Evaluating Your Financial Advisor

Ultimately everyone is responsible for their own financial well-being.  If you are one of the many individuals who choose not to take an active role in their finances for lack of time or interest, it’s important to acquire enough knowledge to determine whether the advisor you have entrusted is doing – at a very minimum – an acceptable job.

Many investors work with one or more of the following:  investment advisor, stockbroker, financial planner, mutual fund agent, or insurance agent.  Other individuals may have investment accounts with a chartered bank, credit union, or trust company.  Regardless of the advisors that are handling your investments, it is important to periodically evaluate the service you’re receiving and the performance of your investments.  Many people are unaware of the services that some investment advisors provide outside of investment selection.


How do you monitor the performance of your investments?  Unfortunately the tide of the market often affects investors’ opinions of their advisor.  One of the most widely used equity indices in Canada is the S&P/TSX Composite Index.  The Dow Jones, Nasdaq, and S&P 500 are also popular U.S. indices.

The single biggest factor that determines investment returns is asset allocation (percentage of cash, fixed income and equities).  The most common type of equity is common stock.  Stocks are exposed to the fluctuations in the indices noted above.  Fixed income investments such as guaranteed investment certificates, or bonds often provide investors with more assurance regarding the return of their capital and the income that they will be receiving.  Each investor should decide how much risk they are willing to take.

Risk Assessment

Do you have an idea of how your portfolio is structured from a risk standpoint?  What is your percentage of cash, fixed income and equities?  What is the quality of your equities?  Let’s look at an illustration of a typical investor with $200,000 and an asset mix of 30 per cent cash/fixed income and 70 per cent Canadian equities.  If we know that the fixed income investments earned four per cent last year then we can easily calculate that portion to be $2,400 ($200,000 x .30 x .04).  For 2005 the S&P / TSX Composite Index returned 24.13 per cent.  Provided the investor had investments that were similar to those in the index, the equity return would be $33,782 ($200,000 x .70 x .2413).  As a reasonability test, the combined portfolio should have earned approximately of $36,182 (18.09 per cent) less commissions and/or fees.

Using the same information from above, an investor with 100% guaranteed investment certificates earning four percent should not expect to earn more than four percent.  Investors that have taken the risk and have 100 per cent equities should have seen some reward last year for the risk they have taken.  Certainly some foreign markets did not fair as well as Canadian markets in 2005 and should be factored in if a portion of your equities were outside of Canada.  Individuals will also need to look at their individual equities to see the risk profile of their portfolio.

Other Services

A characteristic that should be admired in financial advisors today is the ability to communicate effectively and provide services beyond basic trade execution.  An advisor should have the expertise to deal with an increasingly complex financial and regulatory system.  The value added component is when your advisor is able to identify issues that should be proactively addressed.  Unless you speak with your advisor about issues that arise it may be difficult for your advisor to be proactive in providing you the best advice.  In many cases your financial advisor may not have the expertise to assist in all questions; however, they should have the knowledge to guide you in the right direction.

Over the 2005 fiscal year, did your financial advisor:

  • Review your plan at least once to ensure that the overall strategy is on track?
  • Discuss your asset mix to see if you were still comfortable with the amount of risk you were taking?
  • Incorporate any new personal information into your financial plan?
  • Provide you with regular updates on how your investment portfolio is performing?
  • Make themselves available to answer all of your questions or address your concerns?
  • Provide you with information to complete your taxes?

Over the 2005 fiscal year, did you:

  • Review the investment recommendations provided by your financial advisor?
  • Keep your financial advisor up-to-date on any changes to your personal situation?
  • Notify them when you could not be contacted (i.e. holidays)?
  • Review the performance of your investments?
  • Review your asset mix and discuss any concerns with your advisor?

Investors should periodically look at their asset allocation and returns over a period of time.  If you compare this information to the appropriate benchmark indices then you will be able to monitor the relative performance of your financial advisor.   We encourage those investors that have not spoken with their advisor recently to book a meeting to review their accounts.  Taking an active part in your finances may be one of the smartest investment decisions you will make.

Advisor choice not easy

Selecting a Financial Advisor

Choosing a financial institution and advisor has become an increasingly difficult decision for many individuals to make.  Finding the right advisor was not always this complicated.  Prior to the deregulation of the financial services industry in the early eighties, there were four distinct business units: banking, trusts, insurance and investment dealers.

Today, each of these business units may offer multiple services overlapping into the other pillars – the clear distinction is gone.  Adding to the complexity is the sheer growth in the number of investment dealers and advisors.  Spending the time to find the right financial advisor based on your needs may be one of the most important investment decisions you will make.

We recommend that individuals looking for a financial advisor visit at least three different financial institutions.  The more time that you spend at this stage the more likely you will find an advisor that is most suitable for you.  When you meet with each advisor, we suggest that you are prepared with a list of questions.  By obtaining answers to these questions from at least three advisors, you can make a better comparison.

The following are suggested questions that you may want to ask a financial advisor before entering into a relationship:

Experience / Education

  • What is your educational background?
  • What professional designations do you have?
  • How long have you been in the financial services industry?
  • When do you plan to retire?
  • Are you licensed as a securities dealer?
  • Are you licensed as a mutual fund dealer?
  • Are you licensed to sell insurance products?

Service Overview

  • How many clients do you have?
  • Do you have a minimum account size?
  • How often do you contact your clients?
  • Do you have support staff?
  • What are the types of services you provide?
  • What makes your service offering unique?
  • Do you work with other professionals, such as lawyers and accountants?

Investment Process

  • What is your investment selection process?
  • Do you sell proprietary products?
  • What type of products do you primarily sell (i.e. individual equities, mutual funds, bonds)?
  • Are there any restrictions on the types of investments you may offer?
  • How liquid are the investments you are recommending?
  • How do you monitor the investments?


  • How is the firm compensated?
  • What are the fees to sell and buy the investments you recommend?
  • What portion of the fee paid to the firm is paid to you as the advisor?
  • Do you offer fee-based options?
  • Do you offer managed accounts?
  • Do you offer commission only accounts?


  • Do you have clients willing to speak with me about your services?
  • Do you have professionals that may be willing to speak with me about your services?
  • Have you ever had a complaint filed against you with the BC Securities Commission, IDA or any other professional or regulatory body?
  • Have you ever been disciplined by a professional or regulatory body?

We recommend that you call any references provided and that you visit the BC Securities Commission website at www.bcsc.bc.ca.  For a nominal fee you can conduct a background check through the website and search for any disciplinary action since 1987.

The decision to select the right financial advisor is an important one.  Doing your due diligence could prevent an unfavourable outcome.

Diversification a key component

The words diversification and investments go hand-in-hand.  The term diversification generally refers to owning a number of different investments.  Investors should generally diversify by asset class, sector, geography and capitalization.   Some investors may feel they are diversifying their holdings by having investment accounts at several financial institutions.

In our opinion, diversifying between financial institutions is not necessary.  The following are a few benefits of consolidating your investments with one advisor:

Asset Mix

The most important component of investment performance is asset mix.  Consolidation can help you manage your asset mix and ensure that you have not duplicated your holdings and are therefore, not overexposed in one sector.   Unless your financial advisors have been given a copy of all of your investment portfolios, it will be difficult for them to get a clear picture of your total holdings.  Even if you were able to periodically provide a summary of each account to each advisor, as transactions occur you would still need to update every advisor with those changes.


Most firms provide access to view your investments online.  If you have accounts at different institutions, then you will need to get online access from each. It is unlikely that you will be able to transfer funds between these institutions online.

Tax Receipts

If you hold non-registered investment accounts at several institutions, you will receive multiple tax receipts.  By consolidating your accounts, you will receive a limited number of reporting slips for income tax each year.  Reducing the number of tax receipts may also reduce the amount of time your accountant will spend completing your tax return.

Managing Cash Flow

Projected income reports from different institutions will be presented in various formats and at different points in time.  For you to obtain a complete picture of your financial situation, you will have to manually calculate the total income from your investments.  In situations where you have instructed your financial institution to pay income directly from an investment account to your banking account, it becomes more complicated to manage when there are multiple investment accounts.

Estate Planning

A couple of weeks ago we highlighted the benefits of registering your physical share certificates in a nominee account.  Another helpful estate planning measure is to reduce the number of investment accounts and bank accounts.  Having your investments in one location will certainly simplify estate planning and the administration of your estate.

Monitoring Performance

Some investors may be comparing the performance of one firm/advisor to another.  Investors should be careful when doing this to ensure they are really comparing apples to apples.  One investment account may have GICs while another may have 100% equities, in which case we would expect the returns to be different.  It is easier to understand how all of your investments are performing when you receive a consolidated report.

Conversion of Accounts

If you have multiple RRSP accounts and are turning 69 next year you may want to consider consolidating now and discussing your income needs with an advisor that you trust.

Account Types

Fee-based accounts are usually suitable for a household that has total investment assets of $100,000 or more at one institution.  Consolidating allows these types of accounts to be an additional option.  As your account value grows, the fees as a percentage may decline in a fee based or managed account.

Other Benefits

When individuals have all of their registered and non-registered investments in one location an advisor may be able to fund RRSP contributions through in-kind contributions.  Your advisor may also be able to swap investments between accounts to improve the overall structure from a cash flow and tax efficiency standpoint.

Building Relationships

Building trust between advisors and their clients goes both ways.  Clients want their advisor to have the expertise and ethics to do what is in their best interest.  Advisors want to be able to trust their clients and ensure that the effort they are dedicating is appreciated.

As you’re looking through all your individual account statements you may want to give some thought to the level of service you’re currently receiving.  If you are happy with one of your advisors, the best compliment you can give is to consolidate your investment accounts with them and this will provide you with all the benefits described above.

The value of knowledge

Do you need a Financial Advisor?

There used to be a time when investors who wanted to purchase stocks and mutual funds had only one way to go – through a financial advisor.  But since 1984, when Toronto Dominion launched its discount brokerage services have appeared allowing individuals to choose to continue working with an advisor or execute trades themselves by phone or online.

Many investors are unclear about what financial advisors do and how they are compensated.  This is understandable as every advisor has a different skill set and offers various services.  Spending some time this spring to understand the services and options available may provide clarity on the benefits of working with an advisor.

The decision for some investors to do their own finances may come down to wanting to save money.  Another reason may be that individuals feel that it is easy to take control of their own investments.  These individuals may also be unaware of the services offered by financial advisors.  The more time you dedicate to your financial needs the more likely you are to realize the benefits of working with a qualified financial advisor.

Is It Too Expensive?

When fees are charged on a per transaction basis, the value of the service is directly linked to the cost of the trade.  Unlike an accountant or lawyer that charge a fee based on time, financial advisors historically have charged on a transactional basis.  The premise being, the more trades you are doing, the more work the financial advisor is doing on your behalf.  This is only partially true as the majority of the services that many financial advisors provide are not billed in this traditional way.  The industry solution to this issue was to develop a fee-based platform.  Fee-based advisory services are charged a flat fee that is based on your total investment assets – these types of accounts provides free trades up to a reasonable limit.  This places the focus on all of the services provided by the financial advisor including transactional costs.  This also highlights the other services that financial advisors do, such as structuring your total finances in a way that saves you money.

Past Experience

Some individuals may have received poor advice from an advisor in the past leading them to question why they are paying fees when they may not perceive value in return.  In these cases, we encourage investors to consider the following:  How much effort did you put in to finding the best financial advisor?  Did you stay the course when things got volatile?  Did you take unnecessary risks?  Did you have a plan?

Easy to Do Yourself

A discount brokerage representative does not provide advice on individual investments or offer other value added services that an advisor does.  Some discount brokerage firms are beginning to provide their clients with limited access to research.  Will you have the time to read through research reports and understand the financial jargon?  Are you able to develop a diversified portfolio that optimizes returns while minimizing risk?  Financial markets have become more complicated and staying on top of all the changes and financial news is more than a full time job.

Taking Out Emotion

Removing the emotions from buy and sell decisions is important.  All too often when individuals are making their own investment decisions, they are based on emotions such as anxiety about not being in the markets, or being nervous about overexposure in the markets.  An advisor can offer guidance having experienced several market cycles.

Limited Time

Many savvy investors use the services of a financial advisor.  Having a trusted advisor to discuss your total financial picture with can give you more assurance that the decisions being made are the correct ones.  Individuals that are busy at work often have limited time to attend to financial affairs.  Others may want to enjoy retirement without the daily work of monitoring their investments.  Regardless of the individual’s stage in life, they can be comforted by having an advisor that knows about their personal situation.

Other Services

There are many things that some advisors do for clients that can easily go unnoticed.  An investor that gets fixated on the cost of a single trade may decide that doing trades themselves through the internet is a prudent move.  What is the big picture here?  Is it time to cut corners when it comes to your finances?  What is the value lost by not having an advisor on your side to help you achieve your goals?  A simple strategy recommended by your advisor may increase returns, reduce risk, save taxes, and simplify your life.  An advisor can provide clarity when you receive conflicting advice from friends and family.

A trusted financial advisor is dedicated to keeping up-to-date on regulatory changes and financial news.  Financial advisors have resources and a network of professionals that provide solutions to the most complex of financial questions.  Most individuals are more likely to achieve their financial goals if they work with a knowledgeable advisor.