Financial adviser

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Financial advice can mean a number of things, depending on whom the adviser is. Accountants and lawyers, insurance agents and mutual fund salespeople, stock brokers and financial planners, all offer advice but tailored to very different situations.

While financial advice is not, in itself regulated, the activities of someone who gives advice generally – but not always – fall under the scrutiny of a regulatory body, sometimes a self-regulator such as the provincial and territorial law societies, sometimes a provincial agency such as the pension and insurance superintendent, sometimes a securities commission or the Investment Industry Regulatory Organization of Canada or the Mutual Fund Dealers Association. In addition, some advisers belong to voluntary associations, such as Advocis, the Financial Planners Standards Council and the Institute of Advanced Financial Planners.

Types of financial advice

For small businesses and estate planning, typically a retail investor will seek the advice of an accountant or a lawyer (generally both) to structure arrangements to conform with the Income Tax Act, among other pieces of legislation.

But this provides only the legal framework. To execute a plan for a small business transition, such as a transfer to another owner, or for a bequest from an estate, other financial instruments may be involved, very often insurance.

Insurance need not stop there, of course. A life agent will do a needs analysis to determine what risks an individual should think of covering off: early death, for example, or on the other hand, the prospect of greater life expectancy. In the first instance, a simple term insurance policy may be adequate. In the second, there are various forms of annuities (fixed and variable) that can supply an income for life.

Product sales

As soon as a financial products enter the picture, however, the nature of advice changes. Most financial advisers provide advice as something that is incidental to the sale of a product. They are registrants with either securities or insurance regulators who are required to recommend only those products that match a client's needs.

That requirement enjoins advisers to investigate a client’s circumstances and detail it in a know-your-client form (KYC). KYCs will generally contain information about income, assets, dependants and financial goals.

But remember, the regulatory burden forces the product to be the focus, not the plan. Attempts to regulate the provision of financial advice beyond ascertaining product suitability have fallen afoul of two currents. Stock brokers have insisted that they need to know no more than what’s in the KYC to sell a product; by contrast, organizations that champion planning have decried what they see as standards that would be watered down by securities authorities. It is unlikely that this tension will resolve itself soon.

This, however, is only the regulatory framework. There are advisers who exceed minimum expectations. The puzzle is how to find them. Planning credentials are a useful start.

Credentials and designations

A law degree or accounting certification is helpful, but not sufficient. For one thing, a lawyer or accountant should concentrate on wills, estates, small businesses and so on, rather than be in general practice. For another, products are often too complex for the non-professional to do comprehensive due diligence.

But product specialists still require the help of lawyers and accountants. In a full-service brokerage firm, an adviser will have access to legal, accounting and insurance specialists. Outside that environment, a good adviser will have an established team of professionals to rely on, either through their sponsoring firm or through a network of contacts.

A planning credential indicates a commitment on the part of the adviser to look into the client's total financial situation.

There are three basic ones to look for. The first is the CFP, or certified financial planner. It requires two years work experience, plus, following an approved course of study, a comprehensive examination that covers the “financial planning process, income tax planning, retirement planning, estate planning, investment planning, family law, risk management, general principles including the Code of Ethics, and small business applications in financial planning,” according to the Financial Planners Standards Council (see links below).

The second one is the RFP, or Registered Financial Planner. This is lesser known, but is sometimes a step up from a CFP. It requires three years of work experience, a comprehensive exam, plus the submission of a sample financial plan.

The third one is the CLU, or chartered life underwriter. It is step up from the CFP for advisers interested in estate planning and small business issues – but the CFP is no longer a prerequisite. It also prescribes a course of studies.

Here’s a quick guide to the designations that investors will find when looking at the credentials of investing professionals.[1]

Investing Professional Designations.jpg

Paying for financial advice

Financial advice is often inseparable from paying for a product. Most Canadian financial advisers are compensated for their planning through commissions, either upfront on the sale of a product, or as a trailing commission for as long as the client holds the product.

There are some advisers who are fee-only; you pay for a plan which, depending on its complexity, could cost between $1,000 and $10,000.

Other advisers are fee-based. That means they charge an annual fee based on assets (the value of the managed porfolio, also called "Assets Under Management"). Generally, the more the assets the lower the annual fee.

Finally, there is a hybrid model, where the fee for the plan is charged outside of any fees received for asset management.

There is also a co-operative model, Investors-Aid Co-operative of Canada[2]. Like all cooperatives, it is owned by its members and operated for the benefit of its members.

Finding a financial adviser

To find a financial adviser in their vicinity, many people turn to word-of-mouth from fellow investors for assistance. However, there are several tools available to assist both in the search and in discussions with whoever you consult[3]:

10 Questions to ask your planner

The Financial Planners Standards Council (FPSC) lists some questions you should consider asking your planner[4]. Don't be afraid to ask these and any other questions you feel need a full and open answer. Any professional will welcome them.

  1. What are your qualifications?
  2. What experience do you have?
  3. What services do you offer?
  4. What is your approach to financial planning?
  5. Will you be the only person working with me?
  6. How will I pay for your services?
  7. How much do you typically charge?
  8. Could anyone besides me benefit from your recommendations?
  9. Are you regulated by any organization?
  10. Can I have it in writing?

It is recommended that you review both the questions, as well as FPSC's intention behind each question.

Standards enforcement & consumer complaints

Canadians must be able to trust that their financial planners are working in the best interests of their clients at all times. If you’ve worked with a Certified Financial Planner® professional, you are no doubt aware of the set of standards that guides their conduct, regardless of where or for whom they work. If you are a CFP professional, you know it is adherence to these standards that is the foundation upon which trust is built – trust in you and in your profession.[5]

Effective December 13, 2011, the Standards of Professional Responsibility for CFP® Professionals and FPSC® Registered Candidates | Financial Planning Standards Council ("Standards of Professional Responsibility") define the ethical and professional responsibilities of CFP professionals. It encompasses four sets of standards:

  • FPSC® Code of Ethics
  • FPSC® Rules of Conduct
  • FPSC® Fitness Standards
  • FPSC® Financial Planning Practice Standards

Prior to the release of the Standards of Professional Responsibility, CFP professionals were governed by the provisions of the CFP Code of Ethics and the CFP Financial Planning Practice Standards. Depending upon when your CFP professional was certified, and/or the time of the alleged misconduct, these documents may continue to apply.

To lodge a complaint with FPSC against a CFP professional, you should read How to Lodge a Complaint with FPSC | Financial Planning Standards Council, which provides information on how to submit a complaint, including information on the required documentation and the steps taken by FPSC once it receives a formal complaint. You can also submit a complaint through our secure online reporting service. Only submissions expressing concerns about individuals who hold Certified Financial Planner® certification, are accepted by FPSC. Disciplinary Rules and Procedures details the Disciplinary Rules and Procedures (the "Procedures") guide how FPSC conducts investigations and hearings. Reports are available on current and past Disciplinary Actions.

Lastly, Other Enforcement Bodies lists other organizations and regulatory bodies to whom complaints regarding the conduct of financial advisors may be lodged.

References

  1. Rob Carrick, Globe Investor Investment Ideas. Learning what those fancy letters mean to your financial future, viewed May 29, 2009
  2. Investors-Aid Cooperative of Canada, Canada's Consumer Investment Site, viewed Oct. 13, 2009
  3. Financial Wisdom Forum, Contact a Professional, viewed Feb. 19, 2009
  4. Financial Planners Standards Council (FPSC). 10 Questions to ask your Planner, viewed November 29, 2012.
  5. Complaints & Enforcement | Financial Planning Standards Council, viewed November 29, 2012.