Choosing the right advisor could be the most important decision you make for your financial well being. Client-advisor relationships can span 10, 20 or even 30 years or more and these individuals become active partners through many significant life events, including marriage, children, buying a home, retirement and death.

Whether you are looking for a financial advisor or already have one, there are a few essential questions you should ask to ensure you have the right person managing your financial future. After all, this person will be responsible the for the direction and guidance of your investment portfolio to ensure you successfully achieve many of your life goals.

Why use a Financial Advisor?

Sound financial advice is vital to ensuring that investors are able to navigate through the complexities of financial markets to reach their goals. There are literally thousands of investment products to choose from, many of which are not suitable for everyday investors. And although the media may highlight new product fads especially if the returns are newsworthy, just because something has gone up a lot doesn’t mean you should buy it. Just ask any investor who bought tech in 1999, real estate in 1987, sub-prime in 2007, etc, etc, etc. Having someone to speak to about whether an investment is right for you is important.

Another reason to use an advisor is human nature. Ever changing market conditions means the value of investments can fluctuate wildly at times. One of the biggest stumbling blocks to achieving higher returns (particularly when markets drop) is investor behaviour, which can impact long-term market performance significantly. Dalbar research studies have reinforced this fact, pointing to individual investor returns typically under-performing market indices by 3-4%, primarily due to panic selling when markets fall. Having someone to speak to when markets are volatile is important.

Fees are also important. A financial advisor can provide investors with a number of valuable services including goal setting, building financial plans, choosing appropriate products, and keeping individuals invested during times of crisis (one of their most important roles) and on track to meet their investment objectives. But fees also eat into returns and so it’s important that you get what you’re paying for.

Fees and what you should expect from your advisor

Most investors pay anywhere from 1-3% of the value of their investments to service their account and provide professional investment management. And just like any other professional service, you have a right to ask what you are receiving for these fees.

Here are some of the typical services you should expect:

• A financial plan outlining your investment goals and the required path to achieve them
• Ongoing account maintenance and support
• Regular meetings and portfolio reviews with your advisor (minimum annually)
• Updates and support during times of market uncertainty
• Estate and tax support where required

The above items are “table steaks” that are expected from all financial advisors. Many will provide additional services to these which can be beneficial to a number of investors, particularly those with more complex financial situations (eg. tax, business). To find an advisor that is truly right for you however, ask the following 5 questions and see how confident their answers make you having them run your investment portfolio.

1. What types of products can you sell?

Depending on the firm, an advisor may not be able to access the complete universe of investment products that are available on the market. Planners generally cannot actively buy and sell stocks, bonds or ETFs (many can transfer in and sell them however), and full-service brokers may differ in the different types of alternative and specialty products they offer. Not all investors need access to a full range of investment products so be sure to ask an advisor what they can sell and why their products are the most suitable for you.

Advisors are also sometimes provided incentives to promote in-house products and in some cases may not have access to products outside of their firm. Many of these in-house (or “proprietary”) products are perfectly suitable for average investors, however if your advisor is promoting an in-house product solution, ask them how their solution fares vs. competitors.

2. Will I receive a written financial plan?

A financial plan is a written document that outlines your current financial situation, your short and longer term investment goals and the strategy you need to undertake to achieve them. It relies on some assumptions with respect to expected rates of return, contributions and other variables, such as retirement age.

Your financial plan should be referenced during annual reviews to ensure you are still on track to meet your goals or if you need to make any changes. Some financial plans may be fairly basic or can be extremely complex with tax and estate, business succession and philanthropic considerations.

3. How often should I expect to hear from you?

Your advisor is compensated for servicing your account and alleviating market concerns, and so be sure to ask how often you can expect to hear from them. Market volatility is normal and so you shouldn’t expect a call every time the market moves (that may actually encourage you to sell), however when significant events occur that impact the markets you should expect to hear from your advisor.

As an investor, you need to balance the need to check your investments frequently with legitimate concerns about your risk tolerance. If your financial situation does change, be sure to be proactive and speak to your advisor to see if this impacts your financial plan. At the end of the day, you should always feel comfortable asking for an update and re-assessing your risk tolerance. If you have an advisor that doesn’t return phone calls or take your concerns seriously – look for a new one.

4. What rate of return should I expect?

Performance is one of the main variables to consider when investing. Ensuring you understand how financial products perform in various market conditions over the short and long term is one of the key roles an advisor plays in managing your portfolio.

As a rule of thumb, the greater the risk, the greater the reward.

Buying GICs or fixed income securities may provide a guaranteed rate of return, but over the long term they typically under-perform the stock market. Over the long term, stocks tend to outperform other asset classes, however many individual stocks will deliver extremely high rates of return, while others will lose money. This is why most advisors build portfolios of multiple stocks (or buy mutual funds) to manage that risk.

A great chart for understanding how various asset classes and products have performed over the years is below:

When it comes to rates of return, the number to focus on should be the one that was used when building your financial plan to reach your investment goals. If you start seeing average returns that are far below or far above that number, speak to your advisor.

Most advisors will not promise an annual rate of return, at least nothing that isn’t a few percentage points away from the benchmark. As the saying goes, “if it sounds too good to be true, it usually is”. If an advisor suggests that they can deliver consistent 15% annual returns, walk away.

At the end of each year, your statement will illustrate what your annual rate of return was. Use this number with your advisor and ask them to clearly articulate how you performed vs your target and vs other portfolios on the risk spectrum.

5. How Do Your Fees Work?

Fees can be complicated. Advisors may charge a commission per trade when they buy or sell, or they may charge an overall fee to manage your investments (much more common). In the second scenario, there are two components to consider when looking at your investment account. The first is the overall fee you are charged on your investments and the second is what the advisor is paid to service your account.

Investors in mutual fund portfolios are charged a portion of their total assets and advisor’s fee are paid out of this. In other cases, an advisor may charge this fee separately. Generally speaking, an advisor receives anywhere from .75 to 1.5% to service your account, with the investment manager (eg mutual fund manager) receiving anywhere from .8 – 2%, depending on the fund. If your advisor is not using mutual funds, the fees they charge go to them. Depending on your total assets, your total portfolio fees when using an advisor can range from 1.25% to 3% on the high end. Keep in mind that an advisor typically doesn’t receive the full fee, as most dealers pay them a percentage (eg. 30-50%) and keep the remaining to cover things like technology, admin, statements and other overhead costs.

The Most Important Thing

Many individuals do not require dedicated financial advice, preferring instead to use the services of robo and do-it-yourself investing solutions. But if you are more comfortable having someone professionally manage your investment portfolio, look for a financial advisor.

The right advisor is someone that works with you to uncover your investment goals and your risk tolerances. They provide ongoing servicing, take the time to explain the financial solutions they recommend to you and provide piece of mind that yore financial affairs are in order.

Ultimately this is someone you trust that you feel is earning your business. This should be someone you feel comfortable enough referring to your friends and family. Having the confidence to do this is the ultimate test of whether you have chosen the right advisor.