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5 Questions to help evaluate your Financial Advisor

Advice only planners see many different types of clients. One of the things that I love most about what I do is the ability to switch between various planning subjects and not consult on the same subject all the time.

Something that has been coming up moreso in the past year is the topic of mistrust between clients and their financial advisors (interviewed on this very subject for the Globe here). Generally, we will have conversations with clients who are not convinced that their advisor is acting in their best interests, or whether they truly HEAR their clients (i.e. poor communcation).

What are some of the main things to consider when evaluating your financial advisor?

There are often many competing priorities for our savings or cash flow, which may have different time horizons associated with them. For example, you may be trying to simultaneously pay down student debt, save for your children's education, and create a down payment for your first home purchase. Does your advisor have the ability to create a cash flow plan that will accommodate all of your priorities, and ensure that the investments for any savings are appropriate for the time in which you may need to access them?

Things we see:

  • All savings being invested 'for the long term' (i.e. retirement) with the same asset allocation across all accounts or same mix of investments for each goal;

  • No cash flow and savings plan has been created (this could be because the advisor is not a planner and only sells products);

  • Investments floating 'in outer space' - i.e. with no definitive goal. It's hard to understand if your advisor is doing well if there is no personal benchmark to attach to it;

  • A product centric approach. This could be because your advisor is a salesperson and not a planner.

2. What is the focus of their practice?

Advisors can specialize in various areas of financial management. Some may identify as an 'insurance advisor' for instance, where their focus is on insurance products and how to manage your personal risks appropriately. Some may be 'investment advisors' who focus primarily on asset allocation and the placement of your capital into various investment products or securities.

Understand a few key things about your advisor:

  • Do they specialize in a certain area, and if so, does that align with you?

  • Do they do anything differently to show their proficiency in this area?

  • Do they communicate any news or changes to that specialty that are applicable to you, with you, and make any required changes to their recommendations?

3. What is their compensation modeL?

Does your advisor's method of compensation align with your expectations? How do they earn a living? Do they explain this clearly to you? Often we find that clients have no clue as to how their advisor makes a living, or if they do, they are not sure of the details of the compensation structure. This can lead to mistrust as clients are not sure if recommendations being made are in the best interest of themselves, or if it's in the interest of the advisor.

Advisors can be compensated in various ways:

  • Product sales / commission - each time the advisor makes a change in your account, they get compensated.

  • Fee based (percentage of assets under management) - typically, they will charge a percentage fee based on the portfolio size they manage for you.

  • Direct fees (fee for service) - a direct and distinct fee, typically charged for financial planning services and not attached to a product.

  • Indirect fees (trailer fees on mutual funds/ bank funds) - compensation paid to the advisor from a mutual fund company or bank for selling their particular funds.

  • Salary and bonus - although less frequent, some advisors will be compensated directly from the firm that they are a part of.

It's okay to ask the question of your advisor. They should be disclosing this to you regardless.

4. What education or training do they have?

Understanding your advisor's level of education, experience and training can give you more comfort in taking their recommendations as appropriate or not for your financial situation. The nomenclature of 'financial advisor' or 'financial planner' in Canada is still very unclear, so it's important to go beyond the basic title when doing your due diligence.

Some things to look for include:

  • Which licences (for product sales) does your advisor have? This could be mutual funds, securities (stocks, ETFs, bonds, etc), insurance, mortgages, or bank products.

  • How long have they been practicing in the industry? (an interesting question could also be, how long have you been working with your longest standing client)?

  • Do they have any industry related designations to show their proficiency beyond product sales? This could be (but is not limited to):

    • Certified Financial Planner (CFP)

    • Chartered Investment Manager (CIM)

    • Chartered Financial Analyst (CFA)

5. Do you like them?

It might seem silly to put this on the list, but the main role of most advisors is relationship management. If you like your financial advisor, it usually means that their are communicating well with you, they have a personality that aligns with you (they don't give you the 'ick'), they are servicing your family well, and you have the confidence that they have your best interests in mind. They are meeting your expectations with respect to servicing (i.e. how often are they talking to you? Is it how often they promised?), and they are reaching out to you to discuss any changes that they might like to implement (and explaining why, if needed).

If not, like any relationship, it could be challenging to work with them for the long term.

Last Thoughts?

Don't use the stock market as a benchmark for your financial advisor's 'success'. Define, for yourself, what success looks like in a relationship with an advisor for yourself. What are the criteria that are important for you to feel like you have hired the right person for the job? Then, you can come up with a list of questions (that may or may not match ours!) to discuss with your advisor at your next meeting.

At the end of the day, ensure that your financial needs are being met. If they aren't, it's completely within your right to find a relationship that will!

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