Financial Friday #152: How to Stress-Test a Financial Advisor!

Whether you use an investment firm or rely on the services available at your local bank or credit union, a lot of us have someone we commonly refer to as our "financial advisor".

It's a generic term and is broadly used, but for most of us it means someone who "handles our investments". The actuality is that the scope of investment products and services they offer as well as their level of professional training and experience varies greatly.

Some of us only rely on an advisor to invest our TFSA or RRSP and meet with them very infrequently, or simply review the statements that show up in the mail from time-to-time. Others depend on their advisor for a lot more than investing and seek advice on retirement planning, tax strategies, saving for a home, and many other issues.

Regardless of the scope or frequency of the service your financial advisor provides, the basic fact is that you are putting a lot of trust (and a lot of cash!) in their hands.

Accordingly, you should be carefully evaluating your initial decision and also monitoring their service on an ongoing basis. Despite the considerable consequences of their job performance on your future, a lot of us spent more time choosing a mobile phone plan than we do the "expert" who manages our life savings.

Whether you have had the same advisor for years or are just now looking for your first, you need to ensure they are offering value for your money. A good advisor is an invaluable resource for those of us who don't have the time or specialized knowledge to manage our finances on our own. However, depending on an advisor also means that you owe it to yourself to carefully evaluate their service and performance on a regular basis.

The main problem with evaluating a financial advisor is lack of knowledge. It is easy for us to judge the quality of food and service at a restaurant and make a decision if we will return, but it's a lot more difficult when it comes to a financial advisor.

Another factor clouding the issue is the confusing hodgepodge of names used to describe financial service providers — (certified) financial planner, financial advisor, financial coach, money coach, etc. Although there are a number of recognized accreditations in the industry, the degree of experience, expertise and qualifications varies greatly.

Financial advisors usually focus on investing while a financial planner and financial coach take a more holistic approach. Their scope of services may include retirement planning, managing expenses, saving for a home, and many other issues. 

There are lots of options to help you manage your money, but it isn’t always clear what each one does, and more importantly, which one is right for you?

A good place to start is to dig into the fees you are paying and what sort of returns you have been getting? You can also evaluate their service on a more basic level — Do they offer all the products and services you require? Do they keep in contact and remember you and your situation? Do they readily and clearly answer your questions.... even "prickly" ones about annual returns and fees? A good advisor should pass your "stress test" with flying colours.

Your main considerations for choosing a financial advisor should be how much knowledge and time you have and the degree you would like to be involved. You could leave it completely up to someone else, and even though they may have a fiduciary duty to act in your best interest, it’s too much of a leap of faith for most of us. We work hard for our money and want to have some ability or knowledge to assess whether it is being managed effectively and within our expectations for risk and return.

If you are reading this newsletter, chances are you are leaning towards educating yourself and taking a more DIY approach. We have many clients who prefer the freedom and lower fees of DIY financial management, but we also have many clients who routinely supplement their own knowledge with that of a professional. Some issues like tax planning can be highly specialized and demand expert-level knowledge and experience.


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