Financial advice, just like anything else we purchase, needs to be evaluated on quality and price. The only difference is that the stakes are much higher.
We have all bought a T-shirt that looked great on the rack only to see it fade and crumple into a rag after a few wash cycles. $40 down the drain and the incident is soon forgotten. Paying a financial advisor thousands of dollars a year for underperforming investments is going to cause a lot more pain and sting for a lot longer.
A T-shirt is a familiar item we’ve purchased many times and we all feel pretty comfortable comparing the quality and value of one T-shirt to another. There is also no ambiguity when it comes to the cost, it could be $4.99 at Wal-Mart or $499 at Chanel.
On the other hand, the value of financial advice is a lot more nebulous and much more difficult to judge. In addition, the cost of financial advice can be obscured by fees and charges that are difficult to understand and may be incurred or have their impact well beyond the initial transaction date — DSC and MER fees are two examples.
It may take you a while, but the good news is that determining the various costs and fees on your investments can be resolved by digging into your broker statements, a little internet sleuthing, and a few phone calls to your advisor. However, the overall benefit of their advice is much more difficult to valuate and depends on your situation and needs.
Before considering a financial advisor, make sure to confirm the scope of advice you require. We have used the term “financial advisor” in this article to mean anyone offering financial advice for a fee, but the reality is that anyone can call themselves a financial advisor in Canada. They may not be accredited by any professional body or even legally allowed to offer some kinds of products or services. After further consideration, you may realize that what you really want are the long-term educational benefits of a personal finance coach — not just someone who can recommend and purchase a mutual fund for you.
You also need to assess the “do-ability” of learning how to handle your finances by yourself. Creating a balanced portfolio of ETFs for your TFSA or RRSP using a low-cost online investment platform isn’t overly difficult and would be a skill that would serve you for a lifetime.
On the other hand, estate planning and inheritance can become very complex and best left to a specialist if you have a lot of assets. Your needs may also change over time. As you net worth builds, you may find your financial affairs becoming increasingly complicated and overly time consuming, so the value of a financial advisor increases accordingly.
One final issue to consider is overcoming trust issues and peace of mind. Financial advisors have a fiduciary duty — an ethical and legal obligation to act in your best interest. The problem is that it can be very difficult to evaluate their fiduciary duty, especially if your financial knowledge is lacking. Would you know if your advisor recommended one fund over another because the commission was higher for them, or because they truly believed it would generate a higher net return for you?
There is a lot of trust and faith involved with an advisor and fiduciary duty should not be blindly accepted because someone has a lot of experience, or because you have developed a friendly relationship over the years. Building your financial literacy and managing your own finances will allow you to accurately and objectively assess the veracity, value, and cost benefit of financial advice.
A trustworthy, professional financial advisor will not mind numerous, seemingly obvious, or even somewhat pointed questions about fees, risk, return, scope of services, specialization, or their accreditations and what they mean. There are plenty of great advisors out there who offer a ton of value for money with unquestionable fiduciary duty.
Whether you choose to forgo an advisor, depend on one completely, or use a combination advisor/DIY solution depends on your situation — we can’t recommend a solution for you. However, we can teach you how to properly evaluate an advisor, the questions you need to ask, and how to compare an advisor to DIY alternatives.
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