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.