Right now, the markets are a scary place to be for the do-it-yourself investor. And many are looking to hand over their investment planning and portfolio management to a professional financial planner, but are at a loss as to where to begin. Here are a few practical tips for finding a financial planner to handle your investments
Choosing the right financial planner can help you set realistic long-term financial goals and achieve them with a financial plan and investment strategy carefully designed to match your personal investment profile and risk-tolerance level. So it’s important to personally meet with and “interview” a few financial planners to determine how they actually handle investment portfolios for clients. Here are a few basics to consider when deciding on a professional planner to manage your portfolio.
The activities of financial advisors are governed to some degree by various regulatory agencies and industry associations. Advisors who buy and sell securities are subject to regulatory oversight by provincial securities commissions, such as the Ontario Securities Commission.
Most advisors now have various designations that certify them as members in good standing of reputable industry organizations. These include such designations as Certified Financial Planner (CFP), Certified Investment Manager (CIM), Fellow of the Canadian Securities Institute (FCSI), and Chartered Life Underwriter (CLU). Professional designations include Chartered Professional Accountant (CPA) and Chartered Financial Analyst (CFA). Look for at least some of these accreditations when shopping for an advisor.
A competent advisor should review your investment portfolio in light of your financial plan, your risk tolerance, and long-term financial objectives. They should create a written statement of investment objectives and asset allocations and should provide a detailed strategy for the investment management team.
But shouldn’t your advisor be the one managing your investments? Given the complexities of the market and the mind-boggling array of investment choices available, many financial advisors no longer attempt full portfolio management for their clients. They in effect “outsource” the job to professional portfolio managers who have large research teams, better access to markets, and cost-effective trading platforms.
This does not mean that you will pay more. In fact, in most cases, you will pay less than if a more traditional investment advisor did the whole job. The fees you pay are simply shared between your advisor and the portfolio manager. This arrangement will deliver the best of both worlds, with your financial advisor guiding your entire financial plan (goals, risk tolerance, taxes, insurance and estate planning, asset allocation, and so on), while specialized investment professionals look after your portfolio.
Beware of hidden affiliations
If your advisor is locked into using the investment products of just one company, there’s a pretty good chance you are limiting your investment choices – and portfolio performance – to a very narrow field. No single company always has the best product in all categories.
It makes more sense to use an advisor who has access to a wide range of investment choices, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs), and not be limited to the offerings of only one company. Ask your advisor (or prospective advisor) if they or their portfolio managers are free to build pools, funds, and portfolios using any suitable investment choices or whether they are obliged to include, through a binding affiliation, a certain company’s products (for example, mutual funds or ETFs) in their mix. If it’s the latter, think twice about signing up with that advisor.
Look for tax efficiency
Taxes are one of the most important factors that affect long-term wealth creation. Your advisor should always be working to maximize the tax efficiency of your investment portfolio. This involves not only the use of tax-sheltered registered accounts such as RRSPs and TFSAs, but also a knowledge of the tax treatment of dividends, capital gains, and return of capital in creating income streams, corporate-class mutual fund structures, and so on, as applicable.
Your advisor should be upfront about how they are paid. Many financial planners and advisors have moved to a fee structure that represents a percentage of assets under management. Some may still use a commission-based approach, charging for each transaction separately, while also charging separate fees for various services, but this model is rapidly disappearing in the face of stiff competition and demand by consumers for lower advisory costs.
For example, typical fees charged by financial planners now range from 1.6% to 1.80%, including all financial planning, investment advice, and portfolio management. By contrast, the average you’d expect to pay for a Canadian Equity mutual fund is 2.65%, not including comprehensive financial planning, portfolio guidance, or direct access to asset managers.