Does he or she pass the smell test? Here are 4 important things to consider before entrusting your savings and investments to an adviser.
In today's real-estate obsessed world, it's not uncommon for a homeowner to know not only the value of her house, but the percentage appreciation over the past three years, and which nearby neighbourhoods are seeing the most sales activity. But ask that homeowner similar questions about her retirement savings, and you're probably going to get a look somewhere between a blank stare and mild panic.
If this is you, you're not alone, and nobody's suggesting you take a brokerage course and become a hobby investor. But you do need to make smart choices about your retirement. For many, that means entrusting your nest egg to a financial planner who look after all your financial advice (including estate planning and insurance) — but more specifically an adviser to cover your investment and savings decisions. The trick, of course, is finding the right one.
"Investing is a multi-decade endeavour. It's probably the longest thing you do in your life, so finding someone you can work with and trust is super important," says Tom Bradley, president and founder of Vancouver-based Steadyhand Investment Funds.
But the trick is knowing what to look for. With that in mind, here are some pointers to keep in mind when seeking an adviser.
Check out the options
Have you ever gone car shopping with the idea that you're going to visit several dealerships and play hardball, only to buy the first one you test drive? It can be frustrating, though hardly the end of the world. But taking on the first adviser you meet without doing your homework can have bigger consequences than just the humiliation of realizing the car salesperson got you AGAIN.
It can be an easy trap, with referrals from relatives that make it easy to find someone only too happy to take on your account. But Uncle Fred's adviser may not be right for you (or even for Uncle Fred!). Look around, set a minimum goal of interviewing at least three advisers. Think of yourself as the CEO of your portfolio, and you're hiring someone to do the grunt work of buying and selling the stocks. Remember, you're the boss here.
Ignore the logo
Just to revisit (or beat to death) the car analogy: even if you end up not getting the Honda you wanted, it's still a Honda.
But Bradley says advisers may differ greatly in approach and background, even if they work for the same company.
"If you hire an adviser at a brokerage firm, they're are all independent sole practitioners. So two advisers from the same brand can have a totally different investment approach," he says.
Make sure you ask the prospective adviser about approach, past performance, background, and why the adviser got into business in the first place. Do at least the same due diligence you would with a new babysitter.
Figure out who's paying whom
So, just after saying you're the CEO here, you also have to remember that your adviser may not actually work for you.
It's not uncommon for advisers these days to work on a pure fee basis, which is good, because you're paying them for time and expertise. But there are also many advisers who are paid mostly by commissions on the sales of the stocks or funds they sell to you. This isn't ideal, because A) the adviser is incentivized to make trading decisions based on what will increase his or her income, and B) it means that the adviser really isn't working for you.
In Canada, there's even a distinction between "adviser" and "advisor" and it's not just a spelling preference. "Advisers" are government-regulated and have legal responsibilities to their clients, whereas "advisors" can be sales people with a more impressive title.
"I think one of the biggest failures (of the industry) is that on the one side of the table, the client thinks they're getting an adviser, somebody to help them and guide them through the markets, and on the other side of the table is a salesperson who is being compensated on bringing in assets, not on customer service and the quality of their advice," says Bradley.
Disclosure rules that came into effect last year—called CRM2—have improved transparency somewhat, but experts say the industry still needs to do better.
Trust the smell test
Your prospective adviser may have a strong reputation, good referrals, and the right books on the shelf. But Bradley says it's important to look for small cues that can indicate this might not be the right person for you.
If the adviser tries to change the subject when you bring up the subject of fees, that's a red flag. Or if the adviser name-drops other clients, that's a betrayal of their confidentiality and means you should walk away. And don't mistake confidence for competence.
"If an adviser recommends a strategy or fund before they've asked you 10 questions, or you hardly say anything and they've got a fund for you," says Bradley, "it's what I call a deal-breaker."
Also, be skeptical of an adviser who's track record is a bit too perfect: he got into tech stocks at the right time and sold before the market crashed, or he emerged from the 2008 market crash unscathed.
Ultimately, it's like that luxury minivan that the dealer is telling you is somehow affordable: if it's too good to be true, it probably is.