Ellen Roseman, personal finance columnist for The Toronto Star, has a great column on choosing a financial planner. For people not interested in DIY financial planning, finding a good advisor is as difficult as finding a good mechanic, only much more important.
Like many people, I had a negative experience with the financial planning industry. Just out of university and working for the very first time, I went to an advisor recommended by a colleague. The advisor recommended two options for my retirement account: a venture capital fund or a telecommunications mutual fund. Both these funds are very inappropriate as initial investments. A good recommendation would have been a broad stock index fund and a broad bond index fund. He did not tell me that both funds provided him with fat trailer fees and the venture capital fund had a 6% sales commission. I bought the venture capital fund and it is down 56% in five years. My colleague bought the telecommunications mutual fund and it rocketed for a while before the bottom fell out of the sector. Soon, both of us fired the advisor.
There are some very good financial advisors who take their fiduciary duties very seriously. Some of the signs include:
- Fee-only planners who charge on an hourly basis for a financial check-up or drawing up an investment plan.
- Professional designations like the CFP.
- No affiliations with the mutual fund industry. An employee of a mutual fund company might be bound to sell active funds from their employer.
- Willing to provide at least three references and being up-front about fees and commissions for any of the products they suggest.
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2 responses so far ↓
1 cvrk // Jun 20, 2005 at 8:30 am
While I may tend to agree with your observations, I tend to disagree with you regarding affliations. An affliation, besides, providing an income also provide access to the industry, so that he keeps abreast with what is happening around/ A prudent FP is one who disclosed what he gets as a commission and convinces you why he recommends such investment, and explains the risk involved. A financial planner only guides you and after all it is your money! Naturally he should be compensated for his time either by way of upfront fee or commission. I would consider the first quality a FP should possess, is transparency in his dealings.
2 Arbee // Jun 20, 2005 at 11:28 pm
cvrk: I totally agree that a FP should be compensated fairly for their time and efforts. After all, they have to make a living and they bring valuable skills to the table.
That said, I think a professional designation is a must. I’ve read somewhere that in Ontario you need more qualifications to be a hair stylist than a financial planner. Even a professional designation is meaningless if a planner is employed by a mutual fund company as they will sell only their own funds.
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