What do you want your advisor to do for you?
Do you want an objective financial plan without sales pressure or do you want to seek out the top stock or fund pick to boost your portfolio returns, choose a provider that will meet your need. I have identified five main service platforms to help you determine the best service provider for you.
Product Specialist – No Planning
On one side of the financial services spectrum you have product sales with no planning included. These advisors are compensated by way of commission when they sell you a product and they may also receive on-going service fees that are paid directly out of the investment you purchased. These people are product specialists and they work to keep on top of product development and should know detailed information about any recommendation they make and how it is best suited to your situation. They may hire the services of Financial Planners or may even have one ‘in-house’ that will complete a financial plan for you and they may either charge you or your salesperson for their time.
Product Specialist – Planning Included
As you move toward the middle there are advisors who are product specialists and are compensated by way of commission and service fee but will provide a plan as well. These plans are usually single issue plans specifically designed to support the product recommendation and while the plans are very often well designed they are too often forgotten in favour of the product results. Advisors generally prefer to be thought of as product specialists and the planning service is designed to provide the client with a plan for achieving their desired results as they relate to the product. Review meeting are most often focussed on investment returns and may result in changes to portfolio composition either as a result of performance or in anticipation of prospective performance.
Fee Based – Product Included
The middle ground service platform advocates charging for a financial plan because it will be taken more seriously and if the client doesn’t act on recommendations the advisor still gets paid. The advisor prepares a financial plan which can be a comprehensive plan or a single issue plan but may not necessarily merely support a product recommendation. If the investment or insurance purchase is placed with the advisor they are compensated for the purchase as well but rarely in the form of an up-front commission preferring instead to charge for investment advice in terms of a percentage of assets held. These advisors consider their planning expertise and investment management expertise to be equally worth the fees they earn and contend that they are providing objective planning service with superior investment return potential.
Fee Based Planner – Product Included
Next you have a Fee Based Planner who provides planning services that range from single issue to comprehensive and are generally considered experts in the planning area but will also have access to investment and segregated funds without any upfront commission. Investments that are supplied for the client are from a separate class of funds that separates the advisor fee from the Management Expense Ratio (MER) resulting in lower cost holdings providing better returns. Segregated funds can be purchased on a front load basis with a zero percent commission paid to the advisor, however, the on-going service fee cannot be separated from the product and is paid. Compensation paid to these advisors is based on the service provided and is disclosed in writing so you see how much you are paying for advice, if you choose to pay through the investment placed then your statement with show this fee payment in dollar and cents terms. Portfolios tend to be designed for downside risk protection suitable to the client’s investment style and detailed in a policy statement dictated by the client. These advisors consider themselves to be planners first and they suggest that their clients are less stressed about investing because the focus and the review process is centred on the direction that the plan is taking.
Fee Only – No Product
On the other side of the spectrum you will have Fee Only Financial Planners who do not offer specific products directly but will refer you to someone who does. These people generally complete comprehensive plans that include all areas of your financial circumstances for a total picture complete with recommendations and an action plan. They discuss the need for investing and tend to be more conservative in their forecasts because they don’t need to impress anyone with return expectations. They recommend insurance of the proper type and amount and may suggest two or three agents for you to see for placement.
The financial services industry tends to have a bad rap for people taking clients money and making a commission while the client continues to experience mediocre results but, there are good and bad advisors on every end of this spectrum and we can lessen the frustration if there is care taken by both clients and advisors to make sure the fit is right.
In order to complete your search for a financial advisor please consider the following:
Decide what you are looking for.
Do you want a financial plan, Investment selection or something in between.
Understand how the advisor is paid.
Make sure that the advisor is paid to do what you want them to do. If they only make money from the sale of a product you hold them accountable for the product and if they only charge for a service you hold them accountable for the service.
You should not need tax returns and investment statements for the first meeting but be prepared in case you decide to move forward.
Don’t expect immediate answers, the advisor needs to know more about you in order to provide accurate recommendations.
Listen to your gut.
You should feel comfortable with the advisor because you will be sharing a lot of very personal information with them.
Be aware that they are assessing you.
Unless they are simply chasing a commission an advisor should make sure that the service they are providing is appropriate for you.
At the first meeting you are kicking tires to determine if what the advisor does is what you are looking for. You will probably need another meeting or two to get things going.