How to spot the signs and signals that make the perfect match
Q. Hi, I’m in search of a new financial advisor to help me with some short-term and longer term planning. I make good money and also have stock options with my company. I want to know how to reduce the tax I pay (I assume by adding to my RRSPs), while still putting towards short-term savings goals (renovations). I need to know whether going to an independent financial advisor is best or whether I should stick with my bank for investing advice. Please help as I don’t even know where to begin!
A. An investment advisor is, very basically, someone who can help you select your investments to meet your financial goals and match your risk-tolerance level. But an investment advisor should do more than suggest what stock “looks good” this month. A lot more.
Research has shown that up to 95% of your investment return is a result of proper asset allocation, not just picking the right individual stock, bond, or fund. It’s important to find an advisor who can provide documentation that clearly outlines an asset allocation methodology that’s right for you. This is generally referred to as an “Investment Policy Statement,” and it will outline your asset mix objectives, your risk tolerance, return objectives, restrictions, constraints, and your time horizon.
How to choose an advisor
Your advisor should not be restricted to using only the products of one company. If, for example, all the investment funds recommended by your bank advisor begin with the bank’s name, then there’s a pretty good chance your advisor has just shut out most of the fund universe from consideration – and that’s a lot of funds. No single company always has the best product in all categories. It makes more sense to use an advisor who has no particular bias for one company’s product in their selection methodology.
Your advisor must have access to a wide range of investment choices, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs), and not be limited to the offerings of only one company.
Here’s a basic checklist of what to look for in an investment advisor:
- Written policy. The advisor agrees to manage your assets in accordance with a clear process that is written down and agreed to by both of you. This is the Investment Policy Statement.
- Shops the market. Your advisor accesses the whole marketplace for investment products, not just the products offered by a company the advisor may represent.
- Controls costs. The advisor uses low-cost exchange-traded funds (ETFs) in structuring an investment portfolio.
- Fair compensation. Your advisor is upfront about how she gets paid, and is paid by fees levied on assets under management instead of commissions and trailer fees from fund companies.
Advisor qualifications
I’ve found that today, many of the best financial advisors no longer attempt full portfolio management for their clients. They in effect “outsource,” or “subcontract” the job to professional portfolio managers who have large research teams, better access to markets, and cost-effective trading platforms.
This does not mean that you will pay more to have assets managed in this type of arrangement. In fact, in most cases, you will pay less than if a more traditional investment advisor did the whole job. The fees you pay are simply shared between your advisor and the portfolio manager. This arrangement will deliver the best of both worlds, with your financial advisor up in the wheelhouse, directing the whole process for you, while highly trained professionals toil away in the engine room driving your investment strategy and growing your portfolio.
Typical investment advisor fees
Many financial planners and advisors have moved to a fee structure that represents a percentage of assets under management. Some may still use a commission-based approach, charging for each transaction separately, while also charging separate fees for various services.
In my own practice, for example, fees range from 1.6% to 1.80%, including of all financial planning, investment advice, and portfolio management. By contrast, the average you’d expect to pay for a Canadian Equity mutual fund is 2.65%, not including comprehensive financial planning, portfolio guidance, or direct access to asset managers.
Bottom line
Choosing a financial advisor is part art, part science. Ask a prospective advisor about his or her policies on the points I’ve outlined here. Look for clear, unhedged answers, with no provisos, qualifications, or escape hatches. If you sense someone is giving you the runaround, especially as to their complete independence in recommending and selecting investments, or their fee structure, leave! There are plenty of advisors who will be happy to give you the straight goods.
© 2014 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited.
