Asking the right questions can help land the best adviser
A lot of Canadians want good financial advice. They just don’t know where to find it. Studies have repeatedly shown that people who have a financial adviser fare better with their investments than those who don’t. However, we know anecdotally there is another side to this coin — a few unscrupulous advisers take advantage of unsophisticated clients through such techniques as overleveraging, churning accounts or recommending risky, high-commission products. Each year I receive numerous requests from people for guidance on choosing a financial adviser. I usually refer them to the Financial Advisors Association of Canada (Advocis) website, which offers guidelines and some questions to ask during an interview. That information is all good in theory. But last week I accompanied a friend to some meetings with prospective advisers, each of which lasted about 90 minutes. By the time it was all over, we were both suffering from information overload and I had evolved a series of dos and don’ts for the whole process that may be helpful to anyone looking for financial help. Here they are: Do prepare questions in advance. Know exactly what you want to learn during the meeting. The best way to do that is to write out a list of questions in advance and make sure they are all answered before you leave. Here are some that we included.
What are your professional credentials? Do you have portfolio manager status? Only an estimated 4 per cent of advisers have this. Those who do have a fiduciary responsibility to always put the client’s best interests first.
What is your investing philosophy? You’d be surprised how many advisers skate around this one.
What services does your company offer? Some firms provide brokerage only, others offer a full range including portfolio construction, estate planning and tax return preparation.)
How would you structure a taxeffective portfolio for this client?
What would you consider to be a realistic target rate of return in view of this client’s risk profile?
May we see a sample of your reports? How often are they sent out?
How would you insulate a portfolio against a 2008-style crash? Don’t allow the prospective adviser to sidetrack you. One of the advisers we met with kept wandering away from the specific questions we asked, shifting the conversation to some of the great trades he had made or other topics. If that happens, don’t hesitate to interrupt and force the person to get back on point. Do be prepared to provide personal financial details. My friend was startled to be asked questions about her personal income, other investments, property ownership, liabilities, family financial obligations and the like. I should have warned her in advance that any good financial adviser will do this. No one can put together a proper financial plan without knowing all the relevant information. So go prepared. Don’t be tempted by promises of high returns. My friend is older and conservative by nature. Therefore, her portfolio should have capital preservation as a top priority. After discussing this with the prospective candidates, I asked them what target return she might expect in such circumstances. In my own mind, I felt 5 per cent to 6 per cent would be reasonable. The answers ranged from 6 per cent to 8 per cent. I raised my eyebrows at the 8-percent estimate; anything that high implies a greater level of risk. Do listen to the message behind the words. Sometimes you can learn a lot about how an adviser operates by analyzing the true meaning behind the words. In one instance, the person repeatedly talked about profits he had made by buying and selling at just the right time. That told me immediately that he was instinctively a trader, not a buy-andhold adviser of the type my friend was looking for.
Don’t let anyone talk over your head. I thought my friend was going to fall asleep when one prospective adviser insisted on talking to me about such issues as forward hedging oil sales, discounts on closedend funds, adjusted cost base, etc. Of course, he should have been focusing on the potential client and making sure he spoke on a level she could grasp.
If you’re in a meeting with someone who tries to snow you with technical terms, pull them back down to earth.
Do ask cost details. Find out the exact costs you’ll be expected to pay. Advisers don’t work for free and their compensation is sometimes hidden in sales commissions, trailer fees and the like.
In 2016, this information will have to be disclosed, but for now it is up to you to insist on receiving it. For fee-based investment management, expect to pay 1.5 per cent on the first $500,000, with the percentage dropping on amounts above that. If you use other services, such as tax preparation, there will be an additional charge.
Don’t sign any agreement on the spot. Take any materials that are offered, go home and spend a few days reviewing them. A well-prepared adviser will have put together some relevant information in advance of the meeting, perhaps including a model asset allocation and even some suggested securities. Don’t make any decision until you have had time to assess everything. Gordon Pape is editor and publisher of the Internet Wealth Builder newsletter. His website is BuildingWealth.ca