How to Choose a Financial Advisor

The topic of choosing a financial advisor comes up often in my meetings with medical students.  Medical students are invited to attend “lunch and learn” sessions which are sponsored by companies in the financial services industry.  In these sessions, the students are offered some financial advice and also introduced to a firm and/or advisor that they may choose to work with in the future.

The value of these sessions varies.  I have attended one session which was primarily a sales pitch for disability insurance, with very little “learning” offered to students.  Another recent session delivered exactly what was promised:  an unbiased presentation of financial planning topics relevant to upper year medical students.

Students often contact me after these sessions to ask for my opinion about the presentation content, the financial products discussed, or the presenting firm.  I often share with students what has been my experience working with financial advisors, and some advice for when they are assembling their own team.  I will share the same here.

I first worked with a financial advisor in 2004. I was leaving my employer to pursue my doctoral studies and needed to transfer my accumulated pension to a locked-in retirement account (LIRA). I contacted the bank where I had an existing account and they referred me to a financial advisor. I wasn’t interested in managing my own investments at the time, and transferring the LIRA funds was simply a task on my to do list that I needed to complete. Given this, I didn’t ask any questions of the advisor, or assess whether he was a suitable match for me. He did volunteer that he was late in his career and was approaching retirement. This piece of information should have been relevant to me as it would have been a far better fit to work with someone who was at the beginning of their career, as I was, and would be able to assist me for the long term.

We had one meeting during which I completed the necessary paperwork to open the LIRA.  The advisor made some investment recommendations for a portion of the money, but suggested waiting for the outcome of the 2004 US presidential election before finalizing any of the US investments.  My LIRA funds were transferred directly to the financial institution and I moved to Kingston and commenced my doctoral studies.  November came and went and the outcome of the US presidential election was known.  I didn’t hear from my advisor.  I made some attempts to follow up with him, but with limited success.  So, I tried to follow up with an advisor at the Kingston branch of the financial institution.  Again, I had limited success.  The Kingston-based advisor had limited/no incentive to help me with my investments as, although it was still the same financial institution, the funds (and associated commissions) were in the customer portfolio of the Winnipeg-based advisor.  Frustrated, and with little time to pursue the issue further, the funds sat, underinvested.

Some time later, I had a conversation about my experience with my LIRA funds with a colleague’s partner who was a Certified Financial Planner.  He followed up with an invitation to meet over dinner to discuss the financial planning services that he could offer.  He shared my outrage (!) that there had been no follow-up from the Winnipeg-based advisor, and said that the company that he worked for required him to meet with clients once per year, at a minimum.  What he promised in terms of a client-planner relationship sounded like an improvement compared to my current situation, so I made the decision to transfer my LIRA funds to him.  Once again, I wasn’t interested in managing my own investments at the time, and accepted his investment recommendations with little independent research.  Subsequently, Mr. Schultz and I completed a full financial plan with him, and purchased disability and life insurance policies.  However, after the initial flurry of (commission-generating) activity, there was no on-going communication, beyond an auto-generated periodic newsletter sent via email.  All contact was at my initiation, for example, when I opened a registered education savings plan (RESP) account when my son was born.

Given this lack of communication and on-going advice, I started educating myself on my investment and financial planning needs.  I reviewed the investments that had been recommended by my advisor and was dismayed to discover that the management expense ratio (MER) of the mutual funds he had recommended was 2.37%.   This is really high!  A portion of the MER is used to pay the investment advisor for ongoing financial planning advice.  Yet, I was not receiving any ongoing financial planning advice.  This did not seem like good value or good service.

I began to investigate self-directed investment options as an alternative to working with an advisor.  Did you know that, according to SPIVA (https://www.spglobal.com/spdji/en/research-insights/spiva/), 95.71% of Canadian equity funds underperformed the S&P/TSX Composite over the 5 year period ending June 30, 2021?  What this means is that a passive investment in an index fund that tracks the S&P 500 outperformed Canadian managed funds, approximately 96% of the time over this time period.  And for a lower fee.

After completing my research, I made the decision to transfer my investments into a self-directed investment account.  I am responsible for making my own investment decisions, and now pay a fraction of the fees that I was paying when working with an advisor.

What did I learn from this experience?

1. No one will care about your money as much as you do.  Not everyone is interested in, or has the background to, manage their own investments.  Working with an advisor is a reasonable step in this case.  However, you must educate yourself in order to ensure that you are getting good, unbiased, financial advice.
2. Ask questions!  Think of the advisors you meet as candidates for the position of your financial advisor.  Interview them to determine if they are a good fit.  Some questions that you should ask are as follows:  What is your educational background that qualifies you to do this work?  How often can I expect to see you in person each year?  Do you provide written disclosure of all compensation you earn from me (so I can judge value and fairness)?
3. Working with an advisor is like being in any relationship – sometimes things start out great, and then at some point, they may no longer be working well.  If this is the case, it is time to move on. And like any relationship, the ending of an advisor-client relationship can be challenging. My advice to you: Rip off the bandaid! Who wants to stay in a bad relationship and pay 2.37% to do so?

You should seek financial advice when making complex financial decisions rather than attempting to navigate the financial world alone. However, getting good, unbiased financial advice requires the confidence and capability to ask questions, critically evaluate the quality of advice given, ask for clarification if the advice isn’t clear or understood, and raise concerns. Financial knowledge will assist with building confidence and financial capability.