Financial Advisors 101: The Basics
One of our major goals here at QUBER is to help support our users as they work to increase their financial literacy by offering them resources that’ll help them get to know various aspects of personal finance in more detail, as we’ve done with our Money Talks series. But, though we love sharing Money Talks articles with all of you, we do acknowledge that our advice can only go so far. By that, we mean that most resources (ours included) only speak in general terms. It’s easy to share basic information, but next to impossible to answer every question there is on a financial subject; there’s simply too much variation amongst people’s individual situations, and too many variables to consider. What we can do is generate curiousity and point you in the direction you need to start heading, but once you find you need answers specific to your financial situation, you’ll need to find yourself a financial advisor.
What is a financial advisor?
A financial advisor is a professionally licensed individual who can help you navigate the world of finance according to your needs, though they are sometimes referred to as “financial planners” as well. In general, this process will involve them creating an effective, comprehensive financial plan for your life, but will involve many more aspects as well. According to the Investment Industry Regulatory Organization of Canada (IIROC), there are 67 different license designations for financial advisors in Canada. However, as you look for an advisor, we would recommend that you look specifically for advisors with the designation CFP (certified financial planner) and RFP (registered financial planner). Both CFP’s and RFP’s are required to meet a certain minimum level of work experience and must undergo regular testing to maintain their credentials, while other designations aren’t bound by the same strict certification process. CFP’s are also required to adhere to strict regulatory guidelines as they serve you, meaning you know your best interests are being considered above all while they manage your wealth for you.
What can a financial advisor help me with?
Many people assume that a financial advisor is only helpful if you need investment advice or need someone to invest on your behalf, but they really provide so much more than that. A financial advisor can help you in regards to the following topics:
retirement planning: This is one of the biggest reasons to find yourself a financial advisor, as retirement is most people’s largest financial goal in life. A financial planner can help give you a timeline for your retirement based on your current situation. This can help confirm if you’re on track with your goals, or highlight that you need to make changes if you want to retire sooner. An advisor can also help you choose investments for your RRSP, which will help maximize your retirement savings so you can live a more comfortable life after you stop working.
tax strategies: A financial advisor can help you navigate the annual practice of filing taxes, and help you do so in the most effective way possible so your tax bill is minimized.
insurance advice: This is an area that an advisor can offer great counsel, particularly if you find that your situation creates some unique conditions for insurance coverage. They’ll be able to guide you towards a policy that both makes sense for you and falls at a fair price point. However, it’s important to note that if you have a financial advisor from within your bank, they’re going to be limited in the types of insurance products/services they can offer you (as it’ll have to be in-house or from a partnered insurance provider).
debt/credit management: This is something you’ll probably cover in detail in the early stages of as you get to know an advisor, and may even be the specific reason you feel you need professional assistance.
saving strategies: Need tips on how to get ahead? A financial advisor can help you assess the way you save money and help you highlight areas where you can cut down your expenses and mindless spending.
estate planning: It’s admittedly not a fun thing to think about, but if you have financial dependants (even just a pet!), it’s important that you have a will in place so there’s a clear plan for your assets when you pass. An advisor can help you determine how to allocate everything and get the paperwork officially filed.
investing: And of course, investing remains one of the largest reasons people seek professional advice. Though there are many part-time investors out there that pursue the stock market as a hobby or past time, the world of investing is complicated. Not everyone has the time, interest level or advanced knowledge to pursue it, and for most people, taking a major loss isn’t something they see as a harmless side-effect of trying a new thing. Relying on a professional to manage your investments for you is smart if you’re not 100% confident on your own!
A good financial advisor will also help educate you as they work for you too. The reality is, even with a financial plan created by a professional, you’re still the one who will make choices that move that plan forward or halt it in its tracks. To move ahead, you’ll need to be continuously learning more about personal finance so you’re equipped to make smart decisions when you don’t have your advisor on hand. As such, your advisor should be continuously offering you lessons as your main focus shifts over time. In the beginning, they may be teaching you about more basic topics such as how to manage debt, while later on in your relationship, they might teach you about more complicated topics such as how to choose from different kinds of investments.
I’ve never had a financial advisor before. How does it work?
If you’re meeting with a financial advisor for the first time, your first meeting is going to be used to discuss your financial situation in detail. This may be in the form of a questionnaire, or in a one-on-one interview. You’ll be asked to share a wealth of information about your financial life, so arrive prepared! This is going to include coverage on all your assets and liabilities, financial commitments, income (both current and expected), expenses, special needs or insurance considerations, short and long-term financial goals, risk tolerance and more. Remember, your financial advisor is going to create a plan for you based on what you share with them. For some, it can be uncomfortable to speak openly about their financial situation, but your advisor isn’t there to judge you. If you withhold information from them during this process, the plan they design won’t really be able to help you in the end!
Once your advisor has your answers, they’ll get to work on creating a detailed financial plan for you based on what you want to achieve. This plan will encompass everything you discussed in your initial interview, and will allocate your assets in a manner that aligns with your risk tolerance, your earning power, your financial commitments and so on. It will involve short-term goals, like building an emergency fund or paying off a loan, and will draw a clear path towards your long-term goals, like retirement. Though your financial advisor can’t predict the future, they’ll ultimately try to highlight the path you need to take over the next 10, 20, 30+ years to reach your ultimate goals based on where you stand today.
Then, once your plan has been drafted, you’ll need to see your advisor for check-ins on a semi-regular basis. This will be different depending on your needs, but you’ll want to touch base with your advisor occasionally to confirm that you’re on track with the plan. Beyond that, your goals and plans are likely to change over time. For example, you may end up having more kids than you anticipated having when the plan was drafted, or find yourself separated from a long-term partner (which might change your tax responsibilities). Unexpected changes like that might change the nature of your plan dramatically, and require that you make lifestyle changes to stay on track with your original timeline.
When does it make sense to see an advisor?
There are a variety of situations in which a person might want to seek professional financial advice. Some of these situations might include, but aren’t limited to:
You’re planning for a major life event or financial goal, like retirement or saving for a child’s education. These kinds of large-scale financial goals require some planning to work towards, and an advisor will be able to help you navigate the steps you need to take to reach them.
You’ve got investments, but you’re losing money on them. If you’re investing on your own time but you’re not seeing favourable returns on your efforts, it may be time to contact a professional.
You have a large sum of cash and want advice on how to invest it. Due to inflation, money that sits in standard savings accounts over time depreciate in value. Investing is the only way to grow your wealth, and seeing an advisor will help you determine an investing plan that makes sense for you based on your net worth and your risk tolerance.
You aren’t currently insured in the way you need to be, or you need an estate plan. A financial advisor can guide you as you pick insurance products and plan your estate, helping you navigate the complicated legalese that often accompanies both tasks.
You want to minimize your tax bill. A financial advisor can work with other professionals, like your accountant, to balance your household’s tax responsibilities as effectively as possible.
You want financial peace of mind. Don’t we all? An advisor will give you an external perspective on how you’re managing your money and give you a clear plan of action to follow to protect your assets, secure your financial future and grow your wealth as effectively as possible.
How do I find a financial advisor?
You can seek out a financial advisor in a number of different ways. The easiest place to start is by contacting your bank, as they’ll be able to offer you a financial advisor from within their system. You may be able to get a special deal on the service as an account holder, but it should also be considered that an advisor from your bank is tied to your bank’s products and services, and won’t have flexibility to make you offers beyond that.
Some people have access to a financial advisor through their job as an employee benefit, or might have the opportunity to offset the cost of seeing a professional. If you’re not sure, check with your HR department to see if your employer offers anything similar. Again, this advisor may be limited in the types of products/services they can offer you if they’re linked to a larger financial institution, but if you can access their services for free (or at a very low cost), it’s absolutely worth taking advantage of it.
If neither of those options appeal to you, you’ll need to come up with a list of potential advisors from other sources. A great place to start is by asking your local friends and family if they have an advisor they like. If they don’t, a simple online search will highlight advisors in your area that might meet your needs. Read through online reviews from others who may have used their services, and try to contact a few different advisors to get a feel for what’s available.
It’s important to note that finding a financial advisor that suits your needs may not be easy. Much like all other professional services, you’re going to develop somewhat of a close relationship with your advisor, so you’ll want to find one that you feel comfortable sharing with. You also may have specific needs or considerations that specialized advisors can help you with, such as if you run a small business and have a corporation to consider. Or, a woman with young children may prefer seeing a female financial advisor, as they’ll be more likely to understand the emotions and motivating factors that are going to define that woman’s financial needs.
How much does seeing a financial advisor cost?
There are a variety of ways that financial advisors charge for their services, so it’s always important to ask your advisor to be upfront about all the costs you may incur as their client. Some advisors will charge a fee based on your total assets, usually around 1-2% of the total you possess. You may find others who will charge you a flat rate to create a financial plan for you, which on average, would cost you somewhere between $1000-$3000 depending on the complexity of your portfolio. Others may charge you an hourly rate, which would likely fall within the range of $200-$400 per hour.
How do I know if a financial advisor is acting in my best interest?
Some financial advisors have a fiduciary duty to their clients, meaning they have a legal obligation to act in your best interest. Clients, by nature of the service, must place a great deal of trust in their financial advisor to serve them as best they can when they give them access to their assets and their personal, financial information. However, not all designations that fall under the umbrella of “financial advisor” have a fiduciary duty in Canada. For example, in Ontario, many advisors must simply act in a way that demonstrates duty-of-care, meaning the advisor must act “fairly, honestly, and in good faith”. As such, it’s important to be vigilant when it comes critically analyzing your advisor’s suggestions.
In order to prevent having a negative experience with an advisor, remember that your advisor is working for you (not the other way around). They should be able to clearly answer any question you have for them, and you should be asking lots of questions! If an advisor can’t definitively explain to you why they’ve invested in a certain way on your behalf or why you’re being charged a certain fee every time they invest for you, that should raise a red flag. Be wary for potential conflicts of interest, and keep your eyes on any kinds of the amount of fees you’re paying for investing-related actions.
To be clear, if an investment made by your advisor on your behalf loses money, that doesn’t immediately translate to them breaching their contract. As long as they made that investment from the point of understanding in which they genuinely believed it would be profitable for you, they have not acted outside their duty of care.
Is there anything else I need to know?
Most people wouldn’t attempt to give themselves medical care in place of going to a hospital, or represent themselves in court instead of hiring a lawyer. A financial advisor represents the same thing, except with your wealth. Unless you’re pursuing financial education fervently on the side of your full-time job or you already work in financial services, a financial advisor is going to be able to help you create a much more logical, effective and comprehensive plan for your life than you can create for yourself.
If you’re an adult in charge of your own finances, you would benefit from getting some professional financial advice (it’s as simple as that!). It’s fair to be wary of the cost of seeing an advisor, as we know that not everyone has a few hundred dollars in disposable income to put towards seeing an advisor on a regular basis. However, when you compare the cost of seeing an advisor with the potential tax savings and investment earnings you’ll accrue over the course of your financial plan, you are likely to gain way more over time than you’ll pay in direct costs.
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