Financial Advisors
Caveat Emptor
Caveat Emptor is Latin for buyer beware. This phrase certainly applies to whoever you choose to work with your finances. This blog’s intent is to educate and assist you in warily ‘buying’ (choosing) the financial advisor(s) who are best for you.
Fundamentals
A financial advisor is really a combination of a Financial Planner and an Investment Manager. Or your advisor will provide you with one of these services and refer you to someone else for the other. Either way, you need both.
Financial Planner
A financial planner is generally the person who understands how to plan your finances. This includes not only budgeting and saving but also tax planning, insurance, estate planning, and decumulation in retirement. They typically operate powerful, expensive software that can collect a ton of input on your situation, set some assumptions with you, then forecast several financial scenarios into your future.
Investment Manager
An Investment Manager is generally the person who provides two main functions:
· Taking the output from the financial plan and working towards meeting or beating the minimum return on investment; and,
· Managing the cash flow between you and your investments
To be a wary buyer, you should be considering your financial advisor’s education, employment, and several additional factors. Let’s look at some considerations:
Education
Just like doctors, nurses, teachers, lawyers, accountants, plumbers, electricians, car mechanics, etc., financial advisors have regulated training. Regulated financial advisors are professionally trained and belong to regulating organizations with ethical standards.
· Typical Canadian certifications for financial planners are Register or Certified Financial Planner (CFP) and Chartered Life Underwriter (CLU)
· The typical Canadian certification for investment management is Chartered Investment Manager (CIM)
Note these are different educations. A CIM managing your finances is not trained to offer financial planning, unless they also have CFP or CLU training to be a planner.
Employer Bias
Where your financial advisors work matters. Planning, insurance and investment decisions can all be subject to the advisor’s employer bias. They may be employed at your bank, your credit union, an insurance company, a wealth management firm or self-employed.
At one end of the bias spectrum, chartered bank employees may tend to sell you investment products managed by their bank as opposed to ones provided by their many competitors. They may also recommend continuing a loan with them rather than paying it off. Insurance employees may sell you their insurance instruments, possibly over-insuring you or insuring instead of investing. In all cases, their bias is to retain fees and revenues to their employers’ benefit, possibly to your detriment.
At the other end of the bias spectrum, a self-employed CFP will charge you an up-front fee to create your financial plan, ensuring complete lack of bias.
Pitfalls
The biggest pitfall in selecting financial advisors is not taking the time to ask some key questions. A great example of seven key questions is published by the Canadian Securities Administrators (1).
Some other pitfalls to consider:
· Believing your advisor is doing a good job because they’re delivering double-digit returns for the last three years. The markets are doing that themselves. They just have you following the markets. What occurs when the markets drop? Give credit where it’s due.
· ‘My advisor is nice to work with.’ That’s fine, I like working with nice people too. But the primary need is for them to be qualified and deliver on your plans and investments.
· Job titles like ‘mutual fund representative’ and ‘financial advisor’ do not by themselves qualify someone to be your financial planner or investment manager. Without external training and regulation, these titles should have the word ‘salesperson’ in them.
In Conclusion
Managing your money is very important! To Be Prepared, treat it that way. Objectively evaluate and select your financial planner and investment manager. They work for you, and they should be the best you can find. Caveat Emptor.
PS. Invest time to watch https://www.youtube.com/watch?v=ooz0LgBWqfE for valuable content on Financial Advice in Canada (2). Topics include - misguided trust in big banks; insurance companies; insurance, too much & not enough; passing on the cabin; AI & fintech; and more.
2. The Wealthy Barber Podcast #29, interviewing Jason Pereira CFP, RFP