Choosing an Investment Advisor

I’m a fan of do-it-yourself investing, but I know that’s not for everyone. Do you want to work with an advisor or financial planner? Here are some questions to ask to reduce your chance of getting screwed over.

Why are you recommending this particular fund/portfolio/method?
They should be able to give you a clear reasoning. Reasons may include that it:

  • is appropriate to the time frame you have
  • is reasonable for your goals
  • matches your risk tolerance/profile
  • is easy for you to manage yourself (if that’s important to you)
  • has low, or at least moderate, fees
  • has good diversification
  • has a historic volatility appropriate to your situation
  • has principal protection (if that is important to you)
  • has a death benefit guarantee (if that is important to you)
  • provides an ongoing income stream
  • means your money is locked away from you (if that is what you want)
  • it is easy to have an automatic contribution method 

    Can you give me these details in writing?
    If no, never, then run away.

If yes, but it may take a little bit of time, that should be okay. Get a deadline from them and make sure they follow through.

Ideally they will offer this and you will get it very quickly.

Can you explain why you are recommending this product instead of other products?
Even if they are recommending the perfect option for you, it is your money. You should be allowed to make the final decision.

What other options are available within your bank/firm/institution?
Many of the major banks are providing a variety of options – from active management, online passively managed (robo-adviser style), self-directed with assistance, to fully self-directed. They should be open to telling you all the ways you can manage your investments, even if it means less earnings for them personally.

Can you explain the pros, cons, and risks associated with your recommendation?
If they cannot, this is a bad sign. Every investment method has pros and cons. If they say something is “risk-free” that is not good. Nothing in life is risk free. Ask what they mean by “risk free”. Often this term is used for investments where the principal is guaranteed. However there is typically a risk that your investments will not keep pace with inflation and/or your money is locked in and inaccessible without penalties.

Can you explain to me what I am investing in?
If they are unable or unwilling to offer an explanation that you can understand, it may not be a suitable choice.

What is the cost associated with this investment? What am I paying?
If they hesitate, or answer that there is no cost to you, ask them how they are earning a living then? There is no free investment. There are common terms used to describe fees that are confusing. If they can’t explain exactly what is happening to your money that is not good. Ask them to give you a concrete example using real numbers.

Occasionally, such as in GICs and no-fee savings accounts, the cost is built into the product. There is no way to know exactly what this is. But almost all other investments have a knowable cost.

Here are some ways the advisor may be earning money:
If working directly for a bank or investment firm, they may receive a regular salary or hourly wage. If so, ask them if they receive any commissions or bonuses on the products they sell. Ask them if these vary between the different products.

If they are earning commission, ask them exactly how much and when they earn it. Some commissions are paid upfront, some slowly over time.

If they are getting fees for AUM (assets under management) make sure they tell you the actual percentage. Have them do a hypothetical calculation to explain how much money they would make if you had invested $10,000 or $100,000 or whatever is likely for you. They must be able to put this into a dollar amount. If this dollar amount feels high, ask them what services this entitles you to. A yearly phone call or letter is not enough if you are paying hundreds or thousands of dollars.

What are the types of fees associated with this investment?

Options may include:

  • None (built into the products) – such as GICs and savings accounts.
  • Deferred sales charges. (Your investment is reduced when you remove your money – usually the percentage decreases over time.)
  • Front-end loads (The advisor receives commission upfront – your investment is reduced immediately.)
  • Trailer fees (The advisor receives a yearly commission as long as you are invested with them.)
  • Transaction fees.
  • Management fees.
  • No-load mean no fee/commission. However, there is still some kind of fee. They would not want to, or be able to, manage your money for free.

Would you recommend this same investment if you worked at another company?
The honest answer should be, that they are not allowed to recommend this exact same investment if working at another company. They would need to recommend that company’s investment. However, if they say they would recommend an equivalent investment that may be okay.

Why is this investment better than one at…another bank, online bank, robo-adviser, etc?
Most investments are very similar. Most companies have a similar line-up of investments. There is rarely a reason that there wouldn’t be an equivalent fund or portfolio elsewhere. Unless this is a distinctive type of bank, such as online, self-directed, robo-advisor, etc. Major banks and investment firms have very similar offerings. If they won’t admit this, that is concerning.

Will you tell me exactly how much I paid you or your company over the year?This is mandatory now in the Canadian investment industry. You should receive an understandable statement.

What have the returns been historically?
Watch for data manipulation when they answer this. If the fund hasn’t been around very long, results are likely not an accurate representation of what you will expect over decades. Since 2008 most stocks have been increasing steadily. This is very unlikely to continue indefinitely. If the fund has been around since before 2008, but they are focusing on just the last few years instead of since the fund was started (inception date) they are probably trying to make you think you will make more money than you actually will.

Also consider:
Are they willing to explain jargon you don’t understand? Are they able to give you a handout with common terms and definitions?
If they hide behind acronyms and fancy “investing words” this is a concern. They should want you to understand everything clearly.

Have you had any trouble with investment representatives? Email me so I can expand my list. Disagree with me on any point? Also email me. We’ll sort out the truth.