Eeny, meeny, ….

In the midst of writing this article about sorting through the world of financial planners, I was surprised by a piece of mail.  I had had an award bestowed upon me.   Gordon Stockman – Top Financial Advisor of 2013 in Mississauga, according to Top Choice Awards.

This has, of course, made the article I was writing completely redundant and unnecessary.  Choosing a new financial advisor is obviously easy now… call Gord, he is the Top Choice!

Well, not so fast.  The purpose of having an advisor is so that they can advise you.  You will need to be willing to listen and interact well, regardless of your intended use of the advice.  The value of such advice and from such a relationship will be highly dependent on the level of trust present and the quality of interaction.  Interaction will include communication, education and coaching.   Comfort with the relationship is going to be very, very important. Trust is influenced certainly by an advisor’s designations, industry channel of work, remuneration method, time in business, approach to investing, etc.  Interaction will be influenced by personality, personal values, advisor knowledge, feelings of compatibility, etc.

What advice is it that you want?  Well, it generally should not be advice related to the selection of investments.   The Journal of Investing in October 2012 concluded that active portfolio management did not add value in excess of fees charged to clients.  This is not the first study nor will it be the last to conclude that active management and paying for advice on investment selection does not have a positive effect on results.  In other words, even if your advisor were to improve your returns beyond what would be achieved by doing it yourself, their fees would generally be greater than the difference.  You pay to make less.

In September 2012, a Morningstar research paper proposed that it is not the investment selection that has the greatest impact on retirement portfolios, rather it is the intelligent financial planning decisions made during retirement.  This report is in itself a whole article, so I will wait to explain the individual factors in detail in a future article. For now these 5 important factors are a) asset allocation, b) a dynamic withdrawal strategy, c) incorporating guaranteed income products, d) tax-efficient allocation decisions, and e) a portfolio optimization that includes the retirement liability.

So, how do I select an advisor and what factors do I consider?

1)  First and foremost give great value to professionals providing financial planning advice, not primarily investment advice.   Remember, it is intelligent financial planning decisions that make the difference.  Does their work encompass the five important factors identified by Morningstar?  At Efficient Wealth Management we do.

2)  Trust is paramount, so pay great attention to what indicates a professional’s likely future trust.  Past behaviours and actions should demonstrate trust worthiness.  Read what they have written.  Ask them the what ifs that concern you.  Listen carefully to what is said.  Get and ask questions of their referrals, do not just accept the referral passively.

3) Learning and growing your understanding of your financial affairs is very important.  Has the individual helped you or someone you know understand more.  Do you know more at the end of your first meeting than you did?  That is a demonstration of the quality of their teaching.  Do you or someone you know act in a more disciplined or surer way than when the advisor came on the scene?  This is good evidence of their coaching skills.

4) How are they paid?  Commissions are not always bad, but regulators around the world are questioning the potential dangers that accompany them.  Exactly, how much, when and based on what criteria, your advisor will earn their money, should be fully disclosed.  Such disclosure should be very clear and understood by you. See points 2) and 3) above.  Fees paid directly are the best , whether hourly or on assets, simply because there is less potential for abuse.

5) Do not rely on published accolades alone.  Many Elite or Accredited status programs are really purchased promotional endorsements.  The Top Choice Award program is independently administered, but am I the best out of thousands of professionals or of a couple of candidates with social media exposure?