So you've decided you want someone to guide your finances. Whom do you pick?
Recommendations from friends and family can help. But this is a personal decision, so you should interview several advisers to find someone you feel comfortable with.
Even before you get to the interviews, however, you need to figure out what you're hoping to get from the relationship with the adviser.
"You have to find someone who's a good fit," says John DeGoey, vice-president of Toronto-based Burgeonvest Bick Securities Ltd. and author of The Professional Advisor II.
DeGoey says people have some questions to ask themselves: "Are you a trader or a buy-and-hold investor; a stock picker or a fund picker; a collaborator or a delegator?"
Be aware of the difference between advisers and financial planners. Some advisers may be little more than mutual fund dealers. A financial planner typically provides a more comprehensive service that includes advice on retirement planning, taxes, insurance, estate planning, etc.
DeGoey recommends people look for a CFP (Certified Financial Planner) designation as a minimum because it demonstrates an ongoing education commitment and requires training in a wide variety of financial issues facing Canadian households.
|Financial designations to watch for|
|CFP - Certified Financial Planner|
|RFP - Registered Financial Planner|
|PFP - Personal Financial Planner|
|CLU - Chartered Life Underwriter|
|ChFC - Chartered Financial Consultant|
|CIM - Canadian Investment Manager|
|FCSI - Fellow of the Canadian Securities Institute|
|CA - Chartered Accountant|
|TEP - Trust and Estate Professional|
|CMA - Certified Management Accountant|
|CFA - Chartered Financial Analyst|
Many CFPs also have the RFP — Registered Financial Planner — designation, which is well regarded in the financial industry. Many advisers in the banking industry are PFPs — Personal Financial Planners.
During the interview process, you should ask for references from current clients. Then ask the clients what they like about the particular adviser.
Ask the adviser about the services they provide, their education and qualifications, whether they're licensed to sell insurance, and the amount of attention you can expect given the size of your portfolio. If you have a smaller portfolio — say, under $25,000 — you may find some firms or advisers reluctant to take you on.
Compensation methods vary
Most importantly, you should ask how the adviser is compensated. This is an area that is not well understood by the public. If you get any blow-back from the adviser, it's time to try someone else.
There are several ways an adviser can be paid.
- Commission-based advice is the most common compensation model for many financial advisers and planners. Depending on the type of mutual fund or segregated fund bought from a commission-based adviser, the fund company may pay the adviser's firm a commission of up to five per cent of the amount invested. That's for deferred sales charge (DSC) funds. They'll also get a "trailer" fee — an annual commission of up to one per cent of the amount invested to compensate the adviser for ongoing client service. These fees aren't very obvious. They're mentioned in the mutual fund prospectus, but most investors don't bother to read the document. The fund companies are able to pay commissions through charges that are embedded in the annual fees charged by the fund. The management expense ratio — MER for short — averages two per cent or more for actively-managed equity funds. That's an annual fee. On average, almost half of that is used to pay advisers. That fee is subtracted from the fund's assets before overall returns are calculated for the fund's unit-holders. That's why, in the long run, most mutual funds tend to underperform broad market benchmarks. Commission-based compensation methods pose inherent conflicts of interest. Is the adviser recommending I buy this equity fund because it best suits my particular situation or because it pays a juicier commission than a money market fund? No matter how professional and ethical the adviser, critics say, the reality is that commission-based planning has the potential to skew advice.
- Asset-based advisers say a big advantage of their method of compensation is transparency — investors know exactly what they're paying for advice and ongoing service. Asset-based advisers charge a fee that's based on a percentage of a client's assets — say 1.0 to 2.0 per cent on the first $500,000 and declining percentages on the excess. Supporters of this method of compensation say it aligns the client's interests with the adviser's — the adviser gets paid more only if the client's account increases in value. Investment counsel fees are also deductible for non-registered accounts.
- Some asset-based advisers call themselves "fee-only" advisers, while some refer to themselves as "fee-based." The one distinction everyone seems to agree on is that "fee-only" advisers always derive 100 per cent of their compensation from the client, with no compensation related to the purchase or sale of products. Many fee-only advisers charge an hourly rate for their advice, as opposed to a percentage of assets (although a few offer both models). Those fees start at $100 an hour and can go considerably higher, depending on their qualifications, experience and expertise. Most don't sell any products, so have nothing to gain from making one recommendation over another. As with advisers who charge fees based on assets, the investment counsel fees charged by hourly-paid advisers are deductible for non-registered accounts. Do-it-yourselfers can hire hourly-paid planners on a one-off basis to look over their financial particulars and suggest possible mid-course corrections.
- Salary-based advisers are more common at banks, where investors with smaller accounts are seldom turned away. Some salary-based advisers may also get a volume-based commission.
|10 questions to ask a planner|
|1. What are your qualifications?|
|2. What experience do you have?|
|3. What services do you offer?|
|4. What is your approach to financial planning?|
|5. Will you be the only person working with me?|
|6. How will I pay for your services?|
|7. How much do you typically charge?|
|8. Could anyone besides me benefit from your recommendations?|
|9. Are you regulated by any organization?|
|10. Can I have it in writing?|
|Source: Financial Planning Standards Council|
It's estimated that more than 75,000 people provide financial advice or sell financial products in Canada. More than 20,000 call themselves financial planners — a title that is completely unregulated, except in Quebec.
So it comes as no surprise that a number of professional organizations have developed online databases to help you select a qualified adviser. The Financial Planning Standards Council has a searchable directory of 18,000 individuals who hold the CFP designation. The council estimates that 80 per cent of Canada's financial planners are CFPs. The directory also indicates how the individual is paid.
The Institute of Advanced Financial Planners has its own searchable directory that allows web users to find advisers who hold the RFP designation.
Advocis, an association that represents more than 10,000 financial advisers across Canada, has an online directory of its members, searchable by geography, areas of specialization and financial designation.
Whoever you choose and however they're compensated, it's critical that you feel comfortable with your choice and have a clear understanding of what to expect from your adviser.
Don't expect them to offer you the next "can't miss" market tip or to deliver double-digit returns year after year. Almost no one does that.
What do you have a right to expect from your adviser? How about wisdom, reassurance, full disclosure, availability, trust, perspective, the ability to think "big picture" and a willingness to listen and answer questions.
Those are all good starting points for any relationship as intimate as this one.