Foster & Associates’ CEO on utilizing alternative investment strategies in all market conditions.
Published by Wealth Professional
AT FOSTER & ASSOCIATES the mandate is simple – ensure their wealthy clients “never become un-wealthy!” CEO Christopher Foster’s primary goal is to ensure these clients maintain their financial status, steering clear of the volatility that often shakes the market. This approach, while cautious, is far from conservative, as Foster demonstrates with his innovative strategies in alternative investments.
Foster says, “Maintaining low volatility and effective risk management is crucial, especially in our Foster Family Office Group. This group, in particular, is focused on safeguarding their legacy for future generations and decades to come. As a result, we aim to minimize exposure to significant fluctuations in the stock market.”
Foster’s primary concern is to avoid significant losses for his clients. “We never want our clients to be down 35 percent. Such a loss is unacceptable, contrary to some
opinions that suggest a quick market recovery can justify it. Life often presents urgent financial needs during market lows – such as supporting a child’s business venture or refinancing a mortgage. It’s in these challenging times that selling assets becomes a necessity. To prevent such scenarios, we focus on alternative and non-correlated investments, prioritizing our clients’ financial stability,” he states.
Embracing alternative investments
A key component of Foster’s strategy involves looking beyond traditional stocks and bonds. Unearthing a true alternative investment, he points to investments like ICM Crescendo Music Royalty Fund as examples of non-correlated assets that offer steady returns, irrespective of market conditions. This approach paid dividends in 2022, a year marked by significant market downturns.
While it took a fair bit of due diligence work to approve the fund for clients, Foster describes the music royalty fund as a “little jewel” that has consistently delivered returns between 6 and 9 percent annually, regardless of broader market trends. The fund’s strategy of waiting for a song’s popularity to peak and then investing during its predictable decline provides a less speculative and more stable return.
In a market dominated by big-bank-owned firms and conventional investment strategies, Music Royalties represent a fledgling yet promising avenue, but they struggle to get approval. The issue, as Foster explains, is that big banks and firms usually ignore emerging investment strategies unless they offer substantial capacity, often in the hundreds of millions, to suit their large-scale operations.
The seasoned wealth manager notes, “One issue that frustrates me is the reluctance of large institutions to consider emerging investment strategies. Regulators jokingly have suggested that it would be simpler if there were only one major investment firm, eliminating the need to oversee numerous small dealers. But this would be a huge loss to the ecosystem.
As a smaller independent dealer, we have more flexibility in exploring innovative strategies like the ICM Music Royalties Fund. While other music royalty funds we evaluated lacked effective management and governance, ICM stood out for its professionalism and robust management. Its comprehensive approach to governance, reasonable fees, and the significant impact on its overall reputation made this an attractive investment for us.”
Addressing client concerns
As Foster points out, while these alternative investments provided stability during market downturns and modest gains in more buoyant times (like the second half of 2023), they don’t capture the full upside of a rapidly growing market. Nevertheless, they offer a unique proposition for investors, particularly for those who consider themselves already wealthy and are looking for stable, modest returns.
“It’s a positive sign when clients are so content with their steady returns that they hardly feel the need to constantly review their portfolios. This lack of volatility leads to a
decrease in emotional investment in the daily ups and downs reported in the news, like earnings fluctuations or interest rate changes. Clients disengaging from every market tremor can be beneficial. From our perspective, if clients are not overly concerned about earning only 6 percent in a year when the NASDAQ surges by, say, 38 percent, it means we’re succeeding.” He goes on to say, “Our Family Office Group focuses clients on legacy and succession, meaning estate planning, tax planning, and philanthropy – and, frankly, it’s hard to get clients to focus on these truly important issues when their investment portfolios are a source of anxiety!”
Finding fledgling investments
Foster points out that in the 70s and 80s, the stock market was diverse, with stocks of varying ages, stages, and sizes – from burgeoning startups to established companies. However, the landscape has evolved significantly. Now, stocks have become highly correlated, diminishing the diversity once found in the market. The average age of new US companies going public has risen to around 13 years, making it challenging to find truly exciting, high-growth opportunities. Most large companies on the stock market are older and more mature, moving in tandem, which can lead to situations where everything either drops by 35 percent or rises by 25 percent.
The stock market used to offer a mix of young, dynamic companies and older, established ones, but this diversity has decreased, possibly influenced by the rise of ETF investing. This correlation leaves little room to maneuver during bear markets. For example, 2022 was particularly tough, as both stocks and bonds fell. Traditionally, bonds were considered a haven during stock market downturns, but they failed to provide relief, exacerbating investor woes.
For those wanting to avoid such volatility, the only alternative is to step away from traditional stock and bond markets. Without diversifying into alternative investments, clients must be prepared to endure this heightened market volatility.
The competitive advantage over giants
This ability to swiftly adopt and integrate cutting-edge technology into their business model has given smaller dealers another unique edge over their larger counterparts. The advantage here isn’t just in the speed of adoption but also in the quality and relevance of the technology being utilized. While large firms grapple with complex and cumbersome procedural roadblocks when integrating new technology into their massive, existing infrastructures, smaller dealers can handpick the most effective and innovative tools to enhance their operations. This approach allows for a more tailored and efficient use of technology, often resulting in a tech setup that rivals or, in some cases, surpasses that of the big players, despite having only a fraction of their technology budget.
Foster asserts, “Compared to larger firms, our tech capabilities are superior. Big firms face extensive hurdles, like server security and integration challenges, making any tech addition a multi-year endeavour. We’re fortunate to be agile and adaptable in this aspect.”
Opportunities for Foster in Canada’s investment advisory landscape
Observing a concerning trend in the makeup of Canada’s investment advisors, Foster points out, “As an independent dealer, we have a diverse range of investment options available, including alternative stocks, bonds, and mutual funds. However, it’s concerning that in Canada, around two-thirds of the advisors are primarily mutual fund advisors. This ratio is double that of IIROC or CIRO investment advisors. Moreover, many CIRO advisors don’t have a complete range of products due to their banks’ limitations in offering a full spectrum of investment options. This could be due to either a lack of diligence in exploring alternative investment products or a reluctance to feature competitors’ products.
“What’s particularly troubling is that many advisors working for mutual fund companies are limited to selling products from just one company. Yet, they are still referred to as financial advisors. It’s misleading for them to use the title of ‘financial advisors’ when they lack access to the full array of investment tools necessary to provide comprehensive advice.”
Independent dealers, with their expansive and varied investment options, are positioned to offer more tailored investment advice and holistic wealth management. They can leverage a wider array of investment products, from traditional to alternative, ensuring a more customized approach and, in Foster’s case, to make sure his clients never get “un-rich.”
Disclaimer: This article is for general information purposes only, and is not legal, financial, or tax planning advice. Everyone’s situation is unique, and this article cannot apply to every person. The reader should not take any action, or refrain from taking any action, as a result of this article without first obtaining legal or professional advice.
