Find A Financial Advisor

Introduction

Financial information has never been more readily available to consumers. But if you’re like most people, you just don’t have the time or inclination to wade through a mountain of complex information to plan your financial future. Whether you are investing in RRSPs, buying your first house, saving for your children’s education or planning your estate, a financial advisor will help you balance today’s needs with your short-term and long-term financial concerns and aspirations.

More and more, we are expected to take responsibility for our own wellbeing and that of our loved ones. A financial advisor will construct a plan that reflects your situation and respond to your specific needs. He will also help you monitor your portfolio growth and recommend revisions to your plan as circumstances change and new lifestyle priorities emerge.

But choosing the right financial advisor can be as intimidating as deciding which investment products to include in your portfolio. Surprisingly, government is not much help. Financial advisors who sell products such as securities, mutual funds and insurance must be licensed where they practice. But other than in Quebec, there are currently no regulations governing those who provide financial planning and advice. Which means that you really need to do your homework.

That research and the road to financial security and greater freedom for the future begins here. This material is your guide to selecting a qualified financial advisor and building a long-term relationship. It is loaded with articles, checklists and tips that will be valuable in connecting you with the right financial advisor

Whatever your investment goals, a qualified financial advisor can help you get there.

The Financial Advisor

The straightest line from investor confusion to a financial plan and portfolio designed to provide you with long-term financial security is drawn with a planning professional. There’s a tendency to plan toward one single event - say retirement - without giving proper consideration to more immediate priorities or unexpected detours. That raises the potential for mistakes in your financial plan. A planning professional will do more than recommend financial products. They will keep their eye on the broader financial picture. That picture begins with a plan that will serve as your road map to lifelong financial security. It will highlight your concerns, help you finance large ticket items such as a new home, prepare your portfolio for unexpected detours, and ensure that taxes are not unnecessarily chipping away at your disposable income or retirement nest egg.

A professional financial advisor will ask you to list your top financial concerns such as putting money aside for your children’s education or making sure you have enough saved for retirement. You will be asked to set priorities so that they can make certain money will be available to cover your most important concerns. They will also examine your household budget, identify potential barriers to greater financial freedom and design a balanced plan that will not be a burden on your present lifestyle. It is possible to plan for the future and also take that well-deserved vacation in the sun.

But the road doesn’t stop there. A financial plan is a living document. Your advisor will provide a regular fiscal check-up or financial review of your plan to assure that you are on the right path to achieve your goals. In fact, it is recommended that your financial situation be reassessed at least once every year to account for changes in your life or economic circumstances. Still, many people believe that financial advisors are too costly, or are just for people with a lot of money. That might have been the case once - but no longer. An increasing number of middle and low-income households are using the services of a professional planner to chart their financial future. These professionals realize that your financial future is too important to leave to chance.

What Does A Financial Advisor do?

If you are planning to invest (and who can afford not to) you are going to need a financial advisor. Twenty years ago, registered savings plans were primarily intended for retirement purposes. Today the financial picture is far more complicated. The federal government uses the rules governing RRSPs as policy levers to help you meet a series of lifetime goals : from first-time home ownership to putting your children through college or university.

Accompanying changes in regulation are changes in lifestyle. Achieving one goal sets the stage for new investment priorities. A recent disruption or change in your life - an addition to your family, career change, an inheritance or the loss of spouse - could affect your financial future. A trusted financial advisor should be at the centre of your investment strategy, keeping track of personal and regulatory changes, and understanding what mix of investment products (there are more than 1,700 mutual funds alone) makes the most sense for you.

Thinking in terms of pre-tax dollars.

There is a difference between what we earn and what is left to spend after taxes. The same is true with investments. Many investors don’t think in terms of after-tax returns. But the taxman may take up to half of the money you earned from your investments. Different types of investments are taxed differently.

Ignoring penalty-free mortgage payments.

A mortgage usually includes an opportunity to prepay up to 10 per cent a year of the outstanding principal without penalty. Not enough Canadians take advantage of this. If your mortgage is at eight per cent, that extra annual payment is equal to an after-tax gain of the same percentage.

Regulatory changes.

Some mistakes are made because the individual is unaware of shifts in government policy. The lowering of capital gains tax rates, for example, has made investing outside an RRSP more attractive for Canadians in certain situations.

Exceeding foreign content restrictions.

The federal government sets limits on the amount of foreign investments we can hold in our RRSPs. The cost of accidentally exceeding your foreign content is one per cent per month on the excess amount. A financial advisor will help you to assess different types of investments to ensure you have the right product mix, and the best after-tax return. A financial advisor will help to structure a plan to include this annual payment. Your financial advisor would be on top of this.

Think of a financial advisor as your automatic re-balancing mechanism. Every year, Canadians make investment errors that cost hundreds of millions of dollars in lost opportunities and additional retirement income. Here are some of the most common mistakes that a financial advisor would help you to avoid :

• Saving while not retiring credit card debt. Too many Canadians put money into savings while maintaining credit card debt. High credit card interest consumes more of your disposable income on a monthly basis than net returns on investments put back. Using your savings or deferring RRSP contributions to pay down your credit cards will give you a tax-free return equal to the interest you no longer have to pay. For example, at 10 per cent interest, a $1,500 balance on your bank credit card will cost you $150 a year (interest on department store credit cards can be as high as 28 per cent). In comparison, 10 per cent interest on a $1500 investment provides after-tax earnings of approximately $75 - only half as much as you would have earned by paying down your debt.

• Inadequate emergency funds. Most Canadians have inadequate funds to handle an emergency or take advantage of an unexpected opportunity. We all should have the equivalent of three to six months’ salary in easy to cash-in investments such as Canada Savings Bonds.

How Are financial Advisors Paid?

Financial planning doesn’t have to be expensive and most financial advisors will be happy to provide an initial consultation without any obligation or cost.That way, you can determine whether the advisor’s services meet your specific needs. It is essential that you develop a relationship of trust with your advisor, so use the meeting to discuss how the advisor gets paid and any concerns you have about why some products may be recommended over others.

Here are the three basic examples of compensation:

• Commission. Most financial advisors earn a commission based on the purchase of financial products. The supplier of the product usually pays the commission.

• Fee-For-Service. Financial advisors who work on a fee-for-service basis usually charge a flat fee or hourly rate for the work they do. Some advisors may base their fee on the value of a client’s assets or income. Hourly rate fee-for-service financial planners will likely send clients elsewhere to purchase the financial products needed to execute the plan.

• Fee-and-commission. Financial advisors who combine fees and commissions will often charge a fee for the amount of time invested in designing and updating a client’s plan, and also receive a commission from the products purchased.

It is estimated that there are over 50,000 financial advisors in Canada, including accountants, lawyers and perhaps even your local banker. How do you know which one is right for you ? Membership in a professional association is a good start.

Trust is also critical. A large part of your retirement lifestyle is going to be guided by investment income rather than Canada Pension Plan cheques. Planning should be left to a professional whom you are comfortable with. When choosing a financial advisor, find somebody who understands your personal and financial situation, and whom you will feel good working with.

There are several things you should do in advance of shopping for a financial advisor:

1.Word of mouth: Advertising creates awareness of what is out there. But don’t rely on ads alone. Ask friends and relatives about their experiences (good and bad) and whom they would recommend.

2.Request information: Before consulting a financial advisor, ask for general written information about the company they work for and the services it offers.

3.Initial meeting: You need to feel comfortable with your financial advisor. If you like what you’ve heard and read, arrange a meeting - see if the advisor really listens to you, understands your needs and appreciates your concerns.

4.Look around: Don’t limit your search. Visit several advisors to measure which one you are most comfortable with. Ask questions about how they are paid and how they arrive at specific recommendations. Remember your financial advisor is one link in an investment chain. Consider some additional research into the company whose products they are recommending.

HOW TO FIND a Financial Advisor?

Do not be afraid to ask your financial advisor questions either on the telephone or in his office. And do not allow yourself to be hurried. Financial planning is a detailed and complicated process with your financial wellbeing at stake. Most advisors will spend approximately one hour to 90 minutes with a potential client during the first interview. In that interview your advisor will ask you a series of questions. You should also have questions of your own. Here is a guideline:

1.Ask if the advisor concentrates on a particular type of client. It is not uncommon for an advisor to work with a certain profession, income level or age group.

2.Ask about professional affiliations. Does the person belong to the Canadian Association of Insurance and Financial Advisors, or any other professional organization? If not, ask: why not? Professional organizations have codes of professional conduct and continuing education requirements.

3.Ask about credentials. The most common professional designations require courses directly related to personal financial planning.

4.Ask about independence and impartiality. Are the advisor’s recommendations limited or skewed to her employer’s own products and services? Ask about other products and services in the financial marketplace.

5.Ask about expertise. Ideally, your advisor should be able to discuss personal money management issues such as budgeting, investments, insurance and tax strategies. He should also have close working relationships with professional specialists such as lawyers and accountants.

Questions you should ask a Financial Advisor before entering into a relationship.

1. Ask how the advisor will select your investment solutions. Does he do independent analysis or depend entirely on other companies’ research for the products he recommends. What are his reasons for steering you toward a particular mutual fund, insurance or other financial services company ?

2. Ask if the advisor will work with you directly or if an assistant will handle your account. If your account will be delegated, ask to meet the assistant and ensure that he is well qualified.

3. Ask how the advisor keeps clients informed. Many planners publish newsletters or offer seminars. How often can you expect to meet personally with the advisor to review your financial situation ?

4. Ask if the advisor charges on a fee, fee-and-commission, or commission-only basis. Can the advisor estimate the cost of ongoing service ?

5. Ask for references. The advisor should be able to provide names of clients with situations similar to yours and provide a relevant sample plan for your inspection.

Your relationship with your financial advisor should be long term (the average client relationship for an advisor is eight years). Therefore it is up to you to enter into this relationship with specific expectations. It is a good idea to draw up a checklist of what you expect from your planning professional and review it periodically to ensure that this relationship is standing up to your expectations.

Think carefully. At the beginning of the relationship, did your financial advisor :

• Provide you with a personal information document that lists : (a) method of compensation ; (b) business affiliations and all potential conflicts of interest ; and, (c) professional qualifications ?

• Understand all of your financial concerns ?

• Correctly assess your investment philosophy and tolerance of risk ?

• Accurately identify individual barriers to your achieving financial independence and propose written solutions that address each ?

• Provide you with a realistic plan to achieve your goals within your budget (including an implementation memo that outlines specific dates and activities) ?

Over the last 12 months of your relationship, has your financial advisor:

• Reviewed your plan at least once to ensure that the overall strategy is on track in realizing stated goals ?

• Incorporated any new information into your financial plan ?

• Provided you with regular updates on how your investment portfolio is performing ?

• Been available to answer all of your questions or address your concerns ?

What to Expect from a Financial Advisor?

There are things to avoid when selecting a financial advisor. Some points are quite obvious, while others are less so. When developing a plan it is sometimes what the financial advisor doesn’t ask that should sound alarm bells. There is a process to financial planning. If they don’t ask you a series of questions before recommending products, they are not looking after your interests.

You should also beware of financial advisors who routinely try to steer you in one direction. A professional financial advisor will also typically recommend more than one investment product, and will walk you through each to help you decide.

What To avoid in a Financial Advisor?

1.No credentials. Avoid so-called financial advisors who refuse to provide you with their credentials, or are not members of a professional organization that requires continuous learning and demands adherence to strict standards for professional conduct.

2.Bias. Many financial advisors are employees of respected companies that develop and sell financial products. But avoid those who will put an employer/employee relationship (or compensation) ahead of your personal interests. Professional financial advisors always put your interests first and offer objective advice to assist you. Avoid those who may be thinking of their compensation, or the demands of their employer.

3.Reluctant to discuss compensation. If a financial advisor refuses to tell you how they are paid clearly and in writing, look for another advisor.

Good advice. But there is more:

In addition to meeting specific licensing and continuous education requirements, financial advisors who are members of professional organizations such as CAIFA must adhere to a strict code of professional conduct. By agreeing to a professional code of conduct, your advisor is committed to your interests first and foremost. Such a code will most certainly include the following :

• Compliance - Your advisor must adhere to all federal and provincial laws and internal sales standards.

• Disclosure - Your advisor must provide full, accurate disclosure of status, qualifications and relationship with company, as well as detailed information about products and services.

• Competence - Your advisor provides services, advice or information only where licensed to.

• Priority of Client’s Interests - The advice you receive should be tailored to meet your individual needs, and should be given prior to your purchasing any financial products.

• Confidentiality - Your advisor must hold your personal and business information in strictest confidence.

• Documentation - Your advisor provides written copies of advice.

A financial advisor needs a clear picture of your current financial situation and expectations. They will usually begin by discussing your current financial situation including all your assets and liabilities including credit card balances, loans, property and investments.

Your advisor will also want to review your insurance policies, pension plan statements and any other documents that will enable them to pull together a complete picture of your financial circumstances. Time is an important commodity for both you and your financial advisor. You can get your money working for you much faster if you arrive at the office prepared, and minimize the need to ‘get back to them’ with further information.

This checklist of materials every financial advisor expects from a client should help you get ready for the first meeting:

• a sheet of paper listing what you own and what you owe. This includes assets such as your home (and other properties), cars, investments and insurance and in whose name these assets are held

• a sheet of paper that lists your total income and sources (salary, pension, bonuses, rental income, interest, stock dividends, etc.)

• a sheet of paper listing your household’s top three financial concerns

• a copy of your most recent pay slip and tax return

• a realistic household budget that details mortgage and/or rent payments, how much you spend on household items, clothes, entertainment and transportation. Indicate personal savings patterns outside of your investment portfolio. Are you putting money into a savings account for a large purchase such as new furniture or a family vacation?

Giving Your Financial Advisor a Clear Picture

Although no two people’s financial situations are identical, there are common elements to every financial plan. Your plan, for example, will include written recommendations that take into consideration the extent of your financial resources. The plan will balance your objectives with those resources. So it is important to prioritize what it is you want in life. You can always change the plan as circumstances alter and those priorities change.

Your plan must include a timetable for action, starting with those recommendations that should be implemented immediately and moving on to actions that need to be put into place as your balance sheet and cash flow improve.

Whether your plan includes specific or general investment recommendations depends largely on the type of advisor you have selected. For example, expect specific recommendations from an advisor who is licensed to sell financial products. More general recommendations are more likely from advisors who will send you elsewhere for implementation.

When you review your plan, make sure it responds to your individual investor profile by :

• Reflecting your short-term goals (buying a house), medium-term goals (financing your children’s post-secondary education), and long-term goals (retirement) ;

• Respecting your investment philosophy including comfort level with risk or preference for specific investments

• Being manageable within your budget, and providing you with room to save for specific items (such as a vacation)

• Including cash for emergencies

• Including provisions for your family and business partners in the case of your death or disability

Drawing Up a Financial Plan

Most financial advisors will provide you with periodic statements of your financial dealings. Still, you should review your financial plan and strategy with your advisor at least once or twice a year and anytime your circumstances change. At these meetings ask your financial planner to explain actions taken since the last meeting, and how they helped you to achieve your goals. Do an audit of the current mix of investments and other financial products in your portfolio and the returns they have generated. Make sure your financial advisor is kept informed of any personal changes that may affect your financial plans, such as marriage, divorce, illness or the birth of a child. These changes may also affect your financial security and investment objectives.

FISCAL Glossary: Basic Investment and Planning Terms and What They Mean.

Assets: The total value of what you own.

Balance sheet: A list of what you own and what you owe.

Carry-forward: If you were unable to make your full RRSP contribution for any year since 1991, you may carry the unused contribution room forward into future years.

Deferred income taxes: Income tax that would be payable immediately unless placed in a deferred planning product such as a Registered Retirement Savings Plan (RRSP)

Diversification: Investmentdiversificationlessensyourexposuretorisk, and gives yourportfolio an opportunity to grow.

Fixed asset: A tangible long-term asset such as a house or other property.

Goal setting: Your financial goals should be specific, measurable, achievable and reviewed annually.

Estate planning: Gives you the opportunity to provide, on an orderly basis, for the distribution of your assets and payment of your debts upon death.

Leveraging: Borrowing money for investments by using assets such as your home as security.

Liquidity: This is the ease with which you can access your money. Your financial advisor will recommend that easy-to-get-to short-term money be set aside to cover emergencies and expenses.

Risk tolerance: Most investments rise and fall in value. How much volatility can you handle ?

RRSP: A tax deferred plan in which you place investment products such as mutual funds. The tax on RRSP contribution and earnings is deferred until the money is withdrawn.

Spousal RRSP: A plan to balance the retirement income of both partners by allowing the higher income spouse to contribute to the RRSP of his or her spouse.