Did you interview your financial advisor before accepting their services? If you are like most Canadians, the answer is probably no. In this article, I’ll go through the most important questions I think you should ask your investment advisor.
If you have someone else managing your money, they were probably assigned to you rather than chosen. Should that really be the criteria for allowing someone to manage your money? Convenience rather than quality?
At least 60% of Canadians rely on financial advisors to manage their money. Half of those Canadians also feel that their advisor is better suited to help meet their financial goals. That is highlighted as the number one reason that Canadians use an advisor.
After all, having the wrong person manage your money could be very detrimental to your retirement nest-egg. This counts even more for the person who has been managing your investments for years.
Here are six questions you should ask your financial advisor before you start working with one.
Question 1: Are you a fiduciary?
A fiduciary is simply a person who is legally obliged by the law to act in the best interest of their clients. If someone is handling your money, you want them to be a fiduciary.
If someone is a fiduciary, they’re telling you that their doing what’s best for your money. That means not steering you into high priced investment products just so that they make a good commission from you.
Is everyone who manages money a fiduciary? The short answer is no. There is no clear guideline on advisors that makes them a fiduciary. Currently, investment advisors are subject to rigorous regulations and standards that they must meet before they can engage in business.
That means most investors can be certain that when they do invest their money with someone, that those procedures and products are fully vetted.
But that doesn’t mean that all investment advisors will put your needs ahead of theirs just because their legally allowed to handle your money.
As well, many advisors have many different names that can also muddy the waters of their responsibility to you. Some may be advisors, brokers, sales consultants, etc. At the end of the day, they all sell the same financial products.
Most advisors use what is called the suitability standard where they only need to sell you suitable funds. In plain English, as long as the investment fund returns a profit, however little, then it’s seen as suitable. A fiduciary should recommend a fund that is suitable and that is truly in your best interest.
Takeway: If you’re financial advisor answers “no” to being a fiduciary, find someone who is. This person might not be fully committed to your needs.
Question 2: How are you compensated for handling my investments?
The answer to this question should very much dictate if this person should be handling your money or not. Financial advisors are paid most commonly to sell mutual funds. Let’s see how they make money from selling those products.
- A trailer fee. This is a fee paid to an advisor as long as an investor keeps their money invested in a particular mutual fund. It can be up to 1% per year. It is done to compensate an advisor to keep recommending a fund.
- Front-end load. When you purchase a mutual fund, you are sometimes charged a front-end load which is a fee just to buy into the fund.
- Back-end load. A charge you pay, when you go to sell your mutual funds. The advisor will typically get a percentage of this fee from the mutual fund company.
- Some advisors are paid straight salary and receive bonuses and incentives for hitting yearly targets. Many who work in big banks have this sort of compensation plan. While they receive no kickbacks from the mutual fund industry themselves, the banks do. The banks then use some of those commissions to compensate their advisors.
If your advisor is making commissions from managing your money, how will you know that they are actually recommending an investment plan because it’s the best option for you?
In most cases, they recommend a fund because it makes them the most money. The mutual fund industry and the people who sell them make money from fees.
If your financial advisor gets uncomfortable with this question, that may be a warning sign to dig deeper into the products they are recommending.
While most people are not experts in investing, it would be worth it to explore your options ensure that the investments you purchase are truly what is best for you. If you are unsure, get a second opinion.
Now, I am not saying that the advisors are bad people. They may be your uncle, family friend or someone you have known for long time. The fact remains that the mutual fund industry generates profits based on fees. Some of them are given to you up front and many are hidden in the fine print.
Alternatively, if you have a fee-only financial planner, then they do not receive commissions from any outside party. Their compensation is agreed upon by themselves and the investor.
They advise you on how to invest your money. That may include a plan to invest with a bank, a Robo-advisor, or other investment service.
Takeaway: If someone generates commissions from management of your money, be weary. Make sure you know what you are paying. The returns should be worth the sales charge.
If not, think of using a fee-for-service advisor. They are more transparent and don’t usually have any hidden fees.
Question 3: What is your investment philosophy?
While this could lead to a semi-philosophical conversation about the markets and the history of investing, you can gain an understanding of how an advisor thinks your money should be handled.
If they push toward mutual funds and active management, they might only be wanting to generate more commissions for themselves or their company.
Even those who do not receive commissions directly will still be trained to be partial to actively managed investments.
If they never mention index funds and passive investments strategies, (which the probably won’t) then they are not showing you all the options.
A good financial advisor will show you multiple ways to invest your money. They will go through the pros and cons of each type of investment.
That conversation should cover what costs are associated with their plan. The advisor should be interested in keeping your sales fees as low as possible while maximizing your returns.
Overall, it is very important that you know where they stand when it comes to your money. Do they want to help grow your investments or just sell you product?
Takeaway: If your advisor thinks mutual funds is the only way to go, think twice about their advice. Mutual funds charge higher fees and have lower returns on average. Someone who explores all the options (including index funds) and compares fees and benefits is more reliable.
Question 4: What are your qualifications?
Does your advisor have a financial professional designation or any other certificates? How many years have they been in this industry?
Do they have experience working with clients like you? These are all things that you should know about your advisor.
They should have experience managing money for others through good markets and bad. They should be there to help coach you when you need it and not just be there to sell you an investment product.
After all, do you really want someone to manage your money when they only have a little bit more knowledge than you? Many advisors require only minimal courses to sell you mutual funds and past that, their knowledge is limited.
Be careful of who’s advice you buy. Make sure their experience and qualifications make them a good fit for you. If your unsure, ask for testimonials from other clients before starting with them.
Takeway: Make sure your advisor has the necessary years of experience and education to advise you. They should also have experience dealing with clients in your situation.
Question 5: Besides helping me invest my money, what else can you do for me?
Can your advisor help with other aspects of your financial needs besides investments? Ask your advisor if they offer other services such as estate planning, insurance assistance, or tax services.
If you are paying for someone else to manage your money, they might be able to offer additional services as part of the package. Chances are that you have many of these services spread out amongst multiple providers.
It might be a good idea to streamline all your financial services under one umbrella. It makes it easier for you to manage and could save money in the long run.
If you do have the ability to consolidate your financial needs with one advisor, make sure that you understand their fee structure. Understanding any conflicts of interest with their offerings is also a must.
Takeway: Ask if your advisor can help you with other aspects of your money management? Be wary of additional fees before agreeing to anything.
Question 6: Who is the mutual fund manager of my investments?
If you do choose to put your money in an actively managed fund, someone is managing the whole operation and getting paid handsomely to do so.
Some of you may ask why this question is even relevant?
The biggest reason you would want to know about the fund manager is to see if they have a track record of success. Your advisor will undoubtedly show you the performance of the fund over the years its been around.
But does that performance, even if its exceptional, owe their returns to the current manager? Maybe the manager has underperformed their current term and the positive returns have just been averaged over the years.
If you can trust that the person who is in charge of the fund can grow your assets, then you can feel at ease. Someone who may have a checkered past when it comes to investment performance might not be a fund you want to invest in.
Takeaway: Ask how long the fund manager has been in charge of potential investment fund? Make sure that they have success with growing the fund. Someone who has lagged the market for years might not be a good fit for your money.
Most of us don’t pick who manages our money. But there are some very important questions you should ask your financial advisor, even if you have been working with the same one for years.
- Are you a fiduciary? If they are not, you shouldn’t be working with them. They might have conflicts with your investments.
- How are you compensated for investing on my behalf? Someone who is commission only might not be acting in your best interest.
- What is your investment philosophy? Someone who does not mesh well with how you think, might not be the best person to manage your money.
- What qualifications do you have? You want someone with experience and education to help you. Someone who has been in the industry a short time might not be as helpful.
- Can you help with my financial needs outside of investing? Advisors who offer multiple financial services may be more valuable.
- Who is managing my investments? You should know if the person managing your investment portfolio has a track record of success.
Overall, I think that these questions are some of the most important you can ask an advisor. If you don’t feel comfortable with their responses, it might be good to go elsewhere for management of your money.
After all, if you can’t trust someone’s responses to these simple questions, you can’t trust how they might manage your investments.
A fee-only financial advisor is a very attractive option. Since they do not handle your money directly, there is no conflict of interest with them selling you a product with high fees.
The fee structure is usually outlined very clear, either an hourly cost for their time or a percentage of your assets depending on the complexity of your situation.
They will give you an overview of all of your options that will include active management like mutual funds but also alternatives like index investing. You can then decide where you want to park your money and who to do it with.
Whatever route you pick, you can rest assured that you have been presented with all the options rather than what generates the most revenue for the financial industry.
Does this encourage you to ask your advisor some of these questions? Let me know in the comments below.