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Are you getting the most out of your financial advisor?

Your financial advisor is probably pretty busy.


If your financial advisor gets paid using the “assets under management” model - and many do -  they probably have a lot of clients. In order to maximize the fees they receive, they have to be managing a lot of money and unless they only work with multi-millionaires, that means many clients. This can unfortunately result in a lower level of service than you'd like.


A quick lesson in financial advisor compensation. There are several ways a financial advisor can get paid: salary, bonus, commissions from mutual funds, and fees paid directly by clients. The last two (and possibly their bonus) are calculated as a percentage of the money that client has invested with the advisor.


You can see what some of the consequence of such a model can be.  For one, advisors often won’t take on clients with less than a certain amount of money to invest, leaving less wealthy people to invest without help. The model also can lead to having a long list of clients, and the advisor might be hard-pressed to serve all of them with the high level of attention that they’d like to. In my experience, the big firms like Edward Jones and Investors Group tend to display these qualities more than smaller, independent firms.


If you feel like something is missing with your advisor, you should take some time to figure out what that is and how to fix it. In my experience working with people who have advisors - and are wondering if they should continue the relationship - there are three issues that come up over and over again.


1.     A confusing portfolio


Some portfolios are a bit of a mess. There are generally two ways your portfolio will be managed: you will own individual stocks or you will own mutual funds. And possibly you’ll have a combination of the two. The individual stocks you own are probably based on a “model portfolio”, which is a list of stocks that the firm’s research team compiles that is used to build client portfolios. (Sorry to break the news – your list probably isn’t special to you.) You might also own a couple of mutual funds to cover off the international stocks component of your portfolio and perhaps the bond component too. This portfolio can look overwhelming as you can easily own 30 stocks but this isn’t really a concern.


The problems show up more often in portfolios of mutual funds. An ideal portfolio would have a small number of mutual funds, like one or two mutual funds for each asset class. For example, you might own one or two bond funds, one or two Canadian equity funds, one or two US equity funds and one or two international equity funds. That’s eight mutual funds tops - TOPS!


What I often see, though, is a portfolio with many more mutual funds than that. The advisor might be hedging their bets by throwing everything in there: a little “growth”, a little “value” and little “income”, a little “small cap”. That to me isn’t skilled investing – it’s lazy. When a client owns that many funds, it shows a lack of conviction. Also, it’s easy to gloss over the funds that are performing terribly while circling in pen the ones that are doing well. (Yes, I’ve seen this circling technique.)  


Also keep an eye out for advisors who seem to keep adding funds without taking any away. Over time, you’ll end up with a strange list of funds that have overlap each other and make it hard to understand what you own. It's a sign that the advisor isn't putting in the time to rebalance properly.


Another lazy and messy technique is using balanced funds. A balanced mutual fund is one that invests on both stocks and bonds. A balance fund has its place in the investing world; it’s good for investors who have a small amount of money and need exposure to both asset classes. But investors with bigger portfolios don’t need a balanced fund. They need a fund that is specific to each asset class – a bond fund for the bond portion, an equity fund for the equity portion. Using balanced funds makes it hard to see what percent of your total portfolio is invested in each asset class and quite honestly it’s a wishy-washy investment choice.

When you look at your statement, you should be able to quickly identify how much you have invested in each asset class without having to put it into a spreadsheet and analyze it.


2. Lack of service


As part of the fees you pay your advisor, you are entitled to receive personalized service. This includes both investment management service and a certain amount of high-level financial planning. Probably all financial planners who read this are saying out loud “Financial advisors don’t do financial planning!” True, they don’t do comprehensive financial planning. But they can use their software program to print out a report showing how much your savings could grow between now and retirement and how much income these savings will give you throughout your retirement. This is very helpful to give you a broad sense of whether you are on track with your retirement savings. The problem is that it’s not personalized and it’s not comprehensive. Furthermore, in a lot of cases it’s not well-explained. Receiving a report with just tables and numbers without a written interpretation and a conversation can leave you with a lot of unanswered questions and potentially a misleading “retirement plan”.


Worse, though, is an advisor who doesn’t even offer you this. If you don’t have a large enough account with the advisor, you might be sidelined in the advice department. I’ve heard this from a number of people.


At the very least, it’s an advisor’s responsibility to make sure you are invested in line with your risk profile. This means they should be asking questions about your attitude about risk, your comfort with taking on volatility, your investing time horizon and how much of a return you want or need to generate. And this isn’t a one-and-done interview – it should be done regularly to see if anything has changed. I’ve seen examples of accounts that were too conservatively invested for many years, where higher potential returns were being sacrificed because the advisor was being overly-cautious. Yes, I've seen 3% annual returns over a 10-year time period. This is not ok. Your advisor should take the time to explain the risk/return continuum and make sure you are taking enough risk (and of course, not too much risk) with your investments.


3. Lack of clarity on fees


It’s hard to believe that we are still talking about this. A lack of transparency on fees is an ongoing issue. Some advisors aren’t forthcoming with explaining all of the fees the client is paying, specifically the fees on mutual funds. It’s possible they mentioned the management expense ratio (MER) to you when you first invested in the fund, but did they translate that into dollar figures? Did they remind you at all later on?  


The industry regulator has taken modest steps to address this problem by requiring your financial advisor’s firm to send out a report once a year that shows how much the financial advisor is being compensated by you directly – through the fees they take out of your account - and indirectly, by way of the mutual funds you own. However, the report can be hard to understand and more importantly, it’s missing a key piece of information: how much you pay to own your mutual funds. The MER isn’t listed on this report and investors need to do this work themselves


In order to figure out how much you are paying every year for a mutual fund, you need to find the management expense ratio (MER) and multiply it by the amount of money you have in the fund. I’ve had client tell me that they have asked their advisors about this cost and were told to “go find the MER”. Not helpful.


You can read more details about how financial advisor fees work here.


Using a financial advisor to manage your investments has benefits, there’s no doubt about that. But you have to understand what kind of advisor you have. How do they get paid? Do they regularly review your portfolio and make sure it’s being taken care of? Are they giving you all of the advice you are entitled to? Don’t wait twenty years to start asking these questions – that’s too many years of paying fees and sacrificing returns for no good reason.


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