Most financial advisors are good people. But too many are squeezed between a desire to serve clients and the requirement to reach revenue targets and sell their firm’s products. Therefore, when you’re evaluating a current or prospective advisor, a healthy dose of “caveat emptor” (buyer beware) is called for. You need to determine whether that advisor is a good match for your needs, which may include investment selection, financial planning and optimizing TFSAs/RRSPs, and whether they are likely to put your interests first.
The size of your portfolio has a significant impact on the choice you will have when selecting an advisor. There are no hard-and-fast rules, and there are some exceptions, but as a rough guide, investors with portfolios under $1 million or so generally must choose among advisors who sell mutual funds with annual costs typically ranging from 1.50% to 2.50%. Investors with $1,000,000 or more to invest should be able to find advisors charging annual fees of 1.00% to 1.50% of their portfolio total combined with low-cost ETFs, resulting in total annual costs ranging from 1.15% to 1.65%. Those with portfolios above $1.5 million can find advisors with annual costs below 1.00%. Alternatives include lower-cost mutual fund providers such as Steadyhand; robo-advisors; or, for those who are comfortable selecting investments on their own, “do-it-yourself” investing.
To make an informed judgement regarding the type of advice you need and which advisor may be a good fit, you must have at least some understanding of investment basics. Simple online searches will lead you to numerous resources, including this website; investor education sites such as Get Smarter About Money (which is run by the Ontario Securities Commission) and InvestRight (from the BC Securities Commission), as well as a wide offering of Canadian investment blogs and books, including mine.
Now, here is the most important element of this process: submit your questions in writing (by email) and get a written response. This way you can be sure the questions are framed to get the answers you need, misunderstandings can be minimized and both you and the advisor will have a record of the exchange. If you don’t understand the answers, do not be shy. Ask again. It is your money and your future. You have a right to understand. And if an advisor cannot explain to your satisfaction, move on.
Here are the seven questions to ask, and the points to be addressed within each:
1. What are your credentials?
- Your personal qualifications, experience, licenses
- Describe your team
- Expected frequency of contact with you and team members
- Describe online portfolio access
- The bank or trust company which will have custody of my assets
- Have there been any sanctions or penalties against you or your team members by a regulatory authority
All registered investment advisors are part of a larger organization. Some advisors interact with clients largely on their own, while others form client coverage teams. If your prospective advisor is part of a client team, make sure to understand who your main contact will be and what access you will have to other team members. If the advisor provides client coverage largely on their own, make sure you understand how back-up will be provided. Smaller investment firms often outsource custody of client assets to one of the major financial institutions to give clients a level of protection similar to that provided to investors who deal directly with the majors, such as the big banks. Either way, you should know which institution actually holds, and protects, your assets.
2. What products do you offer?
- Product range
- Products not offered
- Any limitations or penalties on selling/redeeming investments
- Access to low-cost products such as index ETFs
- Typical percentage of client portfolios in your own company’s products
3. What costs will I incur?
- How you get paid
- Fees you or your firm charge directly to clients
- Fees you may receive upfront or on an ongoing basis from products you sell
- Costs embedded in products you typically sell, including management expense ratios (MERs)
- Total annual direct and indirect fees and charges in percentage terms and dollar terms for a typical client portfolio amounting to approximately (specify your portfolio size)
- Potential for negotiating on fees
In my experience, the vast majority of Canadian investors significantly underestimate the fees they incur and the impact on their returns. This is not your fault. Unfortunately, most investment statements disclose only a portion of total fees.
4. What is your investment style?
- Level of client approval required for individual transactions
- Method of determining asset allocation for individual clients
- Geographic and sector preferences
- Product and individual security preferences
- Investments you steer away from
- Frequency of trading
- Describe a sample portfolio for a typical client with a 60/40 stock/bond allocation
5. What investment performance should I expect?
- Expected annual returns over one, five, 10 and 20 years, before and after all costs
- The basis of your forecast returns
- Performance benchmarks
- Portfolio performance reporting vs benchmarks
No one knows how stocks will perform going forward. If an advisor is promising great performance, move on. Stocks are volatile in the short term, but portfolios comprised of diversified holdings of great companies have always done well over the long term. So, it can be reasonable to use illustrative long-term forecasts, but don’t count on them.
6. Will you handle smaller accounts for my family members?
- Describe family services
- Any additional charges
7. Do you offer financial planning?
- Describe your financial/retirement planning process
- Provide a sample report
- Degree of tax and estate planning
- Frequency of updates
- Any additional charges
Your choice of investment advisor can have a significant impact on your ultimate investment results and future financial well-being. Take the time to ask the right questions and get straight answers. Once again, make sure you get those answers in writing! The same goes for any clarification you request.
If you would like an advisor questionnaire (in Word-document format) that you can send directly to your current or prospective advisor, please send your request to email@example.com.
Larry Bates is the author of Beat the Bank: The Canadian Guide to Simply Successful Investing, and an investment advisor with Aligned Capital Partners Inc.
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