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?
RRSP, TFSA, RRIF, RESP, index mutual funds… have you broken into a cold sweat yet?
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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I was always told that financial planners and portfolio managers are a huge waste of money. You are second only to the company themselves, who as you said have to pull a profit. In the U.S. we have Vanguard who has the industries lowest expense ratios for Mutual Funds and ETFs. Plus they mainly have indexed funds, instead of paying big wig investment bankers to handle your money!
Exactly! That’s why it makes me so mad when people think their planners are working for “free.” If you choose to use them, at least understand that they’re making money for their service. And don’t get me started on those who believe that their banker is their “friend!”
I LOVE Vanguard, and would be fully invested with them if I had the chance! Unfortunately, in Canada, we are not able to invest in their mutual funds, and we are subjected to currency exchange fees whenever we purchase their main ETFs. They recently introduced some ETFs for Canada, and I’m sure that they will be as good as their US counterparts, but I will wait for a year or two to make sure everything works fine on their end. That being said, I still hold a good chunk of Vanguard ETFs in my own portfolio.
Thanks for dropping by!
Being an educated consumer is so important. Asking them “how they get paid” is a great tip!
Definitely! It is always surprising to me when a lot of people do not even realize that they are paying their advisers!
This is great info. There are so many questions that you should ask a financial advisor. I am slightly leary of them myself~!
Hey Holly,
It is always good to be a bit skeptical of financial advisers, but if you know what you are looking for and what you expect them to do, you will know if you have a good one who has your best interest at heart!
I know there are some really good and really bad ones. I have never really used a financial advisor, but I hope to have enough assets to need one some day.
Hi Kim,
It is always a common belief to feel like you need ‘enough’ assets before you talk to one. Which is fine, but I hope you are still taking the time to learn a bit about investing on your own! If you have money to invest (money sitting in a savings account counts as investing), or you are currently invested in the stock market now (through owning mutual funds or whatever), you should understand the costs and risks associated with your choices. A financial adviser can help teach you (or, at least I would like to think that it is part of their job), but you definitely learn just as much on your own!
Financial advising is something that I would love to have more information about. I would like to eventually have an advisor help me with my investments and make sure I am on the right path.
Ya I’m learning as well. I never had an advisor in the UK so it’s all new to me.
Financial advising could definitely be great! Just don’t follow their advice blindly, believing/hoping that they know best. You have to make sure you understand what they are doing, and agree with the choices as well!
I would love to learn more about this….. can you give me a list of books to look for so I can learn more???? I need to read something a time or three sometimes to fully understand it……Thanks
Vicky is going to do a follow up post and I’m sure she would be happy to add in some of her fav books!
Hi Christine,
Yeah, I’m so happy that you want to learn more!! 🙂 I have a list of books I recommend for people wanting to start to invest on their own under “Recommended Readings” on my website. (Sorry for the plug Mr. CBB! :P)
The one book I have been bugging Mr. CBB to start reading is “The Elements of Investing.” Short and simple, and hopefully easily digestible for a newbie. Pick it up from your local library or find it used if you can! Check out my review on it to see if it is something you would find interesting, and I would love to hear your thoughts on it!
So Mr. CBB… have you read it yet? 😛
Right on! After going through a few advisors in my time, asking them “how they get paid” is sooo important! Great post!!
Ya, I’m learning as well mate…
Hey Anthony,
I think some people find it weird to ask that as it is not a common question you would ask people in every day life. But it is a very fair question to ask your adviser! They should be expecting it actually! 🙂
As an advisor myself, these are definitely questions that should be asked, and I welcome them. Also, one of my mandates is to educate my clients. Not all of them want to get into the nitty gritty bits, but I want them to know what they are investing in and why. All decisions I make are in the best interests of my clients, no exceptions ever. Ever.
1) How do I get paid? Before I even put a nickel away for a client I make sure they know how I get paid. I have nothing to hide. MERs, trailer fees, trading commissions, you name it. Be wary of an advisor that wants to switch in and out of stocks or funds too often. They may be re-setting the clock on DSC funds (aka churning), or getting trade commissions. I also have access to insurance and banking products, and I will disclose how (and how much!) I get paid for those if those products or services are purchased for the financial plan.
2)How did my portfolio return stack up? This is by far the tougher question, as we have to get into the type of investor we are dealng with. A conservative investor could have a much lower return when the stock market is surging along, and possibly a much better return when the market is getting beaten up. Regardless…outperforming the market is NOT a financial goal and is not a financial plan. There is no statistical evidence for consistent outperformance, and selection and timing have little to do with what happens in reality. Behaviour is the dominant determinant in real life returns.
Good luck with your investing! 🙂
M
Hey Martin,
Good for you! I think education is the key to developing a relationship with the client, and I am glad you explain things like MERs and trailer fees and DSC funds! So many people I talk to don’t even know they own DSC funds!!
Portfolio return is definitely a tougher one to answer, but I believe that it is something the client has the right to know and understand. If they choose a more conservative portfolio, they should understand the risks associated with that. And I agree that OUTPERFORMING the market is not a financial goal, but I do expect my portfolio to perform AS WELL as the market. Is that a fair expectation? Cause I can own a portfolio of index funds and receive those returns, minus the MERs of owning those funds and the trading commissions of course. If the funds I own consistently under-perform year-after-year, I would expect to understand the reasoning behind that. What do you think?
Good stuff. I was fired once by a client who had an advisor who was “free.” Yeah…the client actually believed this guy was going to work out of the kindness of his heart. After work he stands on the corner and begs for coins to live….sure…..
As for benchmarks, I get your point, but every good financial plan should come with milestones toward the goal. THAT is the specific benchmark that you should be worried about. I always hated clients who wanted all the gains of the S&P 500 but none of the losses….
For the clients who wanted all of the gains and none of the losses, they obviously didn’t understand market risk is, and how it is inherent in investing. Which is definitely a tough thing to get a client to understand.
I definitely agree that you have to set goals and milestones, and an adviser can definitely help in setting those goals. I think advisers also think of other financial problems along the way that the client doesn’t even realize they could be facing down the road. But I still do believe that if the client owns a portfolio that is under-performing year after year by x%, they have a right to know and understand that. At the end of the day, if they have a portfolio that is under-performing by x% a year, but all the other help they receive in respect to help meeting their financial goals and milestones is worth what they’re losing, then that’s fine. But it is the client’s right to understand that cost and consciously make the choice. I don’t think it is right for the client to never know how their portfolio is performing. What do you think?
It is quite amazing how little most know about the questions you should ask an advisor. I’ve had a few clients bring a laundry list of questions to ask me in their first meeting; it was fairly interesting as I felt like I was in an interview. For the most part though, it’s the advisors responsibility to educate the client on many of these topics. Hopefully you’re able to find one that does so thoroughly.
I wholeheartedly agree Jason! It should feel like an interview! This person is supposed to guide you through your investing journey, and everyone DESERVES to find someone who is good and trustworthy. People work hard for their money, and if they want to find someone to help guide them through the investing world, it should be to their benefit, not to the detriment of their portfolio! Education is key.