Can you trust your financial adviser?

February 26 2009 by Ellen Roseman

Financial advisers are getting no respect from clients these days. Instead, they’re getting hostility from clients whose portfolio values have crumbled.

This year, their phones are still ringing off the hook – but instead of calling to invest money, many clients are calling to complain.

That’s from a Globe and Mail story earlier this week. It attracted more than 200 online comments, many hostile.

It’s natural that people question the value of advice when they lose money. But what’s troubling some clients is the size of their losses. They feel their advisers didn’t build a portfolio that was diversified enough to withstand a bear market.

My Sunday series on investment advisers has a few more weeks to run and I’m also getting lots of online comments, plus some heartfelt letters from readers. I’ve posted some below.

Here’s a question. What do you think can be done to improve the quality of investment advice given to Canadians? What can be done to make salespeople more trustworthy?

25 comments

  1. brad

    Feb 26 2009

    I think much of it boils down to the challenge of financial advisors getting an accurate idea of their clients’ tolerance for risk and their understanding of how long-term investments work. People might say they can tolerate risk in the abstract, but it often takes a downturn in the market to reveal exactly how risk-tolerant they really are.

    If someone is looking for steady growth, as opposed to the dynamic growth that occurs in the stock market, then I think financial advisors have to build them a balanced portfolio that can achieve that. And they have to explain that in accepting a more conservative portfolio they run risks in the other direction: that inflation may outpace growth in their portfolio’s value over the long term.

  2. Charles in Vancouver

    Feb 26 2009

    MK: Wow, putting an 83-year-old into a seg fund for their RRIF? That’s a pretty egregious example of an unsuitable product. If she passes away it might trigger the principal guarantee but, of course, you don’t want to bank on this possibility!

    Regarding the guaranteed amount and the RRIF redemption requirement: What she could do is withdraw the seg fund units from her RRIF in-kind rather than redeem them for cash, to meet the minimum withdrawal requirement. This would require her to pay the withholding taxes from an external source. But the advantage would be that she doesn’t have to liquidate units that carry a principal guarantee. Even with the MER eating into the return, getting to cash out the principal guarantee down the road is likely to get way more money back than liquidating now.

  3. Ernie

    Feb 26 2009

    I think there are two main problems here. One is that ‘financial advisors’ who sell their own company’s products are completely untrustworthy. I would only ever get help from a flat-fee advisor.

    But the bigger problem, and I realize this sounds harsh, is that people are simply ignorant about finances and investing. Someone who would haggle for hours over a five dollar shirt in Mexico doesn’t have the basic knowledge to understand transactions in the thousands of dollars. I find this appalling.

  4. Lior

    Feb 27 2009

    I think that people need to educate themselves when it comes to investments. Don’t just hand over your money or portion of it blindly to a financial adviser without having a concise understanding of your goals, risk tolerance, and the type of investments it takes to get you there.

    Even more so, people have to understand that investing in the markets is a risk. There’s always a potential for loss, sometimes a heavy loss, when the markets tank. Calling your adviser and yelling at them is not going to rectify anything. We’re in a recession where virtually every sector of the economy is affected one way or another.

    There are people out there, whether it’s your next door neighbour, your adviser, and even the media, who like to rave about how to invest in sectors that have been unscathed only to have a few weeks pass by and then we hear about losses in that sector as well. To some extent, all the media sensationalism surrounding the current economic situation has been a good source of information for investors, but I think is causing a great deal of confusion for those who are less experienced. As long as you are properly diversified, as long as your portfolio is optimized for your risk tolerance, and as long as you do your homework and understand what sectors are more prone to losses than others at the moment, stay the course and you will fare well in the long term.

    People who are currently about to retire or are in retirement, I can only hope you’ve invested wisely and that your portfolio assets are allocated properly. As long as this was done years before you started living off your retirement income, you should be ok. On the other hand, if you did not allocate your portfolio in accordance to your retirement and your financial needs to fund your retirement, there’s really nothing you can do now that will make up for it and provide an instant fix.

  5. Canadian Tax Blogger

    Feb 28 2009

    Investment advisors are commission sales people: They are paid to sell you an investment. This causes a fundamental conflict between the advisor and the client and can lead advisors to make recommendations when they are not appropriate.

    In my opinion, the conflict is what it is. The IIROC conducts audits on the compliance with regulations and while not perfect, the system works fairly well.

    The real problem is with supervision. Often the supervisor’s or branch manager’s compensation is tied to the profit of the branch and there’s an incentive to “overlook” questionable activities.

    Firms need to have a separation of supervision and branch management. The branch manager compliance function needs to be kept apart from the sales function.

  6. Anon

    Mar 1 2009

    Ellen, your question about how to improve the quality of advice being provided to Canadians is a challenging one. Unfortunately, there is some split responsibility here.

    First, the industry has to do a better job of separating advice and sales. Virtually every other advice-giving profession in Canada separates advice from implementation. Think of your doctor – he/she gives you a prescription, but you can have it filled at any pharmacy you want. Unfortunately, Canadians don’t want to pay for advice, so advisors make commissions on sales to pay for their time and effort. If your doctor made a commission on writing prescriptions, wouldn’t you be skeptical of their advice?

    Which brings us to the other point: Why are Canadians not more skeptical of their advisors? To a lesser but certain degree, Canadians have to also point the finger at themselves. You can get great unbiased advice from a well-educated, experience planner, but it will cost you more than you are probably willing to pay.

    PB has quoted somebody from the Globe and Mail comment forum who hits it bang-on: “As an MBA, CMA, CFP and CFA, and as someone who has provided financial advice for almost 20 years, I can say unequivocally that there are almost no financial advisors out there who have enough knowledge to give out appropriate financial advice.”

    By blurring the lines between advice and sales, Canadian suffer.

  7. West Coast FP

    Mar 1 2009

    One thing that might go a long way to help regulate the Investment Industry is full disclosure of fees.

    There are many different ways to be charged for purchasing investments. For investors who buy mutual funds it is imperative to stay away from DSC or “deferred sales charge” funds.

    A DSC is a commission paid to the advisor to sell a product. Generally it is about 5% to 7% with a .50% yearly kickback to keep you in the product. Because the fund company has paid a large upfront commission to the advisor it needs to lock you into the fund in order to recoup its expenses. They do this by charging “you” not the advisor if you need to redeem funds or change fund companies. This redemption fee is on a declining scale usually about 7% in year one, declining to 0% over 7 years. If your circumstances change, the fund performs poorly, you need to move and want to change advisors etc… you will have to cough up the dough to escape, not the advisor.

    Advisors who sell on a DSCs basis usually do so with trickery. Phrases like, “if you remain invested for the long term there are no fees, or “this mutual fund has no fee” are common ways to semi-disclose DSC fees while ensuring you do not understand what you are paying for. Would any reasonable person pay their advisor 5% or 7% upfront to lock them into a product when the same product with no upfront fee is available?

    Why do advisors and companies do this? Most advisors are struggling to fund their lifestyle and the large upfront commission help to keep them in cufflinks. The companies like the revenue stream and the locking in of customers. Plus, an advisor who locks in a customer has more time to prospect for new clients. Who cares if the customer calls? The advisor already got paid.

    The worst companies for DSC funds are Investors Group and Edward Jones. I believe it is a company policy for them to charge DSCs.

    The most insidious sales practice is “DSC churning.” Here an advisor switches you into a new fund without waiting for your redemption charges to expire. In this way he can charge you a full 7% commission every few years. Meanwhile you are paying a redemption fee, which might be 5% after two years. This can deplete your funds fast!

    The big banks generally do not have DSC fees. They have “no load” or no upfront commission funds. The fund will pay a higher 1% trailer or kickback to the advisor for continued advice, though. This method of sales is much preferred as you can make changes at any time. But, make sure you are in communication with your advisor as you are paying him for advice and support.

    My advice to the industry is that we include a full disclosure clause for DSC products. For example, “you have chosen to pay me a 7% upfront fee to lock you into this product. If your circumstances change and you want to get out you will have to pay onerous redemption charges. There is absolutely no reason, other than helping me to pay by BMW lease, why you would choose this option when there is a no upfront fee option available.”

    I’m out like insidious sales practices….

    West Coast FP

  8. Anon

    Mar 2 2009

    West Coast FP is a perfect example of why there is so much confusion about the financial advisory community and financial products in general.

    A little bit of knowledge is a dangerous thing. Get your facts straight so you can add valuable insight, instead of perpetuating the half-truths that surround the industry.

  9. Lior

    Mar 3 2009

    Anon: you don’t have to invest in such funds. You can start a simple portfolio with low-cost index funds. That way you stay invested in the entire market and you keep fees to a minimum.

    It has been proven over and over that the majority of mutual funds out there don’t have any kind of “magic” when it comes to generating more lucrative returns than low-cost index funds.

    Many mutual funds in Canada are way more expensive than in the US and the companies that run the funds rely heavily on business from financial advisers, to whom they pay lovely commissions and trailers. The fund company makes money, the adviser makes money, but when it’s all said and done, do YOU make money?

    After all the fees are paid and inflation is taken into account, just how big is your return? 🙂

  10. Adrian Kidd

    Mar 7 2009

    Would anyone be interested in buying a guide to be your own financial adviser? I met this guy who is anti-advisers and the charge for the guide is £47 and you can save £30,000 or more by doing things yourself.

  11. Carol-Ann

    Feb 6 2010

    I’ve lost a lot of money also…got out recently with enough to sustain myself until OAP kicks in. Not a pretty picture.

    If I had to do it again, I would educate myself to invest it myself. I would not depend on a “so called” adviser. It’s a crock.

    If you want to retire, do it yourself. Educate yourself…take responsibility back. LEARNED THE HARD WAY.

  12. B Nash

    Feb 13 2010

    I’ve been reading through some of the comments on this site and it truly saddens me to see so many cases of advisors and financial reps not being proactive and aggressive in caring for their clients.

    Unfortunately, the financial industry is like any other in that there are some really great advisors out there and some not so great. (Just like plumbers, carpenters, etc.)

    Here is a suggestion from a financial representative on finding yourself a good advisor/representative.

    Referrals from people you know is the BEST way. This way there is a track record for you to base your decision on. If your friend/relative is happy with their rep and feel he/she is attentive and on the ball…it’s a good bet they’ll work hard for you too.

    Ask an advisor how long they’ve been in the industry, what training did they do/get (the minimum or is their company proactive about ongoing training?)

    How often does the advisor call to keep up with financial events in your life? They should be in touch with you a minimum of twice a year and even better…every quarter, just to touch base and maintain your relationship.

    How quickly does your rep return your phone calls? Common courtesy and good business practice is by the end of day or at latest by end of then next day. Even if it’s a quick call to acknowledge you and explain a full schedule but will set a time as soon as possible.

    Does your advisor take the time to teach you how a mutual fund works, what is dollar cost averaging, how does a down market affect you and the basics of investing. If your advisor simply wants to throw you in a fund without teaching you anything…not a good sign.

    You do not need to be in 15-45 different funds!! Diversity is good but this is unnecessary and just confusing. 2-3 well thought out and researched funds are sufficient to do the job! Depending on your situation timeline and goals the rep should make this an easy thing for you to monitor and understand. KISS principle, people.

    If your rep will not ensure you understand what it is you are investing in and why. Look for another advisor.

    These are some suggestions for people who are looking for an advisor or want to change their present one. I hope this helps a bit and would like to say that although I know there are reps out there that are more interested in their own commission than their clients portfolio but there are some of us that do this job because we really care and want to help people with such important decisions. Customer service has to the highest priority because if you do that…you will succeed in meeting your clients needs every time.

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