June 1, 2013


bad to worse?Here’s a recent email conversation with minor editing, names changed and personal information removed. Prudence is helping her parents switch investment advisors.
Prudence: Incidentally, I interviewed a guy from (NEW FIRM) who is fee-only. He was ethical and his investment philosophy matches my own. 

This was for my parents as they are not happy with the (CURRENT FIRM) guy. We will test him out (this was his suggestion) with some money to see how he does. The rest will be managed on the discount brokerage side.
Me: I doubt that you'll find anyone at a bank who is true fee-only. The model isn't profitable enough. You probably are dealing with a fee-based advisor who charges a flat percentage of the assets managed (e.g., 1% to 2%). That's essentially an annuity for the seller. Advisors tend to switch to this model as their portfolios grow because it's even more profitable that getting commissions/bonuses on trades. The optics look good — a semblance of transparency. There's now a perverse incentive. The advisors make the most money when they do the least work for the client. Yet clients don't seem to notice or mind that the advisor is spending more time prospecting than serving their needs.

How can you tell if the advisor is ethical, rather than a great salesperson?
Prudence: I put everything on the table at the meeting with the planner and my parents at their home. It was transparent from the beginning. 

(NEW ADVISOR) is fee-only planner my parents are dealing with at (NEW FIRM). He was great and I put him through the ringer with questions about fees (1% to 1.5% of assets), due diligence, educating the investor,  investment vehicles and how he selects investments to buy. He answered all my questions and disclosed things I did not ask about.  We also discussed the methods and models he used to select stocks, ETFs and other non-MER investments. I agree with them. 

He suggested we not give him the full lump sum and test him to see if he can deliver based on the risk tolerance of my parents. They are targeting 5% to 7% annual returns. 

Do you recommend I take steps to check that (NEW GUY) is in good standing? Any direction would be welcome. My parents currently have a guy at (OLD PLACE) (I was upset they went here), who is pretty lousy. 

The (OLD ADVISOR) put $5,000 of my mom's TFSA money into a high risk investment, which violates her risk tolerance and assessment. We are in the process of getting that money back before we sever ties with the planner and his firm due to unethical practices. 

(NEW ADVISOR) said financial investment firms often pay the investor their money back if the planner acted against the investor's risk assessment, which seems to be the case. We will be drafting a letter for the Ombudsman and then meet with the planner’s boss or director. Any suggestions would be appreciated.
Me: What you got looks like the standard sales job from a polished advisor.

You are NOT dealing with a fee-only advisor (gets paid an hourly rate and does not do the investing). You are dealing with a fee-based advisor (gets paid based on the size of the portfolio not the actual work). Do you write cheques to this advisor or to the bank? If the cheques are going to the bank, the advisor is getting paid by the bank. The advisor is not working for you unless you — and only you — pay them.

You know what the advisor charges but not what the advisor gets paid. You don't know if there are other incentives behinds the scenes or what performance criteria are demanded. For instance, there can be incentives/quotas to encourage sales of insurance or other products. If you're buying ETFs, paying 1%+ seems pricey. You're paying extra for the overheads and profit margins of the bank. 

You might want to ask if the advisor is a fiduciary with a legal responsibility to put your best interests first. The financial sector is fighting against a move from the much weaker suitability standard. Here's an article from this week supporting the industry. Here's one from Rob Carrick supporting the public.

You'll have trouble getting objective independent advice unless you go to a true fee-only financial planner (I thought I sent you some names). You seem to be dealing with an experienced salesman, which is fine unless you think you're getting something different.
Prudence: Based on your comments, there is no rush to make a quick decision. This is a good month to interview other financial planners. I will start with the list you gave me. If you have anyone else to add, please let me know. Much appreciated.


I looked up the potential advisor online. Despite his years of experience, I found no signs of visible expertise. No articles. No interviews. No video. No endorsements or testimonials on LinkedIn. The corporate website allows advisors to show their designations, photos and have some personalization. This advisor hasn’t bothered. How does silence, inattention and  invisibility build trust?

Prudence is investing time to help her parents make a wise decision. Not everyone is as patient. Imagine the mistakes that get made every day. Buyer beware.


Podcast 222

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PS How carefully do you select your advisors?


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