Financial Advisor

Finding a Financial Advisor, Part 3

July 27, 2008

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Now that you have a shortlist of advisors, the next step is to interview them. First, I compiled a list of sample questions to ask potential advisors from various sources. The CFP website has a list of ten questions to ask your planner. The Mackenzie funds website also features a list of interview questions that you can print out. Gail Bebee lists some sample questions in a chapter on hiring a financial advisor in her book, No Hype – The Straight Goods on Investing Your Money (review). And of course, Suze Orman has five questions for grilling a financial planner.

Initially, I worked from the list but later found that it is better to mention what you are looking for and develop a conversation from there. For instance, I’d start off the conversation by mentioning that I am a DIY investor, currently managing a portfolio of broad-market index funds and am looking for a fee-only planner to get additional help with taxes, retirement planning, portfolio review and insurance needs and ask if the planner is interested in me as a prospective client.

As someone looking for a fee-only planner, the discussion on fees was pretty straightforward — both planners said they would charge $100 per hour and take 10 to 15 hours for a comprehensive financial plan. If you are hiring a fee-based planner for managing your portfolio and offering other financial planning services, fees are an important point to bring up in an interview. It is absolutely essential that the advisor be forthright about fees and discloses all other compensation schemes (such as commissions) and reveal any incentive they may have to recommend financial products.

One great tip I got from a practicing financial advisor is to ask for a representative portfolio constructed for someone who has been a client for at least five years (without any personal information) and check if the prospective planner is a performance chaser or churns the account too often.

Finding a Financial Advisor, Part 2

July 20, 2008

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In response to the first post on the series on finding a financial advisor, Thicken My Wallet posed an interesting question – why would anyone want to search for potential financial advisors off the internet? – and further suggested that getting referrals from friends or colleagues might be a better option. There are a couple of reasons why I got most of the short-listed planners from the CFP website: First, I am interested in finding out how easy (or difficult) it is for an average person to find a competent planner and the sample set I ended up with would be a good cross-section of what’s available out there. Second, if I did hire a planner, it would be strictly on a fee-only basis. I believe that investment advice isn’t worth paying for but everyone I know deal with investment advisors, brokers or mutual fund representatives, not fee-only planners and pretty much get investment advice only.

Now, I was ready to talk to the short-listed candidates over the phone. I had a list of five planners: Ruth* from Scotia McLeod, Kevin* from Investors Group, Alan* from RBC Dominion, Todd* from Berkshire Securities and June* from an independent planning firm. Of these planners, the only disappointment was Kevin because the first question he asked me was the size of the account and the interview went downhill from there, centering mostly around the great services he offered (i.e. mutual funds from the “best” companies around. Apart from Investors Group funds, Kevin also sold funds from Fidelity, AGF etc.), rather than trying to figure out what I was looking for. He was reluctant to speak about fees but was quick to mention that I don’t pay anything directly and it took much prodding to get him to admit that he gets a sales commission but probably forgot the trailer fees. I mentioned to Kevin that I don’t believe in paying for active investing and would want to continue to hold my current ETFs, only to be interrupted by his question — “ETF? What’s that?” I probably should have thanked him for his time and hung up after the first question but I was fascinated by the train wreck the interview was turning out to be.

The rest of the advisors were straightforward with their answers and as far as I can tell were quite competent but only two (Ruth and June) offered fee-only planning. They were happy to mention exactly what their fees were – typically starting at 2% of portfolio for account sizes starting at $200K – and were impressive with their knowledge of the financial planning process. Almost everyone mentioned that they provide clients with an analysis of their insurance coverage and have a team to assist with wills and estate planning and tax planning. Next week, we’ll look at potential questions to ask prospective advisors.

* All names have been changed.

You can read Part 3 of this series here.

Finding a Financial Advisor, Part 1

July 13, 2008

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While I’m passionate about DIY investing and believe that most people can learn to invest on their own, the reality is that, for whatever reason, most Canadians don’t have the interest and/or inclination in DIY planning and would rather hire a financial advisor. As I get a number of questions on how to find a financial advisor, I decided to find out for myself how easy or difficult it is to find a “good” one.

I started my search by doing a bit of reading – the Mackenzie Financial website has a lot of useful information. In her book, Spend Smarter, Save Bigger, author Margot Bai devotes an entire chapter to getting financial help (Chapter 16, deceptively titled Easy Investing Alternatives to Grow Your Savings Faster). Preet Banerjee, himself a financial advisor, has written many posts (kinds of financial planners, selecting a financial planner) on the topic of financial advisors on his blog.

The type of financial help you can get is limited by the size of your investment accounts. Unfortunately, most financial planners will only consider accounts around $200K (or more) and until you reach that threshold, you’ll have to turn to mutual fund salespeople or banks or mutual fund companies. The best option may be investing directly with a low-fee mutual fund company that also offers consultation on portfolio construction and investment strategy such as Phillips, Hager and North (minimum $25K) or Leith Wheeler (minimum 25K).

Assuming that you satisfy the account minimums to hire a financial planner, the first thing to do is to figure out what you are looking for in an advisor. For example, I would want an advisor to develop an overall plan and strategy for our current goals – early retirement, kids’ education, insurance planning – and handle the implementation details myself. A fee-only planner, who charges on an hourly basis, would be my first choice. Others might have different requirements but whatever the degree of involvement, I would suggest that we bear ultimate responsibility over our finances.

The good news is that there are plenty of financial advisors. So numerous, in fact, that you can throw a rock from your front yard and have fairly good odds of hitting one, which is not surprising considering that the barrier to entry into the profession is fairly low. Therefore, I decided to narrow down the field and look only for advisors with a Certified Financial Planner (CFP) designation. A CFP certification doesn’t guarantee you that the planner will be competent but the odds seem to be fairly good (as I’ll explain later). You can search for certified planners through the CFP website. I found 140 planners within 5 km of my postal code and 340 within 25 km.

From the search results, I picked five names after eliminating planners who were associated with mutual fund or insurance companies. Four of them belonged to the wealth management arms of the big banks and one worked for an independent firm. In future posts, I’ll share my notes from talking with the short-listed planners.

Note: Thanks to everyone who entered in The Intelligent Portfolio giveaway. The winner, picked at random, is Tob.

You can read Parts 2 and 3 of this series here and here.