How to choose the best financial adviser

Issue: BCMJ, vol. 42 , No. 8 , October 2000 , Pages 389-391 Clinical Articles

ABSTRACT: The financial advisory industry has both boomed and been deregulated, resulting in widespread consumer confusion. Physician-investors must take a more methodical, skeptical approach, ensuring the adviser is properly qualified, that there are no conflicts of interest, and that there is a written, legal contract in place.

Most physicians (and other professionals) are perfectly willing to entrust their money to an adviser without ever checking a resume or looking at past performance records. Dr Curran suggests a more rigorous approach.

Choosing a financial adviser is one of the most important career decisions that a doctor will make, but rarely is this approached in an intelligent, informed way. Most professionals are simply too busy to take an active role in their investment planning and leave the majority of such decisions up to their financial adviser. It should, therefore, be of great importance that the “best” financial adviser is given the job of caring for one’s retirement nest egg.

Yet, it continues to amaze me how nonchalantly professionals pass hundreds of thousands of dollars over to an adviser without reviewing their curriculum vitae to check on such things as educational credentials or past performance records. Even more mind-boggling is that most of the time, there is no formal written job description. Compounding this lack of diligence is the unfortunate fact that there are many serious problems within the financial advisory industry that can spell disaster for the uninformed (or uninterested) investor.

This article reviews three essential questions that need to be addressed by all investors if they hope to avail themselves of the best financial adviser:

• Does this financial adviser have proper qualifications?
• Are there any conflicts of interest?
• Will there be a written, legal contract?

Financial adviser’s qualifications
There are presently more unqualified than qualified financial advisers in Canada. It is no secret that the financial advisory industry has gone through a remarkable boom over the last decade to meet the needs of the aging, wealthy baby boomers. But unfortunately this has led to several problems. Because of deregulation, the four traditional distinct pillars (banks, trusts, insurance companies, and brokerage firms) are now all playing on the same field and competing for the same customer.

The resulting turf wars that have broken out between the different financial companies have led to chaos and confusion for the consumer. In the past, each pillar provided their advisers with education for their niche market, but now each is competing against the other, claiming that their course and designation is best. The result is a plethora of designations and acronyms that has left the consuming public dizzy and an industry that is poorly regulated.

As it presently stands, virtually anybody can take a 3-month course and hang out a shingle calling themselves whatever title they want, including investment specialist, financial adviser, financial planner, wealth specialist, etc., and this has created a dangerous trap for the uninformed investor.

The first step in choosing an adviser is finding sanity in the industry nomenclature madness. The term financial adviser is used as a broad reference to anyone who works in the industry. You can divide the financial advisers (and their acronyms) into two groups: the financial planner (the generalist) and the investment adviser (the specialist). Depending upon your needs, some investors will require the services of one or both. A qualified financial planner is a generalist who has done the appropriate courses that cover the many different areas of overall financial planning, including debt management, estate planning, funding children’s education, and insurance needs.

A financial planner will create and provide you with a written financial plan that addresses these issues. When hiring a financial planner, focus your attention on these designations: Certified Financial Planner (CFP), Registered Financial Planner (RFP), or a stockbroker who has completed the Professional Financial Planning (PFP) course. There are many other designations and titles, but these, to my mind, are the best.

An investment adviser is a specialist who deals only with the investment aspect of the financial plan. A good investment adviser will create and provide you with a written investment plan. It is my opinion that once your portfolio reaches $100,000, you need to hold more than mutual funds. Unfortunately, most financial planners sell only mutual funds (and segregated funds) and are unable to offer or recommend individual stocks and bonds. Therefore, limit your search for an investment specialist to the stockbroker or investment counselor who can offer all investment products.

To use an investment counselor's service, you generally require a minimum of $300,000 in assets, and you must be willing to pass the reins over to this person in a relationship referred to as discretionary investment management. Investment counselor services can be obtained under many roofs. One of the most popular forms is through a brokerage firm as a wrap account, but I am not keen on most wrap accounts because of the high fees. If you want discretionary money management, you are best to approach an independent firm directly so as to avoid the middle-person cost.

For those with smaller accounts or those not comfortable with passing the reins, the next option is the stockbroker. To many people’s surprise, the stockbroker is one of the most closely regulated financial advisers! Ideally, you should be looking at a broker who has either the Canadian Investment Management (CIM) or the Fellow of the Canadian Securities Institute (FCSI) designation (in the near future there will also be a new Financial Management Adviser [FMA] designation).

Conflicts of interest
The next step is making sure both you and your adviser are aware of the many potential conflicts of interest. Because of poor regulations, there are no effective industry watchdogs, which means that the buyer must beware. Although there are efforts to improve the policing, this will not materialize for quite some time. Some areas of frequent consumer abuse include: 

• The same firm acting as the underwriter and then adviser
• The excessive sale of mutual funds over individual stocks and bonds
• The sale of rear-load funds over front-load funds
• The sale of RRSP-eligible cloned funds over RRSP-eligible index funds
• The excessive sale of universal life insurance
• The high fees charged by wrap accounts and asset allocation services 

Most of these conflicts stem from the fact that these products are associated with higher commissions for the adviser and their company. The unfortunate part is that most investors are not aware of this abuse because most opt to remain uninformed. This often translates into the adviser's interest being placed ahead of yours, resulting in poor portfolio performance!

The best way to minimize conflict of interest is to hire a fee-for-service (FFS) financial adviser. Most advisers are remunerated by commission, being paid a percentage of what they sell you. This percentage varies greatly between different products and companies, and this is where the problems begin. With human nature being what it is, you could get a product that is best for your adviser but not necessarily for you. The likelihood of this happening is enhanced by the fact that most commissions are hidden, so consumers have no idea for what they are paying.

Similarly, some of the best funds (e.g., no-load and index funds) do not pay the annual trailer fee commission, which means that your commissioned adviser is not likely to recommend them. This conflict would not happen with the FFS adviser, resulting in fewer fees and better portfolio performance.

Most financial planners (the generalists) will work on an hourly fee-for-service basis, but you have to ask. Unfortunately, finding an investment adviser (the specialist) willing to work FFS is more difficult. However, I think this will change in the near future because of the growing numbers of do-it-yourself investors who will be seeking second opinions on their investment portfolios.

Until then, an alternative is to hire a flat-fee commissioned adviser (similar to the wrap accounts), but only if the remuneration is based on performance. Most traditional wrap accounts are too expensive, so you have to shop and compare prices. The performance-based remuneration will guarantee value for your money. Another alternative is to become a do-it-yourself investor and complement this with an hourly FFS second opinion two to three times each year. The pay and rewards for the do-it-yourself investor can be tremendous. 

The written, legal contract
The written investment contract is your legal document that outlines the adviser’s job description. My estimate is that 95% of investors do not have a written contract, which is a recipe for disaster. Most advisers know that they should be providing a written investment plan, but they also know that this could lead to occupational suicide. Many investors are paying a high price for poor service, but most are not aware of this because of the absent job description.

Knowing that the industry is poorly regulated and that a 3-month course will allow you to hang a financial adviser shingle should sound alarms for most investors, but unfortunately, this is not the case. A written investment plan charts your financial future, and without one you are flying by the seat of your pants. In all other professions where money is paid for services—home construction or renovation, leasing a vehicle, or expected dental or legal work—there is a written contract. 

The written contract protects your investments and allows you to keep a score card on how your hired help is performing. There are several things that should be addressed in the written investment plan, but most important for the busy doctor are performance benchmarks to be used and how annual fees are to be reported. At present, a written contract is not the industry standard, simply because we as consumers have not asked for it. Come on, investors—wake up and demand a written investment plan.

Here are the key points to remember when choosing a financial adviser:

• Only use a financial adviser with the correct credentials
• Remember that the industry motto is "Buyer beware.” You have to get informed!
• Minimize conflict of interest by using a fee-for-service financial planner. When using an investment adviser, request that the annual remuneration be tied to portfolio performance
• Always get a written contract outlining such things as expected performance, which performance benchmarks will be used, and how annual fees will be reported
• Give serious consideration to becoming a do-it-yourself investor using one of the many simple investment strategies such as index investing 

Dr Curran is a neurologist at the BC Interior Movement Disorder Clinic in Vernon, BC, as well as the author of Second Opinion: Hire the Best Financial Adviser or Do It Yourself and Prescription for Wealth: Personal Financial Planning for Health Care Professionals.

Terry Curran, MD, FRCP. How to choose the best financial adviser. BCMJ, Vol. 42, No. 8, October, 2000, Page(s) 389-391 - Clinical Articles.

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