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Investing With a Financial Advisor

What to expect from a financial advisor

Working with a financial advisor is the most difficult of the investment channels to understand. The financial advisor industry is fraught with challenges for non-financial folks; it can feel like a black box.

Last week I wrote that there are four main ways to get your money invested: using a bank branch, using a financial advisor, doing it yourself and using a robo-advisor. I described what you can expect if you walk into your bank branch and ask for some help with your investments. In this blog post, I will do the same for the financial advisor route.

This is a pretty long blog post because there’s a lot to talk about when it comes to financial advisors. If you don’t want all the details, let me give you the main points right up front.

  • A financial advisor gives you advice on what investments to own and looks after making the trades.

  • The financial advisor industry is made up of many people with vastly different skills sets and motives.

  • A good financial advisor provides you unbiased advice that it is in your best interest, sets up a simple, well-designed portfolio for you and doesn’t tinker with it, offers you access to the other services at their firm, and is fully transparent about the fees you pay and how they are paid.

  • There are a lot of benefits of working with an advisor: you can be as “hands off” as you want to be, they check in on your portfolio now and then to make sure it’s still set up properly, they will get in touch with you a few times a year, and they know you and your situation better than someone at a bank branch – and therefore the advice is better.

  • There are downsides too and it’s really important to understand them. One of the downsides is that some advisors are compensated through sales commissions. Another is that the fees can be quite high. Also, some advisors feel they need to “do something” for the fees you pay them so might make unnecessary changes to your investments or make them too complicated, which can damage your investment returns.

  • Using a financial advisor might be good for you if you have a significant amount of money to invest ($250,000 or more), you don’t really want to do any work, and you are okay with paying for the service.

If you are interested in learning more, read on.

What is a financial advisor?

First, a definition. A financial advisor is someone who offers suggestions about what to invest in. This person has to be registered with the Ontario Securities Commission, an agency that provides oversight of their interactions with clients. A financial advisor can sell investment products like mutual funds, bonds, and stocks. Although a financial advisor’s primary role is to help you decide how to invest your money, most financial advisors also provide other services like preparing a retirement plan or helping you with estate planning.

Some examples of companies in this field that you may have heard of include Edward Jones and Investors Group, but all of the banks also offer this service. Most advisors work for a firm.

There are definitely benefits to working with a financial advisor: personalized advice, minimal effort for you, and regulatory oversight. The downsides though are quite serious: you might be paying high fees, your advisor might be motivated by sales commissions, and they might feel they need to “show their worth” by making unnecessary changes to your portfolio.

Before I continue, let me say a few things. First, I have never been a financial advisor and I have never worked with one. I’ve been near the industry for many years, though, and I hear from colleagues and clients about the pitfalls of the industry. Second, I always hesitate to paint a group of people with the same brush. Like in any profession – teaching, medicine, law – you have good advisors and bad advisors.

What make for a good financial advisor?

Complicating the discussion is defining “good”. In my mind, a good financial advisor provides unbiased advice that is tailored to what you need. They set up a simple portfolio for you and rarely make changes to it unless there’s been a change in your life situation that requires it. The advisor would be in touch with you a few times a year just to check in and see if anything has changed and whether you have any questions. They will offer you other services offered by the firm and encourage you to use them. Finally, the advisor is upfront and transparent about the fees you are paying and how they get paid.

In my mind, the main benefit of working with a financial advisor is that you can choose to have very little involvement if that’s what you want. The advisor should be looking over your investments periodically to make sure things are still set up properly. Since the advisor can spend more time with you than your bank branch representative, the advice they give you will also be more tailored to what you need. And because the advisor and the advisor’s firm have to be registered with the Ontario Securities Commission, there is quite a lot of regulatory oversight. This means that the advisor has to follow certain protocols that safeguard your interests as a client. If the advisor does something unscrupulous, there’s someone to complain to who will investigate – and there are serious penalties for offenders.

Three things to look out for

In my view, the biggest downside to working with a financial advisor is that the nature of business sets them up to potentially be motivated by factors other than what’s absolutely best for you. I tread carefully here and use words like “potentially” because many advisors would be totally offended by that statement. However, the reality is that some advisors get paid what’s called a trailer fee, which is a payment they receive from a mutual fund company for selling you a fund. Generally, funds that are less expensive for you have lower trailer fees for the advisor. For example, ETFs have lower fees for investors and most don’t pay a trailing commission; I think you can connect the dots here and see that a lower-priced ETF is good for you but not so good for the advisor.

The other issue to watch carefully when using an advisor are the fees you pay. Financial advisors can be paid in a few different ways: through trailing commissions, by receiving a salary (and bonus) from the firm they work for, and/or by charging you, the client, a percentage fee (percentage of the money you invest with them). I won’t delve deeply into this topic – I’ll just say that you should get a clear answer from your advisor about the fees you pay and how they are paid. Regulation requires that the fees are disclosed to you at least once a year and shown in dollar terms, not just as a percentage. Don’t be afraid to ask you advisor to explain all of this to you in plain language.

Lastly, since you are paying your financial advisor, there may be an expectation that they “do something”. And by “do something” I mean switch around your investments, make some trades, or introduce a new product. All of this isn’t necessary unless your situation has changed and you need to reduce your exposure to stocks and increase your cash, as an example. Otherwise, a simple, well-constructed portfolio should need little adjusting over time. Don’t let an advisor tell you it’s a good time to sell one fund for another, or make a bet on one sector over another. They don’t know and it will probably damage your returns.

Finding an advisor

Is working with an investment advisor right for you? If you don’t have an interest in looking after your own investments and you’d feel more secure having someone watching them for you, then it might be the right choice.

If you’re looking for an investment advisor, here’s a good source of information including questions to ask a potential advisor. This website offers a service that helps you find an investment advisor – totally free to you.


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