Who Needs a Financial Advisor?
20 years ago, when I came into the financial industry, I believed that financial advisors had access and were privy to more information than the general public. The world has changed a lot today. There is no shortage of information and arguably the general public has access to the same information because of the power of the internet. This has increased the number of ‘do-it-yourself’ investors.
In my financial education programs, I meet a lot of people every year and I have come to believe that despite the increased amount and access to information, most people still need the help of a financial advisor. Who needs a financial advisor? I believe most people lack one or more of the qualities to be able to do it yourself:
- They don’t have the time
- They don’t have the knowledge
- They don’t have the desire
- They don’t have the confidence
Without these qualities then you may be the ideal candidate for working with a financial advisor.
What does a good financial advisor do?
Contrary to popular belief, I do not think a good financial advisor has superior investment skills or the ability to consistently outperform the market. I think a good advisor has to care, communicate and deliver but most of all, a good advisor puts the client’s interests first (which is near impossible to do). This is not easy to do because of the inherent conflict of interest that comes from the fact that most advisors are compensated from the sale of products like mutual funds, GICs, stocks, and insurance products.
Because of compensation, the focus of advice is usually centred around products. For example many financial advisors, their primary focus is on investing and the management of a portfolio because that’s how they get paid. Another example is estate planners often focus on insurance product solutions because that is ultimately how they get paid.
In my opinion, a good advisor goes beyond just the sale of products. The best advisors I know focus on good financial and retirement planning and will deliver advice and solutions that are not just product-based.
What are some signs of a bad financial advisor?
This is a great question but a tough one to answer because there are so many subjective and personal issues that can occur in a relationship between an advisor and the client. Two people can have the same advisor. One thinks that advisor is great while the other thinks they are lousy.
I think one of the key issues I see is the issue of good service and communication. In most cases, people think their advisors are bad because they have lost faith in their advice or the service from their advisor. A bad advisor is someone you no longer trust.
How can a financial advisor help those in need?
Unfortunately, too many people are financially illiterate or disinterested in their financial affairs. Anyone who knows me, knows I have a very strong opinion on this. I’ve always said that nobody cares about your money more than you care about your own money. Nobody cares about your finances more than you care. The best financial advisors might care but they still can’t care more than you.
I’m in no way anti-advisor. In fact, I am the opposite. As I said earlier, I think many people need and should have advisors but the problem is too many people think a financial advisor is going to solve all their problems or put them on that magic path to financial freedom.
Financial advisors are there to help you but they can’t do everything for you. I would hope that a good financial advisor helps raise people’s levels of financial literacy instead of just saying “Don’t worry, I‘ll take care of everything for you.” While this may sound like what people want, it’s very dangerous to relinquish too much management to others. Ironically, I think the best advisors move clients from being totally dependent to being independent and accountable for their own financial affairs.
The bottom line is you have to care to get ahead. If you don’t care, then who will? Read more, take courses, and look up some basic stuff on the internet. The information is out there, you just have to find some time and desire to get it!
How much will you pay for a good advisor?
As I mentioned earlier, most advisors are paid commissions through the sale of a product. Although fee and compensation disclosure is required, many clients have no idea how much they are paying their advisors. In fact, many people think they are not paying anything in fees because the fees are bundled and indirectly paid. Often, finding a fee-only planner is the best way to remove a lot of the bias from compensation.
The message I think is important is that people need to ask the questions about compensation:
- How do you (the advisor) get paid?
- How much will you (the advisor) earn (a dollar amount)?
- How much am I paying in fees?
Clients have the right to ask and know the answers to these questions. Remember it’s your money. You have to care enough to ask.
Very astute points. I particularly agree with the idea that estate planners tend to lean towards insurance products, and mutual funds reps lean towards mutual funds. And they’ll both call themselves financial planners. (Personally I explicitly state that I am not a financial planner – I do life insurance).
I disagree with your point about disclosure of amount paid. How I get paid is fair enough. How much, none of your business. It would make sense if there was some sort of negotation going on, but there’s not – commission is dictated by the company not the advisor. How commission is paid can affect the sale if one is biased. How much is irrelevant because the advisor has almost no control.
Good tips. I think it is a really good day to understand how a financial advisor is being paid. You really want to find someone who you can trust to have your own best interests at heart.
Hi. My investment advisor is bringing in a return annually of 4.6% on my portfolio. I pay him about $5K a year for this work. The average GIC brings in 2.5% a year and has no risk. Is it really worth running a balanced portfolio with this type of return for this price?