Financial Advisors, who are they? Well I’m here to give you the inside scoop!
ETFs, S&P, TSX… do these acronyms make you nervous?
Do you find that your financial worries are keeping you up at night? Questions like,“Do I have enough to retire?” “Will I have to work until I’m 70?” “Can I afford to have my first kid or another one?” “Can I afford to buy my first house or my first rental property?”
But I have a financial planner! They’re professionals and they’ll take care of all those questions for me. Phew, right?
Well, they should be, technically. But how many of you can answer those questions with some sort of confidence based on what your financial advisor has told you? I have heard A LOT of justifications on why “my financial advisor is great!” “They’re friends of the family… we went on a cruise with them… lots of people we know use them… they’re good at all that investing stuff… they have lots big clients so they must be good.”
Nothing riles me up more than hearing answers that really have NOTHING to do with their ability to help you maximize your investments or help you set up a sound financial plan for your investment goals. I don’t care what your own reason is, but at the end of the day, YOU are responsible for your money and investments. YOU will be the one living with the consequences of your investing decisions. YOU should be able to understand what your financial advisor is telling you!
Don’t get me wrong; I know that there are good advisors out there who really do want to make you some money. Who, to the best of their abilities, really want to help you meet your financial goals. But at the end of the day, YOU ARE THEIR BREAD AND BUTTER! They are not offering you mutual funds out of the goodness of their own heart. They have their own mouths to feed, their own sales quotas to hit, and their own bosses to report to. Remember, companies are in business TO TURN A PROFIT; otherwise, they won’t be in business for very long!
So how can you utilize your financial advisors to their full potential? Here are a couple questions to start you off; if I were to ask someone “why is your financial advisor great!” and they blast out the answers to the following questions, I would be a happy, happy girl!
How are you getting paid?
This is a GREAT question to ask your financial advisor. Some are paid by commissions, some are paid by salary, and some offer fee-for-service. It is always good to follow the money trail, as this can be an indication of why they are making specific recommendations for you. If their answer to this question is “it costs $x a year to manage your funds,” ask if this is in addition to the Management Expense Ratios (MERs).
I HATE it when advisors say that there is “no fee” for their services. Their justification is that the mutual fund companies pay them their salary. Think about that for a second; these mutual fund companies are investing your money because they want to help you out? Does that make sense to you? These companies make VERY GOOD money doing what they’re doing, and YOU are paying for it, whether you realize it or not. A lot of the time, your advisor is being paid for convincing you to invest in specific funds, and they get paid every year for as long as you hold those funds, regardless if your portfolio increased or decreased in value during the year. So, if your portfolio drops by $5,000 in a year, I ASSURE you that your advisor was still paid for that year.
If your advisor is being paid a commission/salary from the mutual fund companies, clarify if the funds you own have sales charges. These are the commissions that you may have to pay if you buy or sell the fund, and can come in the form of a front-end load (initial sales charge) or a back-end load (deferred sales charges). Some funds have a minimum time frame in which you have to hold the fund (7 years for some funds) before you can sell it without incurring sale charges, so be wary when your advisor suggests buying new funds for your portfolio.
If they do make the suggestion, make sure that they are not doing this to lock you in for another 7 years (or whatever the time-frame is for your specific fund). Have them explain why they are making the recommendations for the change, and determine whether or not it aligns with your investment objectives and tolerance for risk. If they suggest something with a lower fee, (as you dance in your head with money signs), don’t forget to ask how the funds performed in the previous years. Although past returns are not reflective of future returns, it is a question they should be able to answer.
How did my portfolio return stack up?
Any advisor worth their salt should be able to calculate this return for you. Don’t be fooled though; if they just tell you what the “fund return” is, it is not necessarily the actual return that your portfolio attained. If you made contributions or withdrawals during the year, or did not reinvest all the dividends that were paid out, your ACTUAL portfolio return can vary quite a bit from what the fund return is.
Once you get your actual portfolio return, ask them whether or not it beat your target benchmark. Wait, that means they should know what your target benchmark is, right? If the stock markets lost money during the year, it shouldn’t be surprising if your portfolio loses money as well; it is just a part of the risk of investing (market risk). But if the stock markets gained during the year and you LOST money, someone has some explaining to do!
These are 2 basic questions your advisor should be able to answer, and if people could easily supply me the answers in regards to their own portfolio, I’d be a happy girl!
Who am I kidding, this barely skims the surface of the types of questions you can ask your advisor. I’m never satisfied I tell you! But it is definitely a great start but I’ll be back soon to give you more of the inside scoop on financial advisors!
Guest Post By: Vicky has lived with a life-long obsession with math and numbers, and this has developed into a passion for personal finance education and investing. Drop by Vix Money to check out her ramblings or to say hi!
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