When it comes to financial advice, trust is generally the most important factor that drives a decision on who to work with. As a result, financial advisors are often selected by clients through referrals from friends and associates.
If you are currently working with an advisor, did you ask relevant questions to ensure you are working with the person most appropriate for your needs? Or did you simply go with a friend’s recommendation or the reputation of the organization?
Unfortunately there is no single standard under which all financial advisors operate in Canada today. As a result, the client experience and costs vary significantly between the different channels of financial advice – advisors at bank branches, financial planners, independent advisors, portfolio managers, etc. It is therefore, of utmost importance that you fully understand who are working with so you know what to expect and how much it might be costing you in the long term.
Here are the 3 key questions that get down to the fundamentals of the relationship that you must ask your financial advisor before you choose or continue to work with one:
1. Are you a fiduciary?
This is the most important question you must ask your advisor. A fiduciary is someone that acts in the best interest of their clients at all times. In other words, he or she places the client’s interest ahead of his or her own. When you have a fiduciary working for you, you can draw comfort that he or she will likely recommend an investment portfolio that is best for you and reduces your overall costs. If not, you may well be buying a product from a sales agent as opposed to receiving advice from someone that is actually working in your best interest.
How do I know I’m working for a fiduciary?
- You are paying your advisor a fee for service rendered, which generally aligns your interest with your advisor’s;
- Your advisor does not receive any commissions from the funds that are recommended for you;
- Your advisor explicitly discloses any conflicts of interest and explains how they are managed.
- Your advisor avoids explaining the basis for the selection of funds in your portfolio;
- The advisor only or mostly recommends his or her employer’s proprietary funds;
- The advisor earns a commission on the sale of investment products to you;
- You find that all the funds recommended are from the same fund company.
2. How and how much do you charge for your services?
Many advisors get paid commissions (by the fund companies) for the funds they sell to you, including an annual trailing commission for the ongoing services provided to you. More recently, there has been an emerging trend of advisors moving to a fee-based model, whereby they charge their clients an explicit advisory fee, most often based on the amount of assets they manage for you.
Advisory fees or commissions significantly lower the value of your portfolio over time. This is a cost that cannot be avoided if you are seeking value from advice. However, costs can certainly be lowered by looking for services that better align with your needs; in other words, you don’t pay for services you don’t need. Think about the value you receive from your advisor over time, for the fees you pay or the cost you incur.
How do I know if I’m overpaying?
Typically, if your total cost of investing (advisory fees, plus fund management expenses, plus any trading fees) exceeds 1.50% annually, you may be overpaying. That said, if you are truly getting value for what you are paying, such as a financial plan that your advisor regularly maintains and follows up with you, a higher cost might be justified. If you are unsure of your total cost of investing, speak to your advisor and/or check the disclosure documents of the funds you own.
Be cautious if your advisor avoids a discussion on or does not disclose the total cost of owning the portfolio, including how and how much he or she gets paid from your advisory relationship.
3. What licences, certification or credentials do you have?
It is important that your advisor has a professional designation that supports his or her role, and that they are registered with the appropriate regulatory body. Think about this – would you seek medical or legal advice from someone that does not have the appropriate credentials?
Unfortunately a professional designation is currently not mandatory in Canada to become a financial advisor, although there are new legislations that are being considered to make it mandatory.
There are many professional designations that focus on different areas of financial advice. Some of these credentials include CFA, CIM or CFP designations. A CFA or a CIM designation generally focuses on a portfolio management or advisory role and a CFP designation focuses more on the financial planning role. The key benefit to the client is that in order to maintain such designations, members are required to abide by the professional code of conduct and the continued professional education requirements.
Advisors in Canada are generally registered with the provincial securities commission (such as the Ontario Securities Commission or the British Columbia Securities Commission) or the Investment Industry Regulatory Organization of Canada or the Mutual Fund Dealers Association.
How do I know if my Advisor has the right professional designation and registration?
- Ask for the advisor’s business card or read their professional profile, and look for the professional designations mentioned. You may also look up the professional organization’s website to confirm membership;
- To better understand your advisor’s professional designation, you may use this IIROC resource.
- To check if your advisor is registered with a regulatory body, you may do so on the Canadian Securities Administrators website.
Here is another resource put together by the Canadian Securities Administrators that has good information on how to work with an advisor.
An advisory relationship should be a two-way street. As much as professional financial advisors are trained to ask questions to better understand their clients, you should also be well prepared to ask all the relevant questions, including the 3 key questions noted above, to better understand your advisor and their business practices before you choose to work with one.
Invisor offers Canadian investors personalized investment management solutions at a fraction of the cost of traditional advisor models, without requiring any minimum investment amounts. Get started now to tell us a little about yourself and your goals, and we’ll find an investment solution just right for you.
If you liked this blog post, please feel free to share it on your favourite social media site by clicking on the links below.