detracting practices always have been vulnerable to competition. This vulnerability is magnified by regulatory evolution.

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

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