Choosing a Financial Advisor: What to Look For

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Investors tend to focus on having a good investment portfolio and owning quality securities, but put less focus on finding a good financial advisor.

If you’re settling for the first person you meet at a financial institution, or worse, a robo-advisor, you aren’t doing your investments, or yourself, any favours. 

A good advisor has many benefits; they can ensure that the client’s portfolio is tailored to their needs, act as a backup when investors seem to be giving in to market downturns, and strive to maximize the portion of portfolio gains that go into the investor’s pocket – and not the taxman’s. Basically, a good advisor adds a healthy dose of confidence and helps limit financial anxiety, allowing the investor to sleep soundly at night.

So how does one go about finding a trusted financial advisor? Here’s what to look for in a financial advisor – and why having a good one can make all the difference.

Trust and Rapport

A good business relationship with an investment advisor is always built on trust and reciprocity. Compatibility between the client and the advisor is fundamental. There are two reasons why there should be a good rapport between a client and his or her advisor.

The first reason is that the investment strategy and asset allocation must be well thought out. Your investment objectives, your investment horizon and your risk tolerance profile must all be considered carefully. While some of these parameters are based on facts, they are also influenced by psychological and emotional considerations. That’s why the connection between investor and advisor goes much further than checking off a form to identify someone’s needs.

The second reason is that when markets are down and volatility leads to much handwringing, a solid advisor-client relationship can help weather the storm. Market conditions will change, and sometimes there will be doubt about the strategy chosen. It’s at these times when a financial advisor can help you the most, offering advice for important financial decisions that may not seem intuitive at the time, but could make a huge difference in the success of your investments. If there is distrust, misunderstanding or incompatibility with your advisor, there’s more room for mistakes in decision-making. 

Here are some other factors we think are important when choosing a financial advisor: education and background, experience, independence/conflicts of interest, cost of services, and of course, suitability. 

Education

Although regulators such as the Autorité des marchés financiers (AMF) and other organizations such as the Institut de planification financière (IQPF) and the Chambre de la sécurité financière oversee the industry and set minimum standards for education, financial markets and products are becoming increasingly sophisticated and complex.

 Undergraduate and graduate university programs in finance can help professionals better understand the basics and inner workings of financial products, and a professional who has earned his or her Chartered Financial Analyst (CFA) designation demonstrates that he or she has achieved what the renowned business magazine The Economist has called the “gold standard” in the field of finance.

With a high-level academic background, the professional relies less on promotional material that obviously emphasizes the benefits of the products and services provided, and will be better able to highlight and appreciate the advantages but more importantly the drawbacks of proposed financial transactions.

Don’t be shy about asking about your financial professional’s educational background and qualifications. You wouldn’t want to undergo surgery with a doctor who trained as a vet. So why not demand that your advisor have an economic, business and financial education?

Experience

Some things can’t be taught in school. There are, in fact, many intangible factors in various fields of personal finance, which are best understood with real-world experience. As the road to financial independence can be bumpy, your journey will be made easier if you’re guided by someone who knows the ins and outs of finance.

That’s not to say that a young up-and-comer can’t be a successful financial advisor. However, make sure they have the right support. A formal, and I emphasize formal, pairing with an experienced hand is a must when entrusting your savings to a novice. When meeting with a financial advisor, it is very important to find out about his or her experience and how he or she is able to leverage it to your advantage.

Independence vs. Conflicts of Interest

The fiduciary duty, which requires that advisors act in the best interests of the client, is not actually mandated by regulatory standards. The financial services industry is famously plagued by conflicts of interest. 

Conflicts of interest have an insidious impact on the advice you receive. Some advisors operate in structures that eliminate conflicts, but the vast majority don’t, and so are considered salespeople by regulators.

Advisor compensation is a factor that can create significant conflicts of interest. It is important to understand the financial motivation behind the advice and transactions offered by a professional and his or her employer, as this may cause your advisor to put his or her interest above yours.

Try to work with a financial professional who holds the CFA designation, as holders are bound by fiduciary duty. The CFA charter holder must sign an annual pledge to uphold the CFA Institute’s strict code of ethics, which is an attestation of independence.

It’s important to be able to identify conflicts of interest in order to assess their impact on the financial advice you receive. Don’t be afraid to ask questions about this issue.

Cost-Benefit of Fees 

They say you get what you pay for, so make sure you know what you’re getting and what you’re paying for it upfront. Some fees, like management fees, commissions or markups over wholesale prices, are charged by the advisor and directly or indirectly impact their compensation. Other fees, such as funds charges, trading costs, foreign exchange fees or self-directed RRSP fees have nothing to do with advisors but are rather the results of the investment structure you’re being proposed. However, every dollar you spend directly affects your net return and should be carefully considered when selecting an investment advisor.

Some fees are obvious and easily seen, but others are less apparent – you’ll need to plow through a prospectus and other legal documents to find the fine print and figure them out.

Since net returns are calculated based on gross returns minus fees, fees have a major impact on your investment success. In other words, if the investments you hold offer a return of 8% and the sum of your fees amounts to 3%, your net return will be 5%. Many clients are content with a 5% return, but the economist in you resents giving away 38% of your earnings.

You have to weigh the pros and cons between the services rendered, the advice provided, and the fees charged. Too high a fee can significantly undermine your returns, but a poorly designed investment or a poorly timed decision can completely ruin your chances of achieving your financial goals. That being said, an investor who, under the pressure of a stock market crash, sells his securities at the wrong time in the middle of a correction and thus misses the upside of the rebound would have been better off paying 1% for several years rather than losing 20% to 30% with a single bad decision. An investor would have been better off working with a seasoned investment manager rather than putting 40% of his assets in Nortel in the middle of the tech bubble. Let’s just say that having access to professional services should justify the fees you pay.

To be effective, an investment professional must offer you a service that improves your chances of success, with a return that is comparable to or better than that of a benchmark.

Type of Services Offered

If you are just starting out and have a few dollars to invest, investing directly in stocks may be counterproductive. If you have several million dollars in an established portfolio of common stocks, a portfolio manager may be better suited to your needs.

What you need to understand here is that the financial industry is very segmented. There are financial planners, estate and insurance advisors, savings representatives, securities brokers and securities advisory representatives.

The type of service required and the size of your portfolio should be considered when looking for a financial professional. Everyone has their strengths. You wouldn’t shop for sportswear at a bespoke tailor’s shop, or look for a tuxedo at a big-box store, would you? Same thing here.

Portfolio managers have pricing schedules tailored to benefit the largest portfolios. However, they have limits on the size of portfolios they will accept as they wish to provide a very high-end service. Therefore, they must limit the number of clients they take on, while trying to achieve a certain level of assets under management.

Savings representatives have access to products that allow them to diversify even the smallest portfolios, and they offer mass-market products that allow them to work with a very large number of clients. On the downside, they may have rather high management fees.

Ask questions about the advisor’s target clients to ensure that the professional you want to work with is able to meet your needs.

Shared Values

Some people are more conservative, while others are more, shall we say, adventurous. If you’re the type of person who looks for an aggressive tax professional, who will try to bend the rules and look for loopholes, then perhaps you’ll prefer a more risk-taking financial advisor who will similarly try to reap strong returns only to be tripped up by volatility. On the other hand, if you’re the type of person who looks for an accountant who always works from a safe place, or a lawyer who advises you to weigh the pros and cons of litigation, you might prefer a more conservative financial advisor who takes risk into account in their advice.

You need to know yourself in order to find an advisor with whom you get along well and whose philosophy matches yours.

Where to Look for an Investment Advisor

Referrals are a great way to find an investment advisor. Don’t hesitate to ask your friends and family to refer you to a good advisor whose values you share.

The AMF website is full of useful information and can help you in your search for an advisor or investment professional. What’s more, you’ll know that the individual has the right to practise and also that no complaint has been lodged against him or her.

And when you meet with your current or a prospective advisor, don’t hesitate to ask questions to find out if they have the expertise, experience, independence and values to serve you well.

Enjoy your search!

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Author

  • Vincent began his professional career in 1999 and is a CFA charterholder since 2004. He holds a Bachelor’s degree in Business Administration and a Masters degree in Economics. Vincent has been an active member of the CFA Montreal society and was elected President in 2010-11. He joined Claret in 2002 and is a Portfolio Manager.

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