Getting real advice in an age of robots and AI

The role of a human financial advisor

In this era of robo-advisors and artificial intelligence, it’s easy to believe that the expert, professional flesh-and-blood financial advisor has gone the way of the horse and buggy. It’s even easier to believe if you buy into the aggressive marketing by online portfolio management services that implies a human financial advisor basically sits back, collects fees, and buys a new luxury car every year. Of course, this grossly misrepresents what real advisors (as opposed to algorithms) actually do for their clients. So here’s a quick refresher on what to expect from a “real” financial advisor.

The role of advisor

When most clients come to see me, they often have several “advisors” and possibly an account with an online service (no advisor at all, just a “call centre”) and no clear understanding of what they are actually getting advice on. This is a fairly common planning mistake. To have an effective financial plan, you need to have one primary investment advisor who can develop, implement, and monitor your plan – and answer your questions from a personal base of knowledge, not from an online client form on somebody’s computer screen at a “call centre.”

An investment advisor can help you coordinate your RRSPs, TFSAs, employer pension plans, RESPs, non-registered plans, and create an investment strategy to meet your financial goals and match your risk-tolerance level. But an investment advisor should do more than suggest what stock, mutual fund, or ETF “looks good” this month according to some mysterious “algorithm.” A lot more.

More important than picking individual investments is the process of asset allocation. Research has shown that up to 95% of your investment return is a result of proper asset allocation, not just picking the right individual stock, bond, or fund. It’s important to find an advisor who can provide documentation that clearly outlines an asset allocation methodology that’s right for you. This is generally referred to as an “Investment Policy Statement,” and it will outline your asset mix objectives, your risk tolerance, return objectives, restrictions, constraints, and your time horizon.

Now, online services will ask you to fill in a detailed questionnaire in the hopes of eliciting all this information. A real financial advisor will work with you directly to probe, question, and clarify your questionnaire to ensure you end up with a plan that represents a true picture of your risk tolerance and financial objectives. Your advisor will then build, implement, administer, monitor, and regularly review your plan – with you personally.

How to choose an advisor

Your advisor must have access to a wide range of investment choices, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs), and must not be limited to or be influenced by the offerings of only one company or those selected by a rigid algorithm. In other words, your advisor should be able to “shop the market,” applying professional expertise, flexibility, and experienced judgment when choosing investment strategies and assets that are most suitable for your plan.

Here’s a basic checklist of what to look for in an investment advisor:

Written policy. The advisor agrees to manage your assets in accordance with a clear process that is written down and agreed to by both of you. This is the Investment Policy Statement.

Shops the market. Your advisor accesses the whole marketplace for investment products, not just the products offered by a company the advisor may represent.

Controls costs. The advisor can access low-cost exchange-traded funds (ETFs) in structuring an investment portfolio.

Fair compensation. Your advisor is upfront about how she gets paid, and is paid by fees levied on assets under management instead of commissions and trailer fees from fund companies. Annual fees range from 1.60% to 1.80% of assets, including all financial planning, investment advice, and portfolio management. By contrast, the average you’d expect to pay for a Canadian Equity mutual fund is 2.65%, not including comprehensive financial planning, portfolio guidance, or direct access to asset managers.

Availability. Your advisor should be available to answer questions about your financial plan when necessary. They should meet with you in person regularly to review and update your plan if necessary (for example, if your life situation has changed). And, as a matter of course, you should expect regular account statements, communications, newsletters, and updates from your advisor.

Advisor qualifications

Because the financial market has become so complex, financial advisors should have formal training in financial planning, portfolio planning, investing, and money management. This type of training, which is offered by several reputable and accredited industry organizations, ensures the advisor meets a high standard of knowledge and continuing education. Designations such as Certified Financial Planner (CFP), Chartered Investment Manager (CIM), and Fellow of the Canadian Securities Institute (FCSI) indicate the advisor meets those standards for knowledge and client service.

Robyn Thompson, CFP, CIM, FCSI, is the founder of Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management for high net worth individuals and families. Contact her directly by phone at 416-828-7159, or by email at rthompson@castlemarkwealth.com for a confidential planning consultation.

Notes and Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned are illustrative only and carry risk of loss. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact the author to discuss your particular circumstances.