Investing your money is complicated at best. And downright scary at worst.
With seemingly unlimited investment options available and no formal training on how financial markets work, you naturally turn to a financial advisor for help. Seems like the only rational choice, right?
It is a good choice actually - the bad news is that many people cannot be trusted with your money, including so-called “financial advisors”. That term is completely unregulated in most of Canada and practically anyone can call themselves an advisor.
Many of these advisors, especially at retail banks, are just glorified salespeople that are given extremely short training. They are basically told to promote the bank’s own products whenever possible to give them the highest profit. Here’s one prime example.
Advisors that work more independently - like those at Investors Group, Freedom 55, or the investing arms of the big 5 banks - have a huge incentive to recommend high fee funds that pay them increased commissions. That doesn’t mean your advisor is doing that - but you need to be aware that they could be doing that.
Sadly, the low cost DIY approach to investing can be equally problematic - take a look at my own investing blunders for proof of that.
So what’s a Smart Saver to do then? Throw in the towel?
NO WAY ...
Instead, watch out for these big red flags that your financial advisor is ripping you off, start asking the right questions, and take action!
Warning Signs Your Financial Advisor Is Ripping You Off
1) They don’t explain how they get paid.
When you visit many financial advisors it can feel like you are getting a free service because you don’t have to pay anything directly out of pocket to see them. That couldn’t be any further from the truth.
Both the financial advisor and their parent company get paid a commission or fee based on the products they sell:
- If you buy individual stocks or bonds, there will be a flat one-time commission charged when you both buy and sell them.
- If you buy a mutual fund - a managed collection of stocks, bonds, and other investments - there is a percentage-based management expense ratio (MER) fee that you are charged annually lowering your investment returns. The advisor, his company, and the company that manages the fund all get a piece of that. Mutual funds can also have hidden front-load and back-load (deferred sales charges) fees in addition to the MER. Fortunately, those have mostly gone away in the face of increased low cost competition.
- If you buy exchange traded funds (ETFs), which are like low cost mutual funds that are traded on the stock markets, you will pay a flat one-time commission + typically a very small MER. The commission goes to the advisor and his company, while the MER goes to the company that created the ETF.
- If you pay for fee-based advice, then your advisor and their company charge you a flat percentage of the total value of your portfolio every year for their services. The cost of any trades on the stock market are typically included at no extra charge and the MER of any mutual funds is reduced accordingly. Your advisor doesn’t make any additional money from selling you investment products.
On large portfolios, those ongoing MER fees can really add up. The average MER fee paid by Canadians on mutual funds was 2.20% in 2014, meaning if you have $250,000 invested it costs you $5,500 per year. Your advisor might only see 25% of that, but that’s still $1,375 every year.
Those fees compound too, meaning over a period of 30 years on that same $250,000 portfolio you’d have $976,876.89 less in the end. That number comes from comparing a 7% return on a hypothetical no-fee investment to the 4.8% you would get with a mutual fund containing identical underlying investments after subtracting the average 2.2% mutual fund MER. Yes, that 2.2% fee means a loss of nearly 1 Million dollars - essentially half of the roughly 2 Million you would have if you could find a way to pay no fees.
Fortunately, new regulations are being introduced forcing companies to disclose exactly how much investors are paying in fees in actual dollar amounts. These regulations introduced in 2013 are finally coming into full-effect this month.
2) They don’t really care about your needs and goals.
If your advisor hasn’t taken the time to truly get to know YOU, then there is no way they can properly advise you on your money. They should try to understand you as a person along with your goals for life, your time horizon for retirement, and how concerned you are about investment losses over the short and long term.
If you don’t feel like your advisor cares about you and your financial success, it’s time to look elsewhere.
3) They tell you they can “easily” beat the market.
If anyone tells you they can beat the market, don’t walk - RUN - in the other direction.
Study after study has proven that the vast majority of people, including investment professionals, can’t beat the average long-term returns of the market after fees.
Keep in mind, your financial advisor isn’t a top-tier stock trader no matter how good they are. Most of their day is spent managing clients and their portfolios. They don’t have the time to master the ins and outs of the markets to always be picking winners.
Even most highly paid mutual fund and hedge fund managers whose sole job it is to outperform the markets typically can’t beat market returns with any level of consistency.
4) You only hear from them once a year, or less.
Any advisor worth their salt should make an effort to communicate with you on a semi-regular basis. At the very least they should be calling to see how you are doing, ask you about any major life changes, and make sure you are on track to reach your long term goals.
Additionally, they should occasionally check to see if you are earning extra money and want to increase your contributions, update you on investment performance, tell you about current market conditions, and possibly hold your hand and help you stay the course if markets are in turmoil.
5) You’re only invested in high fee “closet index funds”.
We’ve established mutual funds often have high fees, but that doesn’t make them worthless.
However, if your fund has a high fee and is also a standard “balanced” or similar fund that contains a set basket of stocks and investments that rarely changes, you are getting ripped off. You are paying high fees for a fund manager to do practically nothing.
If this is you, seek out low cost alternative funds or ETFs that track an actual index. If you are going to pay a high fee, make sure that your “actively managed” fund is actually actively managed. For the added cost, you should at least have a chance at outperforming the markets - but it has also been proven that chance is relatively small.
6) Every time you talk, they ask you to buy something.
If your advisor is paid by commission, they only make money when you buy or sell something. They are highly incentivized to call you and get you to buy and sell your investments.
Sure, it’s normal to buy and sell investments or change your asset allocation as your priorities and goals change. Or, sometimes there is a real opportunity that has cropped up that you could benefit from. Just be wary if that happens too often or if it is always the primary reason for the call.
7) They haven’t offered you a written financial plan.
If you’re paying hundreds or thousands of dollars a year for a financial advisor, they should help you plan for the future. It should be more than just a little pie in the sky advice, but a real written financial plan with targets based on your budget and income.
8) They have few certifications and qualifications.
We’ve established that literally anyone can call themselves a financial advisor whether or not they are educated and certified, so it’s up to you to make sure they are qualified.
If they are capable of buying and selling investments on your behalf, then they need a minimum of the following from the Canadian Securities Institute:
- Canadian Securities Course (CSC)
- Conduct and Practices Handbook Course (CPH)
You should also look for the Wealth Manage Essentials certification. You can see a full list of certifications here.
Another (optional) one to look for is the Certified Financial Planner (CFP) designation. This is a more rigorous training program with exams that the advisor needs to pass. You can use this tool to verify your advisor’s CFP designation or find one in your area.
9) They only sell you funds from their own company.
When selecting a mutual fund or ETF, you should be looking for a low cost option with a proven track record. If your advisor is only offering funds from their own company, chances are you are paying more than you need to and possibly getting worse performance. This is a clear sign they are trying to maximize profits and increase bonuses.
10) They’re always giving you “hot stock” tips.
Any advisor who tries to talk you into investing a large percentage of your portfolio into an individual stock, especially a “hot” stock, should be avoided.
There is a chance that they have done the research and have good reason to believe one particular company will perform well, but it is still VERY risky. See how I lost my shirt betting on individual companies like Nortel, Bombardier, and Yellow Pages.
Instead, if you are buying individual companies it should be with a small portion of your portfolio you are comfortable losing entirely or a group of well-diversified companies to limit your concentration risk.
11) They won’t compare your results to an equivalent benchmark.
Just because your investments are showing big gains does not mean you are doing well. Markets are very cyclical and go through periods of massive growth and big declines.
When markets are on fire, even the poorest investments can look amazing. The only true test of performance is to compare your actual results with that of a comparable benchmark.
For example, if you are globally diversified in 100% equities, then a benchmark or index that tracks the performance of all the companies worldwide would be suitable. If you have a balanced fund that contains stocks from North America and a diversified set of government and corporate bonds, then you would need a benchmark that combines a similar set of investments to compare with.
Plus a travel bonus worth another $150.
Quantities are limited.
How To Avoid Getting Ripped Off
It seems picking a good financial advisor is almost as difficult as picking the investments themselves.
That’s why you need to do your research, arm yourself with information, ask the right questions, and get reliable help you can trust.
Do Your Research
A good place to start doing your research is by tuning in to a couple of good investing blogs. That way you’ll get to know some of the terminology and investing strategies that are out there so you can have a more informed conversation with your advisor. Here are two that I recommend:
Then, if you want to start asking questions and getting some advice from other people, you could read and participate in a few forums like:
If you want a quick study, then picking up a few Canadian personal finance books can help immensely:
Ask The Right Questions
When choosing a financial advisor, you should properly interview them. Don’t just go with any random Joe your friends or bank recommends. Go in prepared with a list of smart questions to ask and see how well they answer them.
Here’s a few questions to get you started:
- Can you explain to me what fees you charge and how you make money from me?
- How often can I expect to hear from you after our initial meetings?
- What process do you use for selecting the investment products you recommend to clients?
- What is your opinion on investing in individual stocks vs. mutual funds vs. exchange traded funds?
- Can you give me a sample financial plan that you offer to your clients?
- Can you give me a list of products and funds you typically recommend?
- Can you guarantee my investments will beat market returns? (The answer should ALWAYS be no).
- What training and certifications do you have? Are you a certified financial planner?
- What resources do you use for giving financial and investment advice? (This could be additional team members, software, tools, access to industry experts, etc).
Get Help You Can Trust
One of the best ways to ensure you are getting help you can trust is by removing advisor financial incentives from the equation. All bank employees and commissioned financial advisors have at least some conflict of interest.
One way to do this is to hire a fee-only financial planner and pay them to create a financial plan for you and get started with low cost investments from which they will earn no commission.
Robb and Marie Engen, a trusted personal finance blogger duo, have started a fee-only advice service for Canadians.
Robb has many years of personal finance blogging experience and is currently studying for his CFP designation. Marie is a former bank employee and financial advisor with 25 years of experience and a CFP designation. Their packages start at $750 for a basic financial plan and go up from there depending on which type of services you need.
Sandi Martin of Spring Personal Finance is another well-known personality in the Canadian personal finance scene that has a fee-only planning business. She left the banking industry because she became disgusted at the pressure to push products instead of genuinely helping her clients.
Use A Cheap Automated Approach
Investing doesn't have to be expensive or complicated if you choose an investing service that follows best practices of global diversification and risk management.
Fortunately, a new type of service just like this has become popular in Canada called robo advisors. They essentially use pre-built low-cost portolios to automatically invest your money according to an asset allocation that is based on your risk appetite.
With this approach you get to essentially be a DIY index investor, which is a low cost investing style that is known to perform very well by taking the emotion out of investing, without having to learn about it and manage it all yourself. You pay a very small management fee for the robo advisor to do it for you.
If you have questions or need help choosing a robo advisor, this Canadian guide to robo advisors will point you in the right direction.
Laugh While You Learn!
The following video from John Oliver on retirement plans will have you laughing out loud and by the time you’re done you’ll actually learn quite a lot the fun way. He does use a fair amount of mature language but it’s completely worth the full 21 minutes to watch it:
It’s Time To Take Charge
Remember - only YOU can make sure your money is being properly taken care of. Don’t skimp out when choosing a financial advisor or investing approach. Once you have a solid plan, you can relax and let it unfold gradually over your entire life.
Until then, you need to put in the work to make sure you are on the right track. Your whole financial future is at stake and you shouldn’t take that lightly.
Question for You
If you want to take charge of your money and your future, there's no better time than now.
Here's my question: What stage are you at with investing?
- Do you manage your own investments? If so, I would love to hear what you've learned along the way.
- Do you have a financial advisor you can trust? If so, tell me how you found that person.
- Or are you just about to get started (and witness the magic of compound investment returns in action)?
Leave a comment and share your thoughts below.