What to look for in a Financial Advisor
So you’ve decided you’re in the market for a financial advisor, but where do you start? In some cases you might be referred to a financial advisor by a friend or family member, but is that really enough to go on?
This is a big decision, and you want to get it right, because your future financial independence might depend on it. And with the number of advisors out there, and investment options in general, it feel complex and overwhelming. But that’s why a financial advisor is there for you, to help guide you to the answers that work best for you. Now you just need to select the right financial advisor.
Below we set out 6 questions/thoughts to ask yourself and your advisor, to help determine the best course of action for you.
1. Determine what level of advice you need (or think you need)
Financial advisors come in many types, from providing general investment advice, to specializing in a narrow field. Some focus on younger clients, others help older clients reorganize for retirement. Some advisors like to be focused locally, others provide advice to clients across the province or country. Determining what kind of advisor makes you comfortable will help narrow down the field.
Additionally is the kind of financial planning you want help with. A majority of people handle their own investments, and maybe you just want an advisor to look over your financial plans and help guide you in the right direction. On the other hand, some advisors will take hold of your investments and aggressively reorganize them to help maximize yield. The amount of guidance you want (or need) with your financial future might help narrow down the kinds of advisors you’re most likely to connect with.
2. Check their credentials
Canada is a relatively unregulated market when it comes to holding yourself out as a financial advisor, so it’s important to understand what kind of training and knowledge background your potential financial advisor has. There are a number of designations that an advisor in Canada can have: many will have an undergraduate degree in accounting or business, some might have training through an insurance broker or a bank. Then there are actual certifications that a financial advisor can hold themselves out as having, including some of the following:
Certified Financial Planner (CFP)
Chartered Investment Manager (CIM)
Registered Financial Planner (RFP)
Chartered Financial Analyst (CFA)
One of the more well recognized certifications, even on an international level, and trains a professional to work with clients to build an actual financial plan.
This certification often leads to work managing portfolios of financial instruments for high net-worth and institutional clients.
Many advisors who pursue or have the RFP certification are already CFPs, and having an RFP evidences an advanced understanding of the financial planning role.
A CFA is one of the most highly sought after certifications, and requires an in-depth understanding of all finance related elements, not just personal investment strategies. CFAs are in demand in a number of finance related industries, and are able to provide strategies and insight into some of the most complex investment arrangements.
There are a number of other certifications and designations that exist in Canada and elsewhere. Whatever letters exist after your potential financial advisors name, it would be wise to ask for more information about their training and background.
3. Ask for their track record, and see what kind of referrals they are willing to provide
Any financial advisor worth their salt should have a track record they can point to in order to help establish that they know what they’re talking about. Make sure to ask your potential financial advisor to provide you some information about previous investments and returns on other client’s investments.
One thing to keep in mind is that some financial advisors will advise more liquid investments (i.e. stocks and bonds), which lends itself to a more visual track records. Also keep in mind how recent the historical record is that your potential financial advisor is providing. It’s good to understand how your potential financial advisor fared with their client’s investments in good times and bad times, and understand what they did to protect their client’s money.
4. Review all information regarding their services and the fee structure they charge
Most financial advisors will have documentation setting out the services they provide, including various terms and conditions of doing business with them. They likely have documentation setting out their investment strategies, their portfolio breakdown, and of course the way they charge fees. There are numerous investment strategies and means of charging for their work. Some will take more of your money upfront, others will take percentages based on returns, and yet others will make money by referring you to insurance or mortgage brokers or banks. It’s important that you understand the fee structure so you aren’t caught off guard down the road. If you’re unclear about vocabulary or how the fees work, ask the advisor. Also ask about lock up periods and how you would sever any services with the financial advisor if at some point in the future you want to consider other financial advisors.
5. Understand their investment philosophy
Probably one of the most important elements in weighing the pros and cons of a particular financial advisor – agreeing with the investment strategy for you. If you’re about protecting money, and not to concerned about growth, make sure the financial advisor is of similar mindset. On the other hand, if you’re looking for risky but high growth options, make sure the financial advisor your looking at has access or knowledge about the kinds of investments that can provide those kinds of returns.
6. Actually get to know the advisor
You will potentially spend years working together with your financial advisor, and it will help to actually get along with them. This point alone should be self-explanatory. One thing you may want to understand, what is your financial advisors future plans, and how are you (the client) covered in case your financial planner is incapacitated or otherwise out of touch long term. These aren’t immediately pressing questions, but it’s useful to understand what your financial advisors exit strategy is, especially if you’re younger than them. And if they regale you with exciting retirement plans, make sure your investment strategy mirrors theirs!
