Research studies have found that Canadians have low confidence and trust in the financial advisory and asset management industry. Further research has shown that when selecting an investment professional, investors care most about whether they can trust the advisor to act in their best interest. Can you trust your financial advisor? We have developed a list of seven questions to help you assess if your advisor is not only trustworthy, but also experienced and qualified to meet your investment needs
If your advisor is not a Chartered Financial Analyst (CFA), then he or she is not obligated to deliver the highest standard of care in the industry. CFAs have a fiduciary duty to act in your best interest, always putting your interests first without exception. The CFA charter is the most prestigious investment credential that has set the standard for professional integrity and advanced skills in the financial industry.
Most financial advisors work for large organizations or have third-party relationships with other financial companies. These advisers are often incentivized to sell you investment products that are developed by these institutions, creating a potential conflict of interest. Many advisers who say they don’t have a conflict are not being candid with you.
In recent years, many advisers have placed their clients’ investments into asset allocation programs that are designed to systematically diversify a portfolio. These programs are often comprised of an assortment of standardized mutual funds, a cookie-cutter approach to investing that leads to over-diversification. Often with above average fees and index-like returns, these programs benefit the advisor, but don’t take into account a client’s specific needs.
A trend in the investment industry has been to separate the advisor from the investment decision making process. Many financial institutions consider the advisor to be an asset gatherer, with onerous sales targets. A significant number of advisors have never purchased individual equities, in particular foreign equities for clients. Investment decisions are often outsourced to another department, leaving the advisor to rely on others to understand what you own in your account.
If your adviser’s portfolio is very different from yours, can you trust them to look after your finances? Different investments can expose conflicts of interest and may distract your advisor from serving you better. Common portfolios build trust with your advisor by aligning incentives that can drive performance.
Many advisers are paid by earning fees from commissions or from the sale of third-party products that may be in your account. These fees are either upfront (commissions) or recurring (trailer fees). Investments with such fees have an inherent conflict, which may benefit the advisor and not the client. Investors are better served with a fee-only advisor that is paid strictly for their advice to clients, typically as a percentage of total assets.
You may be paying too much for your investments and may not even know all of the fees that you are handing over to your advisor and their affiliated firms. If your advisor can’t tell you how much you are paying, how can you judge if you are receiving value for the advice being given? Transparency is an important way to build trust.
If your advisor cannot provide answers to all these questions or if you are not satisfied with the answers that you receive, we encourage you to contact Headsail Wealth Management to discuss our unique approach to these important issues.