It may be difficult to evaluate investment advice, but it’s a necessary task on the path to your financial success. In this second post on the value of investment advice, we’ll look at the profile of individuals who need an advisor, describe the types of advisors available and offer pointers to find the professional that’s right for you.
Who Needs an Investment Advisor?
Many people manage their financial affairs (including investments) themselves and do it well. However, there are situations where an advisor’s services are welcome. Here are a few:
- You don’t have the expertise or interest in the workings of the financial markets.
- Your assets are significant and you’re not comfortable managing them without professional help.
- You tend to abandon your investment strategy in times of market stress.
- You own several properties or businesses.
- You have a complicated financial life in general.
- You’re a busy person and have little time and patience to manage your finances.
What Type of Professional Is Right for You?
In our view, these are the three levels of service, from the simplest to the most sophisticated.
1. Non-Discretionary Advisors
This type of financial advisor makes investment recommendations but is not allowed to execute any individual transaction in your name without your consent. The classic non-discretionary advisor is the commission-based stockbroker or mutual fund salesperson.
2. Discretionary Portfolio Managers
With this type of service, you defer investment decisions to your advisor, who is legally bound to comply with your investment policy. The content of such an investment policy will be discussed in post #3 of this series.
3. Integrated Wealth Managers
In this type of practice, the management of investments is often discretionary, but the portfolio manager in charge of your investments also teams up with non-investment financial experts, such as financial planners, tax accountants, and trust and estate planners.
What Does a Competent Advisor Look Like?
Look for a person with the character and the expertise to provide solutions that are best suited to your needs. Character ensures the person will put your interests above his or her own, and has the work ethic, transparency and accountability to deliver the best possible independent advice. Expertise ensures your advisor has the knowledge required to help you achieve your goals. Here are three pointers:
1. Conflicts of Interest
Advisors who are remunerated on the basis of management fees and who do not accept commissions or trailer fees for selling products are less prone to conflicts of interest. If the advisor works at a firm that offers in-house products or keeps an inventory of securities, there’s a greater risk that decisions will be made in the interest of the advisor or the advisor’s employer, rather than yours. Make sure the interests of your advisor’s firm align well with yours. Avoid salespeople passing themselves off as advisors.
2. Credentials
In order to identify the right advisor for you, consideration should be given to professional certifications or credentials. This article1 from Morningstar should help you understand the most relevant and useful certifications in Canada. Some require long, hard work to receive, and some also require continuous education to maintain in force. While even the best certifications are no guarantee of quality, they provide a strong signal about your advisor’s dedication, work ethic and expertise.
3. Reputation
Of course, you should check on the reputation of any advisor and their firm. If you know other people who have worked with an advisor, take advantage of their experience. Also, some advisors will agree to provide references to their potential clients: feel free to ask for them.
Other post in this series
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1Bebee, G., Decoding Advisor Titles, Morningstar.ca, 2015.