Financial advisor

A financial advisor is a term that can be applied to anybody who helps you manage your money. Financial advice can mean a number of things, depending on whom the advisor is. Accountants and lawyers, insurance agents and mutual fund salespeople, stock brokers, portfolio managers and financial planners, all offer advice but tailored to very different situations. According to a large national survey, 42% of Canadians have a financial advisor; among investors, the figure is 76% of "frequent investors" (those who invest quarterly or more often) and 65% of "non-frequent" investors.

After briefly exploring who needs a financial advisor, this article first looks at the distinction between advisor (O) and adviser (E), then dives into advisor registration and duty of care, applicable for those selling financial products. The article then presents the different types of advice you may require (or not) at different stages in life, such as basic personal finance, financial planning, or portfolio management. It then discusses different compensation models and explores the different credentials and designations available to advisors.

Who needs an advisor?
Some people seem better at managing their own money than others. If you feel you need help with that, there is no shame in consulting (and paying fairly) a professional, just make sure that you understand the types of advisors that exist, the standards of care, the different compensation models, the possible conflicts of interest, etc. as outlined in this article.

There may be a link between people's ability to manage their finances and their personalities. For example, a small US study linked the "big five" personality traits (the most commonly used system categorizing personality traits in psychological research) with four financial outcomes: financial literacy, financial risk tolerance, income, and net worth. The study found that "16 out of a possible 20 personality–financial-outcome relationships were significant". Free self-assessment questionaires are available online by searching for "Big Five personality test". Scoring high on neuroticism (the opposite of emotional stability) and/or scoring low on conscientiousness (often summed up as hard work and discipline) is associated with a lower net worth than average, and also with a lower financial literacy. People with such personality traits might therefore benefit the most from using a financial advisor.

Adviser vs Advisor?
In Canada, there is a difference between a financial advisor and a financial adviser, beyond British versus US spelling. From the Canadian Securities Administrators (CSA)'s point of view, advisor, with an 'o', is an unregulated title. Adviser, with an 'e', is a legal term used in securities legislation and means a person registered with provincial regulators in the "advising representative" category (see "Registration" below).

Anyone can be an "advisor", with an 'o', and financial advice on its own is not regulated. The sale of financial products however is regulated, and firms and individuals wanting to sell such products must register with provincial securities regulators, as explained in the next section. The rest of this article uses advisor, with an 'o', with the implication that is is a broad colloquial term with no legal definition:

Registration
Regulators rightly stress the importance of checking to see that your financial advisor is registered before buying any investment products. This is a way to prevent fraud or scams. You can check registration using the Canadian Securities Administrators (CSA)'s National Registration Search. But it’s not enough to be registered, it’s important to see what they are actually registered to do.

Dealing representative
According to the Small Investor Protection Association, about 96% of 'advisors' are registered as a "dealing representative". The CSA's definition of this category is "A person that buys or sells investment products on your behalf based on your instructions. What they can sell or buy depends on the registration category of the firm that employs them."

For example, if the dealing representative works for a "Mutual Fund Dealer", then (s)he is a mutual funds salesperson. Mutual Fund Dealers must be a member of, and follow the rules of, the Mutual Fund Dealers Association of Canada (MFDA).

If the dealing representative works for an Investment Dealer, (s)he can offer of broader range of products (stocks, bonds, mutual funds, ETFs, etc.). Investment Dealers must be a member of, and follow the rules of, the Investment Industry Regulatory Organization of Canada (IIROC).

Advising representative
Another, much rarer, individual registration category is "Advising Representative". CSA's definition of that category is "A person who provides advice on investment products. They can manage your investment portfolio according to your instructions. They can also make decisions and trades on your behalf. Advising Representatives are employed by Portfolio Managers." They also supervise the work of persons registered as "Associate Advising Representatives".

Standard of care
The standard of care for clients depends on the registration category and on the relationship between the advisor and the client. The two main concepts here are the suitability standard versus the fiduciary standard.

Suitability standard
A suitability standard applies to dealing representatives such as:
 * mutual fund dealers
 * some IIROC members

Regulators require that advisors recommend only those products that match a client's needs. That requirement enjoins advisors to investigate a client’s circumstances and detail it in a know-your-client form (KYC). KYCs will generally contain information about income, assets, dependents and financial goals. KYC rules are related to a suitability requirement, which means that "each order or recommendation must be in keeping with the client’s KYC information". For example, buying a high-MER actively managed mutual fund covering Canadian equities might be considered a 'suitable' investment, since it matches the client objectives, circumstances and risk tolerance. The advisor selling this product may get a large commission (including a trailing commission), embedded in the product's MER. While that recommendation may have been legally 'suitable' from the regulators' point-of-view, it was perhaps not in the client's best interest, since there are products with much lower fees out there, which will allow the client to keep more of her money working towards her goals. However, less expensive products typically do not return commissions to advisors recommending them.

Other commonly cited examples advisors not necessarily putting the clients best interest first are (i) recommending that the client commute their pension to invest in mutual funds, or (ii) recommending that the client borrow to invest.

Cost disclosure has been recently improved in Canada. Roseman writes that "there's now a requirement to list all fund fees in a plain-language document" but that "under Canada’s still-weak rules, mutual fund sellers are free to recommend products that offer them the most compensation. They do not have a legal duty to put the client’s interests first".

Is change coming?
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.

In 2019, the Canadian Securities Administrators announced the Client Focused Reforms initiative, a "new national standards governing the relationship between clients and financial advisors". However, according to some investor advocates, the new standards are still mostly about suitability of products, rather than setting a "overarching, across-the-board best interest standard". Others believe that although there is "no overarching best interest standard ... the CSA has put considerable effort into trying to achieve a similar outcome".

Fiduciary standard
A fiduciary standard means that an advisor must always act in the client best interests. At the moment, it seems to apply most clearly where the client gives discretionary trading authority to the advisor. In a CSA consultation document, this fiduciary duty in relation with accounts where there is discretionary trading authority is presented as a "ad hoc common law" duty, rather than a statutory duty, except in four common law provinces and Quebec. Thus a fiduciary standard would seem to apply to:
 * advising representatives
 * IIROC members with the "portfolio manager" approval category

You can check if an IIORC member has the "portfolio manager" approval category by searching for the individual's name in IIORC's AdvisorReport.

Money coaches
If you carry significant consumer debt, enjoy shopping a bit too much, never open your bank statements, are always worried about money, carry a credit card balance month to month, are living paycheque to paycheque, or struggle to save money, you may need assistance with basic personal finance issues. In a consumeristic society with abundant easy credit, it can be psychologically difficult to resist over-spending. Just like people hire coaches to help them design a physical fitness program and motivate them at the gym, you could perhaps benefit from the services of some sort of "money coach" or "personal finance coach". Such services are not regulated, so "the experience and knowledge of coaches can vary dramatically – and so can their rates".

Services offered by money coaches may include help with cutting living costs, budgeting, saving strategies including automated transfers, paying back debt as efficiently and quickly as possible, etc. Remember the TV shows Til Debt Do Us Part or Money Moron? A bit like that, but with a lot less drama and you won't be on TV. In general, money coaches are paid by the hour or charge a predetermined fee, so they should not be trying to sell you anything other than advice. Money coaches may have backgrounds in accounting, finance, psychology, or other fields.

Similar advice might be obtained from financial planners, but "their bread and butter is longer-term planning". Another option, if your particular problem is debt, might be a credit counselor. Some non-profit community groups offer free seminars or consultations on debt and budgeting, for example ACEF de l'est de Montréal. Various initiatives exist in Canada to help working class families obtain basic personal finance coaching.

Life insurance agents
Life insurance also falls under basic personal finance. If you have dependents, you probably need life insurance, which unless you have enough coverage through work, will mean dealing with a life insurance agent. Make sure you do throughout research on your needs and the different types of life insurance before you meet a life agent, since they are paid from commissions, so your interests may not be perfectly aligned. The commissions on permanent insurance are higher than those on term insurance, which is the type that most young people need.

Life insurance agents can also sell disability insurance, which protects at least a portion of your employment income if you become disabled. Individual disability insurance policies are a must if you don't have group coverage, and you have dependents. They can also complement group policies. Again, do your research before contacting an agent.

Financial planning
When your current financial situation is stable, and you are spending less than you earn, you are ready to engage in longer-term financial planning.

Why use them?
This is where consulting a competent financial planner to discuss your goals and create a personalized plan could be helpful. What are the required savings rates and investment returns required to reach your goals? What may be a reasonable asset allocation for your portfolio? Are you ready to retire? How much can you withdraw from your portfolio every year? When should you take CPP/QPP and OAS? These are all questions that a planner can help you answer.

Regulations and credentials
In Quebec, only professionals recognized by the Institut québécois de planification financière are authorized to use the title of Financial Planner (F.Pl.) ("planificateur financier"). In other provinces, unfortunately, anyone can call themselves a financial planner:

Because of this issue, it is especially important to investigate a planner's training, credentials, reputation, experience, etc. before hiring him or her. Credentials and designations are discussed in detail below. Some planners belong to voluntary associations, such as FP Canada (formerly the Financial Planners Standards Council) and the Institute of Advanced Financial Planners.

Compensation
Fee-only planners (a.k.a. "fee-for-service" planners) charge by the hour, or offer financial plans for a fixed total cost. They should not be selling you financial products, both because they may not be licensed to do so and more importantly, because this is not what you've hired them for. Fees are often in the $150 to $300 per hour range. Fee-only planners are still rare in Canada because low-income or low-assets clients may not be able to afford the service; because clients who can afford it are not yet used to paying directly and transparently for advice; and because there may be less profit to be made using this compensation model. However the model is proving increasingly popular.

You can also get financial planning services from advisors and planners working on a commission-based model, or a percentage of assets model (a.k.a. "fee-based"). However, this brings on potential conflicts of interest, especially with the commission model.

Portfolio managers
Portfolio managers typically manage your portfolios on a discretionary basis, typically following a written personalized Investment policy statement. The services should also include financial planning advice. The typical compensation model is a percentage of assets under management (AUM). Because of the "full service" nature of the business, and the %-AUM compensation model, each advisory team can only work with a limited number of clients, which means a relatively high minimum portfolio size.

Why use them?
DIY investors are obviously mortal or may become disabled. Would your spouse be able to take over the portfolio management and financial planning duties? If you have enough assets, you could research local portfolio managers who share your investment philosophy and charge reasonable fees, for possible recommendation in your "What to do if I die" and "What to do if I become incompetent" documents.

Another reason to use a portfolio manager is if you are not satisfied with your investment returns as a DIY investor (relative to a suitable benchmark), perhaps due to behavioral issues.

Regulation
The term "portfolio manager" can have two subtly different meanings in Canada, depending on how such firms and advisors are regulated. The first meaning of portfolio manager, set out in the CSA's National Instrument 31-103, is a firm registered as such with provincial regulators; their advisors are registered as "advising representative" or "associate advising representative". Being licensed this way requires specific education and experience. One path is the CFA program and the other is the Canadian Investment Manager designation. This first meaning is also used by the Portfolio Management Association of Canada (PMAC).

The second meaning is that employed by IIROC, where the advisors are registered as "dealing representative" with provincial regulators, work for as firm registered as an Investment Dealer, but have a "portfolio manager" or "associate portfolio manager" approval category from IIROC because they manage accounts on a discretionary basis and have met certain proficiency requirements. For "portfolio managers" this involves either the Canadian Investment Manager designation, the Chartered Investment Manager designation, or the CFA Charter, and a certain number of years of relevant work experience.

Robo-advisors
Online wealth managers, more commonly known as robo-advisors, are a more accessible alternative to traditional full service portfolio managers. The investment minimums are very low. However, you will get a lot less human contact and financial planning advice. Before investing with a robo-advisor, be sure to also consider asset allocation ETFs, which provide fully passive automatically rebalanced diversified portfolios at a fraction of the cost. General financial planning services could then be obtained from a fee-only planner, as needed.

Estate planning
For estate planning, you may seek the advice of an accountant about tax matters, and that of a lawyer (or notary in Quebec) about wills and Powers of attorney. Other types of financial advisors may also be able to help with estate planning matters.

Agency costs
In seeking financial advice, the client is the principal and the advisor is the agent. Different compensation models have different agency costs.

Compensation models
No compensation model is ideal and free from potential conflicts. However, some models seem more problematic than others.

Commission-based
Most Canadian financial advisors are compensated through commissions, either upfront on the sale of a product, or as a trailing commission for as long as the client holds the product. The obvious issue with that model is that the advisor has an incentive to recommend products which pay higher commissions.

In a US academic study, professional auditors pretending to be prospective clients with assets of about $80k were sent to meet with commission-based advisors. Auditors were randomly assigned to four different treatments, i.e. existing portfolios, to see how the advisors would react and what course of action they would recommend if the 'client' hired them. One scenario was an existing portfolio of low-cost index funds covering US bonds and S&P500 stocks. About 85% of advisors ultimately recommended changing the portfolio, typically to higher cost actively managed funds that would allowed them to earn commissions. The authors conclude that "results strongly suggest that advisers try to dissuade clients from investing in an efficient portfolio, likely because this minimizes the fee income for the adviser".

In a literature review prepared for the Ontario Securities Commission, Weinstein (2015) write that "the weight of evidence clearly indicates that embedded compensation influences advice to the detriment of the client and the benefit of the advisor and the product provider". In a mutual fund context, embedded compensation means commissions of all types embedded in the MER.

Fee-based
Other advisors are fee-based. That means they charge an annual fee based on assets (the value of the managed portfolio, also called "Assets Under Management"). Generally, the more the assets the lower the annual fee in percentage terms. Here both the advisor and the client want the portfolio to grow. There is no incentive to recommend high-fee products. But the advisor may not readily recommend courses of action which would reduce the managed assets, such as buying an annuity, delaying CPP/QPP or paying back the mortgage quickly, even if these actions could be in the best interest of the client in some cases.

Fee-only
There are some advisors (typically planners) who are fee-only (a.k.a. "fee-for-service"). They charge by the hour or a flat fee for a certain service. A complete financial plan could cost between $1,000 and $5,000 depending on its complexity. For comparison, the average cost in the US is 2400 USD. Typically there are no product sales involved, which minimizes potential conflicts of interest. However, advisors with poor ethics could potentially recommend unneeded services or charge too many hours.

Other models
There is a hybrid model, where the fee for the plan is charged outside of any fees received for asset management.

A new model is subscription-based advice. You pay a fixed cost for an initial plan, and then a regular monthly or quarterly fee for ongoing advice.

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

Know what you are paying
Surveys of clients with over $50k in investable assets, working with advisors in the US and Canada between 2011 and 2014, show that about a third of clients did not know how much they had paid for financial advice in the last 12 months. The other two thirds of clients thought they know how much they were paying, but "80% gave an estimate well below the industry standard". Clients working with commission-only advisors, the most opaque form of compensation, were the most likely to underestimate the fees.

Advisors and insurance
The Financial Advisors Association of Canada (Advocis) is a voluntary professional membership association. Members must have one of five designations:
 * Professional Financial Advisor (PFA): study program; "practice development, technical knowledge and compliance & ethics to help newer advisors get a successful head start"
 * Chartered Life Underwriter (CLU): study program plus 4 years experience; specializing in "risk management, wealth creation and preservation, estate planning, and wealth transfer"
 * Certified Health Insurance Specialist (CHS): disability, critical illness and long-term care insurance; study program
 * Qualified Associate Financial Planner (QAPF): see below
 * Certified Financial Planner (CFP): see below

Financial planning
A planning credential indicates a commitment on the part of the advisor to look into the client's total financial situation. FP Canada (formerly the Financial Planning Standards Council) is a voluntary national professional body. Professional planners can be certified by FP Canada as either:
 * Qualified Associate Financial Planner (QAPF): formerly FPSC Level 1; "financial planning strategies and solutions for average Canadians with typical financial planning needs"; education program, national exam and one year experience
 * Certified Financial Planner (CFP): "the standard for the financial planning profession worldwide"; education program, national exam and 3 years experience

The Institute of Advanced Financial Planners (IAFP) is a not-for-profit organization that administers the R.F.P. designation:
 * Registered Financial Planner (RFP): requirements look similar to CFP, plus three referrals, and submitting a sample financial plan

Carrick notes that the RFP designation is "much less common" than CFP but is "still respected in the financial community". According to one source, this is a "designation suitable for experienced advisors whose main activity is providing comprehensive financial plans".

In Quebec, only professionals recognized by the Institut québécois de planification financière (IQPF) are authorized to use the title of Financial Planner (F.Pl.) or in French, Planificateur Financier (Pl.F.):
 * Financial Planner (F.Pl.): academic training (university program), professional course, four hour exam

The Financial Planning Association of Canada (FPAC) is a "membership organization for financial planners that aims to elevate the standards for financial planning across Canada". It was launched in November 2019. Members must have A CFP, RFP, or F.Pl. designation and must adhere to a fiduciary pledge.

The Canadian Securities Institute (A Moody's Analytics Company) offers the PFP certification:
 * Personal Financial Planner (PFP): education program and 3 years experience

Carrick notes that the PFP designation was originally "developed by the banking industry for use by staff providing financial advice to customers". He also mentions that the "curriculum is more tailored than the CFP to the needs of bankers".

Investment management
The CFA Institute offers the CFA charter for portfolio and wealth managers, investment and research analysts:
 * Chartered Financial Analyst (CFA): three exams (investment tools, asset valuation, portfolio management) and 4 years experience

One source notes that "the Level 1 exam, which takes a gruelling six hours, is notorious for weeding out a good number of contenders".

The Canadian Securities Institute (A Moody's Analytics Company) offers the CIM designation:
 * Chartered Investment Manager (CIM): "Specialization in high-level investment strategies tailored to affluent clients"; training program and 2 years experience

Summary
These designations, and others, are summarized in the following table:



Finding a financial advisor
To find a financial advisor 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 :
 * Professional advisors and insurance underwriters: Advocis - Find an Advisor
 * QAFP and CFP designations: FP Canada - Find Your Financial Planner
 * RFP designation: IAPF - Find a planner
 * F.Pl. designation: IQPF - Find a financial planner
 * CFA institute members: Member directory
 * Financial Planning Association of Canada

Interviewing potential advisors
Before hiring a financial advisor, you should check their qualifications, credentials, registration, experience, etc. But you should also interview them to make sure you are comfortable working with them. The Ontario Securities Commission recommends interviewing more than one advisor.

FP Canada lists ten questions you could use during the interview, if hiring a planner:


 * 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 FP Canada's intention behind each question.

The OSC suggests a partly similar list of questions and adds the following:
 * How many clients do you have?
 * How often do you communicate with clients?
 * What kinds of investment products or services are you registered to sell, if any?
 * Have you been subject to disciplinary action by any regulator or industry association?

Misguided beliefs
Conflicts of interest related to advisor compensation are not the only issue: misguided beliefs are also problematic, and should be assessed when interviewing advisors. Linnainmaa et al. (2016) examined "comprehensive trading and portfolio information on more than 4000 advisors and almost 500,000 clients between 1999 and 2013", from two unnamed non-bank Canadian mutual fund dealers. They also obtained "personal trading and account information of the vast majority of advisors themselves", which allowed them to see if the advisors were investing in the same way as their recommendations to clients, including after the advisors left the industry. The advisors were free to choose funds from any company when building portfolios for clients or themselves. The authors found that:
 * advisors and their clients chased returns: they purchased funds with better than average recent performance
 * explanation: every mutual fund brochure states that "past performance does not indicate future results" or something similar, yet investors and their advisors are still attracted to recent performance, perhaps believing it reflects skill rather than luck


 * advisors overwhelming recommended actively managed funds: only 1.5% of the client money was allocated to passive funds; further, they invested even less of their own money, just 1.2%, into passive funds
 * explanation: the advisors actually believed that active was better, or they refused to see the evidence that few actively managed funds manage to beat their benchmarks over 5 or 10 year periods


 * the equities in the studied portfolios were not fully diversified: idiosyncratic risk was not eliminated
 * explanation: financial theory suggests that there should be no reward, on average, for bearing idiosyncratic (or unsystematic) risk, since it can be easily eliminated through further diversification. However, poorly diversified portfolios will have greater dispersion of outcomes (e.g., ), including the possibility of large losses


 * the average MER was 2.36% for clients and 2.43% for advisors
 * explanation: advisors did not realize that there is a negative relationship between costs and returns. Yet Carhart (1997) shows that fees of all types have a direct, negative impact on mutual fund performance. Research from Morningstar show that the higher the fees, the least likely a fund is to survive (not be merged) and to outperform its category group

Make sure potential advisors do not share these erroneous beliefs before hiring them, by asking specific questions during the interview.

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.

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.

Finding an advisor

 * Financial Wisdom Forum: Dan Hallet's list of fee-only and fee-based planners/portfolio managers
 * Financial Wisdom Forum: Recommended fee-only financial planner in or near Toronto? (relevant discussion beyond Toronto)
 * Rob Carrick video: Tips on how to find a fee-only financial planner
 * Mostly Money Podcast: 60: John De Goey discusses "Professional Financial Advisors"
 * Mostly Money Podcast: 57: Dan Hallett on Robo-Advisors, Financial Advice, and CRM2 (includes some questions to ask when interviewing potential advisors)
 * Mostly Money Podcast: 60: John De Goey discusses "Professional Financial Advisors"
 * Mostly Money Podcast: 57: Dan Hallett on Robo-Advisors, Financial Advice, and CRM2 (includes some questions to ask when interviewing potential advisors)

Advisor compensation

 * Financial Wisdom Forum: How should a financial planner be paid?
 * Mostly Money Podcast: 77: John De Goey explains how to "Standup to the financial services industry"

Other

 * Sample Investment Policy Statement (IPS)
 * Canadian Foundation for Advancement of Investor Rights