Finding a Financial Adviser

From finiki

Jump to: navigation, search

Introduction

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-to-100 life 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]

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. 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.