Choosing an advisor

(Originally posted April 5, 2007)
Let me start off by saying that I do not have a great deal of personal experience in picking an advisor. My objective in this website is to help you become self sufficient in your retirement planning. My wife, by the way, does not believe that I am pursuing a realistic objective for the majority of people. Clearly, a large percentage of the population is unable or unwilling to undertake doing their own financial planning and/or asset management, because they don’t have the inclination, the skills or time to do it. My other objective, if you decide that you don’t want to be a do it yourselfer, then at least you become an educated customer of a qualified advisor, for the service level that is appropriate for your needs. Many articles have been written on the problem of selecting an advisor.
Why do people decide to go to an advisor? Most people will go to advisor to generate a financial plan and/or to manage some or all of their assets. But, in fact, there are a wide variety of reasons for which one might go to an advisor.
What can an advisor do for you? People go to advisors for one or more of the following • financial plan • tax plan (and tax return preparation) • estate plan • insurance plan (risk management) • investment plan (asset allocation) • asset management (discretionary or advisory, access to the “best” investment vehicles rather than just in-house products-so called “open architecture”, periodic asset rebalancing, performance report against agreed to benchmarks) • complete family office (all of the above including paying your bills, teaching your kids about financial matters, and possibly even acting as your concierge service)
Once you know what you would like from the advisor, then the difficult job of selecting one starts. The parameters that you may want to consider in selecting an advisor.
Who acts as advisor?
Financial advice is provided by: -bank or mutual fund company employees selling CDs/GICs or mutual funds -financial planners -lawyers -accountants -stockbrokers -mutual fund salesmen -life insurance salesmen -private bankers, family offices One or more of these individuals may act as coordinator of the rest of the specialized skills that may be accessed on an as needed basis.
How will he be paid?
If you don’t understand how your advisor is paid, then you can’t even start to understand whether you are getting objective, independent and untainted advice. So as unpleasant as you may find this, you need to ask “How will you be paid?” There are various arrangements in the industry. The three most prevalent are: • fee-only: hourly rate, fixed rate for a financial plan, a percentage of the assets (i.e. no sales, front-end, back-end commissions or trailer fees, no soft-dollars; paid only from the explicit and transparent fees charged to the customer) • commission: front-load, back-load, and/or trailers, soft-dollars • fee-based: can be a mixture of fee-only and commission My recommendation would be to choose an advisor who works on a fee-only model.
NAFPA  is an association of fee-only financial planners
Is advisor acting as a fiduciary? If you have a choice between advisors who have or have not a fiduciary duty in the relationship with you, the ones with fiduciary duty are preferable. Money Central has an excellent description of what is a fiduciary. Essentially a fiduciary is committed to putting your financial interests ahead of his or hers”. It is difficult to tell by the job title of the advisor of she is or is not a fiduciary. For example in the U.S. attorneys, CPAs, RIAs (Registered Investment Advisors) are fiduciaries; insurance agents and registered representatives (stockbrokers) are not fiduciaries. Interestingly, the same person at different points in the relationship may be a fiduciary or not; the example given is that of a financial planner or a CFP, whereby in the planning role they may have a fiduciary duty, but not necessarily in the asset management phase. Once again, ask if your advisor has a fiduciary duty toward you.
Education/Training/Experience Various licensing and certification requirements include formal study that advisor specializes in. In most jurisdictions there are no prerequisite requirements to hang out a shingle as a financial advisor. Some licensing/membership requirements include code of ethics which require that the advisor act as a fiduciary in the relationship, and require full disclosure to all parties, where there is a potential conflict of interest. So it would be wise to ask prospective advisor his qualification and experience.
Certification
In the training for the CFP designation the emphasis is on financial planning. For the CFA designation the emphasis is on investment management (though financial planning is covered as well). In the U.S. to provide advice where total assets under management are over/under $25M, one must be an RIA (Registered Investment Advisor) with an SEC/state registration. In Canada, with the exception of Quebec, the other provinces appear to have no regulatory requirements.
There are dozens of designations used in the financial advice service industry. The training, experience and continuing education requirements for these are varied. The CFP and CFA are the most common and recognized ones used by planners and asset managers. The respective websites for the Certified Financial Planners (CFP) Canadian association is Financial Planners Standards Council  and for Chartered Financial Analysts (CFA) is the CFA Institute.Trust/Comfort with the Advisor
After you obtain recommendations from your knowledgeable friend or lawyer or accountant or other trusted source, you need to verify with claimed accreditation source if there are outstanding complaints against the potential advisor. Most advisors will offer a free introductory meeting. You should take advantage of this introductory meeting to compare two or three of your short-listed advisors. After all due diligence is done, ultimately you must be comfortable with the advisor that you select. It has to be somebody that you can trust and have the right dynamic with, otherwise the relationship won’t work.
Conclusion
The historical evidence indicates that the average mutual fund investor underperformed the professional managers who in turn underperformed passive indexes.
If I wasn’t doing it myself, my inclination would be to use an advisor to develop a plan (how much will I need and how to get there, given my personal constraints) and to select an asset allocation consistent with my risk tolerance (how to maximize my return with the lowest tolerable risk), then do the ETF based portfolio implementation and regular maintenance, myself. This would likely give the biggest bang for your fee dollar. Perhaps, an annual or bi-annual follow-up to review progress toward or revise goals may be useful. Your different personal circumstances, interest, available time, confidence and knowledge may lead you to be more or less hands on, but I would select an advisor who works on a fee-only arrangement and one that would have a fiduciary relationship toward me.
You may also find a number the following articles of interest: Day’s Washington Post article on “Picking the right Planner”
Croft’s Financial Post article “Do you know what the adviser does for you and the fees you pay?”
And for those wealthy enough to need/want a private bank (though the basic parameters are similar), you can read Budden’s article in the Financial Times on “How to pick a bank: it all boils down to trust”
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