5 questions you should ask yourself about your advisor
Finding a financial advisor can be like choosing a flavor from the 56 listed at your local ice cream store. They all sound good, but some are better than others. To help you narrow down your search, here are five crucial questions to ask about your current or prospective advisor, and a four-point checklist to help you make the choice.
1. Does your advisor ask about you? You want your advisor to get to know you – your, values, goals, and financial objectives. Only then can an advisor provide you with an action plan with specific recommendations.
2. Does your advisor provide active investment guidance? A competent advisor will review your portfolio in light of your financial plan. They should create a detailed statement of investment objectives and asset allocations. They should provide a detailed strategy for the investment management team.
3. Does your advisor emphasize tax efficiency? You are legally entitled to arrange your affairs to pay the least amount of tax. Your advisor should maximize tax-cutting opportunities through your entire financial plan. And they should be especially vigilant about making your investment portfolio as tax-efficient as possible. Research has shown that tax efficiency is the factor that has the single largest impact on long-term wealth creation in your portfolio.
4. Does your advisor shop the market? If your advisor is locked into using the investment products of just one company, there’s a pretty good chance you are limiting your investment choices – and portfolio performance – to a very narrow field. 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, and who is free to go anywhere in the investment universe in search of the best securities to fit into your defined asset allocation.
5. Is your advisor qualified? It used to be that almost anyone could hang out a shingle and call themselves a “financial advisor.” This led to a lot of abuse and outright fraud perpetrated on unsuspecting, greedy, or naïve investors. But the rules have tightened up, and the activities of financial advisors are now governed to some degree by various regulatory agencies and industry associations. This is especially critical in the case of advisors who buy and sell securities, and are subject to regulatory oversight by provincial securities commissions, such as the Ontario Securities Commission.
As far as training goes, most competent advisors now have, through study, training, and examinations, earned various designations that certify them as members in good standing of reputable industry organizations. These include such specialized designations as Certified Financial Planner (CFP), Certified Investment Manager (CIM), Fellow of the Canadian Securities Institute (FCSI), and Chartered Life Underwriter (CLU). Professional designations include Chartered Professional Accountant (CPA) and Chartered Financial Analyst (CFA). Look for at least some of these accreditations when shopping for an advisor.
So given this basic background, here’s a four-point checklist of what to look for in an investment advisor:
1. 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.
2. Shops the market
Your advisor accesses the whole marketplace for investment products, not just the products offered by a company the advisor may represent.
3. Controls costs
The advisor uses low-cost exchange-traded funds (ETFs) in structuring an investment portfolio.
4. 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. The industry is slowly moving away from commission-based compensation, which tends to separate advisor and client interests, to a fee-based model, which aligns client and advisor interests. In my own practice, for example, fees range from 1.6% to 1.80%, including all financial planning, investment advice, and portfolio management.
© 2014 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited.