When I was a financial planner, the first question I’d ask new clients was “what do you want to do with your life?”
“What does this have to do with investments?” they’d retort. I’d explain that a pile of money is useless unless harnessed to reach their goals. A comprehensive approach is instrumental to the financial planning process, especially for a financial advisor specializing in broad long-term financial planning. But not all financial advisors operate this way.
While I might be biased towards the use of financial professionals, it’s important to know what you’re getting into and how they can help with your specific situation…or if they can help at all.
What is a financial advisor?
A financial advisor is a general term that can apply to anybody who helps you manage your finances. They can hold positions at banks, brokerages, financial planning and accounting firms, and even insurance companies.
Rules around who can call themself a financial advisor vary by province. Ontario for example, introduced regulations requiring financial advisors to hold specific credentials entailing certain levels of education, exams, and codes of conduct. Whereas Nova Scotia has no such regulations.
Financial advisor vs. financial planner
A financial planner is a type of financial advisor who specializes in comprehensive long-term financial planning for clients. Areas of expertise for financial planners include tax planning, retirement preparation, estate planning, and designing plans to reach investment goals.
Regulations around the financial planner title vary by province, similar to the financial advisor title. Although it’s more likely that a financial planner will hold a relevant designation such as Certified Financial Planner, Personal Financial Planner, or Registered Financial Planner.
What does a financial advisor do?
Depending on their qualifications, a financial advisor may counsel you on investments, taxes, budgets, insurance, and more. If they are providing a full financial plan, then they’ll follow a similar process to:
- Understand your current situation based on your income, expenses, assets, liabilities.
- Determine your short and long-term goals.
- Develop a plan to reach those goals, often through investment and insurance recommendations.
- Monitor and adjust the plan and investments over time.
How much do financial advisors make?
Your financial advisor could be paid in one or a combination of the following ways:
Flat fee/hourly fee. This is a transparent fixed fee for a specific service, like creating a financial plan or providing a second opinion on an existing financial plan.
Percentage of assets under management. Depending on the size of your portfolio and the underlying investments, your advisor may charge a fee that is 1% – 2% of the total amount of assets they are managing.
MER-based percentage fee. Mutual funds and exchange-traded funds (ETFs) have a management expense ratio (MER) which is a percentage of the fund used for operating costs, some of which is used to pay your advisor. MER’s are deducted before rates of return are published, so any gains or losses the fund shows are net of fees.
Commission. Financial advisors can earn commissions in three ways:
- A cut for an initial investment amount or a new insurance policy.
- Potential ongoing payment to maintain client relations.
- Transaction commissions for buying and selling stocks.
Salary/bonus. Financial advisors working at financial institutions may earn a salary and bonuses for performance. Even if they earn a salary, they may earn additional commissions or other percentage-based fees.
Nerd Tip: The Financial Planning Association of Canada has created a directory of organizations that provide pro-bono financial services, for those who can’t afford the fees.
Understanding the need for a financial advisor
The more complex your finances or circumstances, the more likely you are to benefit from having a financial advisor. In an online survey conducted by the Ontario Securities Commission during the COVID19 pandemic, 46% of Canadian investors said they had discussed investments with their financial advisors.
People tend to hire advisors for guidance in planning for major financial goals, such as buying a home, saving for a child’s education, and retirement planning. They may be prompted to seek financial advice in developing contingency plans for long-term care and estate planning, or managing inheritance and financial windfall.
Here are some examples of how a financial advisor can provide value:
- A deep knowledge of all financial instruments, and which ones will help you reach your specific financial/life goals.
- Tax expertise, including the latest legislations and opportunities to reduce your income tax burden.
- Proficiency in wealth management, asset allocation and the ability to rebalance and adjust your portfolio over time as your goals and the markets change.
- Retirement and estate planning capability, including how to plan intergenerational wealth transfers.
Even if you have knowledge in some areas, a financial advisor can offer perspective when counselling you against making fear-based or emotional decisions that would be financially detrimental.
How to find a financial advisor
A successful advisory relationship is predicated on trust, so the best way to find one is to get referrals from friends and family who appreciate their advisors.
For lack of referrals, you can visit your local financial institution, insurance or investment company and ask for a staff financial advisor who can help. Additionally, you can read reviews on the products and services offered by these institutions to find the most endorsed candidates.
Questions to ask a financial advisor
Before entering into a relationship with any advisor, make sure you have the answers to these questions:
- What are your certifications, qualifications and designations, and where are you registered?
- How long have you worked in this field, and where have you worked?
- Who are your clients?
- What products and services do you offer?
- How are you paid? And how does this influence your investment advice?
- How do you decide on the investments you recommend?
- How do you work with your clients?
- How often do we meet, and how will you keep me informed?
You can search the Investment Industry Regulatory Organization of Canada’s glossary of financial certifications to learn more about the certifications your financial advisor holds.
Are financial advisors worth it?
- Saves time: Even if you have broad financial knowledge, it takes time to maintain a portfolio and stay current on tax and investment strategies.
- Accountability: When a financial advisor oversees your plan and follows predetermined strategies, you’re more likely to stick to the plan and potentially avoid making bad or impulsive fear-based decisions.
- Strategic adaptation: As your life changes, so too should your financial plan. Your advisor is a sounding board for these changes, and will update the plan to encompass your new or adjusted goals.
- Potential conflicts of interest: Depending on how an advisor is paid, their investment recommendations may not be 100% in your best interest.
- Risk of becoming disempowered or complacent: While most financial advisors empower their clients with knowledge, going hands-off by leaving the advisor in charge can be risky if they’re not the right person.
- Cost” Unless your advisor is 100% salaried or pro-bono, you’re paying for their services either directly (through flat or hourly fees) or indirectly (through commissions or MERs). Even a 1% or 2% fee will erode your overall growth over time.
Frequently asked questions about financial advisors
At a minimum, you’ll need to register with the federal government as an investment advisor, and also with provincial or territorial Securities Commissions. In order to do so you’ll have to pass certain exams to acquire the relevant licenses.
Yes, if you’re looking for experts whose job is to help you create wealth, save tax, and harness your finances to help you achieve your life goals. Depending on the complexity of your situation and your financial knowledge, financial advisors can save you some missteps.
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