2014 was a strong year for financial markets, capping off a six-year-long bull market that could make anyone look like a star investment manager. As an investor, there are important areas to evaluate beyond positive investment performance to determine the worth of a relationship with a professional financial advisor.
Who are they working for?
A large amount of the financial advisors in Canada operate on a commission basis; they are getting paid by the products or transactions that they are recommending to their clients. This compensation model creates obvious conflicts of interest as these advisors are working for the financial companies, not their clients! The advisor in this model is inclined to make recommendations that will result in them receiving compensation and bonuses. A much more viable relationship exists when the client agrees to pay the advisor directly for their unbiased advice. If your advisor is being paid by the products that they are recommending to you, it might be time to say goodbye.
Are they acting in your best interest?
Financial advisors in Canada are held to a suitability standard. This means that they can legally make recommendations that will benefit them more than you, as long as the investment is suitable. Some firms may choose to hold themselves to a code of ethics, such as the CFA Institute Code of Ethics and Standards of Professional Conduct. If your advisor has not already, and is not willing to, agree in writing to abide by a written code of ethics, they should not be kept around much longer.
Have they built your Investment Policy Statement?
An Investment Policy Statement is a signed document that governs how your money will be invested. One of the most important roles that an advisor plays is determining your short and long-term goals, your required rate of return, and your risk tolerance in order to make an asset mix recommendation. An appropriate asset mix, reflected in the rules written in an Investment Policy Statement, is the foundation of every long-term investment plan. If your advisor is investing your money without having built your investment policy statement, their investment recommendations may not be aligned with your long-term goals.
Are they conscious of your tax situation?
After-tax returns can be significantly different from pre-tax returns, especially if your advisor is not integrating their investment recommendations with your overall tax situation. An involved advisor will be conscious of asset location (which accounts should hold which investments), tax-loss harvesting opportunities, and other unique tax circumstances that may affect your optimal investment portfolio. If you advisor is ignoring taxes to focus on investment returns and picking the next hot stock, they could be doing significant harm to your after-tax returns.
Are they giving you financial advice?
Not all people that are paid to give financial advice actually give financial advice. There are plenty of stock pickers and salespeople parading as financial advisors that do not give advice beyond the hottest new product for your portfolio. Financial advice encompasses the construction of an Investment Policy Statement, integration with your tax situation, and coaching on how to achieve your financial goals. Financial advice can go much further, depending on the expertise of the advisor. It should go without saying, but if your financial advisor is not giving you financial advice, it is probably time to fire them.
Firing a financial advisor can be difficult. Often times advisors work hard to build a personal relationship with their clients, or a personal relationship preceded the professional engagement. As awkward as the conversation and following situation may be, it must be remembered that the cost of poor financial advice can be immeasurably large over a long period of time.
Original post at pwlcapital.com