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What to expect, and not expect, from a financial advisor

Dale Jackson

When markets are up, people tend to love their financial advisors. When markets are down, they tend to question their merits. The fact is - financial advisors have little control over your investment portfolio despite what some may try to make you think. The good ones can only expect to maximize returns in good times and limit losses in bad times.

To clear the air, here are a few things you should expect, and not expect, from a good financial advisor:

What to expect

  • Qualified: You might be surprised to learn that except in Quebec, there are no rules regulating who can call themselves financial or investment advisors. Look for a nationally recognized designation such as Certified Financial Planner (CFP), Registered Financial Planner (RFP) or Personal Financial Planner (PFP). Independent industry organizations such as The Financial Planning Standards Council, The Institute of Advanced Financial Planners and Advocis provide membership databases on their websites.Be careful to distinguish between a financial planner and a mutual fund salesperson who only sells mutual funds from one company. A good financial planner has access to a vast array of investment products that grows as your portfolio becomes more sophisticated.

  • Risk management: A good financial advisor will help you put together a good mix of investments with two objectives - growth and wealth preservation. Wealth is preserved by indentifying and limiting the sort of risk that could impede growth. In other words, holding on to what you have.

  • Personalized strategy: Financial advisors are bound to what is called the 'know your client rule' which prohibits them from making trades that are inconsistent with your investment objectives. That means they must get to know your personal financial goals and the amount of risk you're prepared to take on.

  • Ongoing advice: In most cases financial advisors are compensated annually through fees the investor pays based on a percentage of the amount invested through them. That means you are entitled to ongoing advice if you have any questions or concerns.

  • Current information and research: Many financial advisors are affiliated with larger investment firms with research departments that have access to the latest market information. That doesn't necessarily mean they're the smartest. A good financial advisor is in tune with the latest economic developments, market trends and government policy — things that effect your investments.

  • Fee disclosure: How financial advisors get paid varies but they must disclose how they are compensated. The most common method is through a mutual fund company in the form of a load when a fund is purchased or sold, or an annual trailer fee. Both fees are based on a percentage of the amount invested, which will eat into your total return.Some financial advisors charge a flat fee — normally in the one to two per cent range - based on a percentage of total assets invested through them. Clients could expect the fee to drop as assets grow.

    Other advisors charge a flat hourly fee or work on a salary from a financial institution. In some cases financial advisors are compensated through all or a combination of some of the methods mentioned.

What not to expect

  • Guaranteed returns: Financial advisors cannot promise equity returns of any proportion. Anyone who promises an investment will double is either lying or crooked. If an investment has already had a steep climb they are required to inform the client that past returns are no indication of future returns.

  • Exclusive information: Be wary of advisors who know a guy who knows a guy. Investors will sometimes give more credence to information obtained through mysterious channels than official public disclosure methods. Those methods for public disclosure were devised to force the originators of information to be accountable.

  • Mind reading: Don't assume your financial advisor understands your big picture. It's impossible to form a workable investment strategy or balance risk without knowing all the financial components — retirement expectations, risk tolerance and all income sources including home equity, other investment accounts or government and company benefit plans.

  • Time Travel: Once again, financial advisors have as much control over the markets as the weather. If your investments go south with the markets and your financial advisor provided the advice, don't play the blame game and sour long term relations. If you lived up to your end of the relationship you were part of the decision. You can't turn back time.