Managing your financial advisors

Too many cooks in the kitchen?

When most new clients come to see me, they may already have several “advisors” but no clear understanding of what they are actually getting advice on. They might have a financial planner from their bank, and perhaps an insurance agent who also happens to sell mutual funds but doesn’t do financial planning. There might be a bookkeeper who dabbles in investments “on the side.” Perhaps a lawyer. This is a fairly common planning mistake. I call it “Too Many Cooks in the Kitchen.” In order to be effective at organizing your financial life, saving, and investing to meet your goals, you need to have one primary investment advisor who can look at the big picture objectively and head off the “conflicting advice syndrome.”

A “financial advisor” or “financial planner” is typically a personal financial specialist who can help you create a financial plan and then implement it. This professional may also be an accredited and licensed investment advisor and portfolio manager – someone who can help also help you select your investments to meet your financial goals and match your risk-tolerance level. But an investment advisor should do more than suggest what stock “looks good” this month. A lot more.

More important than picking individual investments is for the investment advisor to practice 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.

1. Does your advisor ask about you? You want your advisor to get to know you – your, values, goals, and financial objectives. Only then can an advisor provide you with an actionable financial plan with specific recommendations to achieve your goals given your risk-tolerance level.

2. Does your advisor provide active investment guidance? A competent advisor will review your portfolio in light of your financial plan. They should create a detailed statement of investment objectives and asset allocations. They should provide a detailed strategy for the investment management team.

3. Does your advisor emphasize tax efficiency? You are legally entitled to arrange your affairs to pay the least amount of tax. Your advisor should maximize tax-cutting opportunities through your entire financial plan. And they should be especially vigilant about making your investment portfolio as tax-efficient as possible. Research has shown that tax efficiency is the factor that has the single largest impact on long-term wealth creation in your portfolio.

4. Does your advisor shop the market? If your advisor is locked into using the investment products of just one company, there’s a pretty good chance you are limiting your investment choices – and portfolio performance – to a very narrow field. No single company always has the best product in all categories. It makes more sense to use an advisor who has no particular bias for one company’s product in their selection methodology, and who is free to go anywhere in the investment universe in search of the best securities to fit into your defined asset allocation.

5. Is your advisor qualified? It used to be that almost anyone could hang out a shingle and call themselves a “financial advisor.” This led to a lot of abuse and outright fraud perpetrated on unsuspecting, greedy, or naïve investors. But the rules have tightened up, and the activities of financial advisors are now governed to some degree by various regulatory agencies and industry associations.

As far as training goes, most competent advisors now have, through study, training, and examinations, earned various designations that certify them as members in good standing of reputable industry organizations. These include such specialized designations as Certified Financial Planner (CFP), Certified Investment Manager (CIM), Fellow of the Canadian Securities Institute (FCSI), and Chartered Life Underwriter (CLU). Professional designations include Chartered Professional Accountant (CPA) and Chartered Financial Analyst (CFA). Look for at least some of these accreditations when shopping for an advisor.

Portfolio Managers must also be registered and licensed by provincial securities commissions, such as the Ontario Securities Commission. When interviewing potential financial advisors, do not be afraid to ask about qualifications and registrations. In fact, insist on it. After all, it’s your money you’re entrusting to this person. Make sure they know what they’re doing.

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.