5 Questions You Must Ask an Advisor Before You Hire Them
Mark McGrath, CFP?, CIM?
New book "Wealthier: The Investment Field Guide for Canadian Millennials" out now!
CBC Marketplace recently released a scathing report on the sales tactics used by the big Canadian banks.
Here are 5 questions you must get answered to make sure you're getting trustworthy advice:
1. What fees do I pay, and how are you compensated?
There are numerous forms of compensation in our industry:
- fee-only/fixed fee
- fee-based (percentage of assets, often called AUM)
- commission for the sale of products
- salary, often time with bonuses based on sales targets
Conflicts exist with each model, but you want to make sure that, to the degree possible, your advisor's incentives align with your own.
This is hardest with the commission model, as well as with models that have sales targets and bonus payments.
Understanding the fees you pay, how you pay them, and how the advisor gets paid is the surest way to tell if you're dealing with a real advisor, or a salesperson.
2. What licenses do you hold, and what products can you use in my investment portfolio?
Advisors may be restricted to using only certain products.
For example, someone with only a life insurance license can only use segregated funds for their clients.
A registered portfolio manager can use stocks, bonds, ETFs, mutual funds, etc., but without a life insurance license cannot use seg funds.
And some advisors may be restricted to only mutual funds and unable to use ETFs.
This matters because they may not have the training, experience, and licensing to compare suitable alternatives for your portfolio and use the best products for your needs.
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3. What is your investment philosophy, and how do you defend it?
The industry is notorious for selling narratives.
What sounds good in theory may not have any grounding in academic research. And most advisors have no philosophy beyond picking things that went up yesterday, or selling the products they're told to sell to hit their sales targets.
Without a sound, cohesive, research-based methodology, you're buying a story, not a strategy.
4. What services do you provide beyond picking investments, and what service do you believe provides the most value to your clients?
Most advisors focus on investments, and may not have experience with things like tax planning, retirement planning, estate planning, etc.
If they don't have a clear picture of your whole financial situation, they may not be able to provide portfolio advice that is truly in your best interest.
And if picking investment products is their only service, you might be overpaying - you could be paying the same amount for more holistic advice on how your portfolio fits into the rest of your goals.
5. What is your service schedule and how do you monitor it?
A good advisor will meet with their clients regularly and have a system for tracking meetings and reaching out to you when it's time for a review.
You're paying for a service.
If they don't know how or when this service will be delivered, they might be focused on sales and transactions and not on helping you meet your objectives.
Note with fee-only planners, this may not apply to the same degree. But many good fee-only planners will recommend meeting with them more than just once, as planning is a continuous process.
Like any industry, there is good and bad.
Use these questions to help you tell the difference.
Wealth advisor | Client Relationship Manager at Nicola Wealth helping business owners navigate tax, estate, and retirement with access to pension style investing
11 个月I wouldn’t be surprised if a significant percentage stumbles at the first question - break down of fees involved.
I would love to see the response by a bank employee to any of these questions. I would add one question: Do you analyze my cash flow (income and spending) as part of what you do? If the answer is no, then how are they possibly able to advise on any other item if they do not even know if you can afford something. In fact this would be my first question.