How to choose a financial advisor—A comprehensive guide

A financial advisor is a professional who helps you make decisions regarding what to do with your money.

This can cover saving, what kind of assets to invest in, retirement planning, and a variety of other courses of action.

It’s not hard to find a financial advisor—everywhere you look, there’s one ready to take your money and show you what to do with it.

Now, finding the right financial advisor—one that can cater to your needs and help you get to the next level financially—that’s a bit more difficult.

In this guide, I will give you all the tools you need to choose between the many financial advisors out there; or at least cross some off your list.

Why work with a financial advisor?

Creating a financial plan can be tough. There are a lot of factors involved that you might not fully grasp, and it can lead to financially devastating mistakes.

Having a financial advisor greatly reduces this risk—they are professionals with more knowledge and experience in the field, and when they know enough about your financial situation, they can better help you navigate the process of improving it.

When helping you create your financial plan, a financial advisor will usually take the following steps:

1. Listening to you and assessing your financial situation
2. Determining your current and future goals, and the steps you need to take to reach those goals
3. Giving advice on, and helping you invest in financial assets that will help you reach your goals
4. Periodically reviewing your investments

The degree of control you have over your investments depends on you—some people prefer a hands-on approach, and will take little to no input from their advisors other than advice; while others let their financial advisors have most or all of the decision-making power.

However, even if you’re more of a hands-off person, you should at least check in on your finances and ask for occasional reports from your advisor. It never hurts to have some idea of where your money is going.

Another thing to note is that not everybody needs a financial advisor. Factors such as your net worth,  stability of income, debt-to-income ratio, and expenses all play a part in ascertaining whether or not you should have a financial advisor right now.

If you’re a high net worth individual, you probably have more sources of income and more investments, and therefore your finances can be harder to handle on your own.

Investing in a financial advisor will protect both your future and your peace of mind.

If you don’t have an especially high net worth, but you still have a steady source of income, it might be good for you to hire an advisor.

An advisor can be the difference between living paycheck to paycheck and having financial security.

If you’re in a bad credit situation, they can help you out of unhealthy debt, and guide you to institutions that provide you with good debt; which will build your credit by creating a string of monthly payments that don’t cost you much, and eventually lead you towards a steady path of wealth building.

It helps if your debt and expenses are less than your income—if you can afford to put 20% of your income towards saving, then chances are, you can afford (and might actually need) a financial advisor.

What are your financial goals?

The most important part of choosing your financial advisor is figuring out your financial goals.

Knowing these is extremely important, seeing as you can’t make a plan without an end goal in mind.

In order to figure that goal out, you need to be sure of the following:

The services you require

There are different kinds of advisors, each specializing in a different service. Knowing which service an advisor specializes in will save you a lot of time, and help you cross ineligible candidates off the list.

Here are a few types of specialists:

• Retirement planning specialists, who help prepare you for retirement
• Estate planning specialists, who help prepare your estate for its beneficiaries
• Tax planning specialists, who help file taxes and reduce unnecessary taxes and penalties
• Wealth planning specialists, who tend to the needs of high net worth individuals
• Insurance planning specialists, who review and adjust insurance policies to make sure they fit your needs
• Investment planning specialists, who create investment plans to meet your needs.

There are many other areas in which financial advisors specialize, including one-time events like weddings.

How much the advisor charges

When you know which services you need, and which kind of advisor provides them, the next thing you need to figure out is how much their services cost.

Different financial advisors charge different prices depending on your financial situation and the kind of services they offer.

They also vary in fee structure—some advisors charge hourly or flat fees, some charge commissions, some charge a management expense ratio, and some charge a combination of two or more fee structures.

• Hourly and flat fees: Some advisors will tell you upfront how much you’re going to be charged for their services. This can be an hourly fee ranging from about $200 to $400, or it can be a flat fee of anywhere from $1,000 to $3,000.
• Commissions: Commission-based advisors usually try to sell you some kind of financial asset. When you buy a stock, bond, or fund, the advisor is given a commission on the purchase by the broker.
• Management expense ratio: Some advisors get paid by taking a percentage of the total amount of money under their management. They usually charge between 1% and 2% annually. robo advisors, however, charge between 0.2% and 0.5% annually.
• Combination: Some advisors use a combination of different payment structures based on the services you require. For example, an advisor could charge a management expense ratio for managing your retirement plan, and then charge a flat fee for helping you build your investment portfolio.

Though not very common, an advisor’s fee structure can influence the kind of advice they give you—they might want to lead you towards financial assets and decisions that hold the highest profit for them.

You should be especially wary of commission-based advisors, as their entire pay structure is based on customers buying certain assets.

The difference between a budget and a financial plan

Knowing the difference between a budget and a financial plan can be the difference between having a financial plan and thinking you have one.

Having either one is great, but having both means having financial security for both your present and your future.

A budget is a short-term financial strategy. It’s also an important one. It evaluates how much money you make and how much you spend, and helps you spend less than what you make. It involves tracing where and how you spend your money, so you better understand your spending habits.

Financial planning, on the other hand, is a long-term financial strategy. While a budget tracks your day-to-day spending, a financial plan addresses your goals for years, even decades, in the future.

With a financial plan, you predict the future value of your assets, what kind of credit products you need to invest in to grow your credit, how much money you’ll need to accomplish your goals, and a lot of other variables.

As you can see, both these strategies go hand in hand—having a budget lets you know where your money is going today, and having a financial plan lets you know where your money can go tomorrow.

After taking note of all the points listed above, you should have a good idea of what your financial goals are. Now all you have to do is find a financial advisor who meets your criteria.

Who qualifies as a financial advisor?

Someone calling themself a financial advisor doesn’t always mean they have any special expertise, education or certifications.

In fact, anybody can call themselves a financial advisor.

That said, there are qualifications that set some financial advisors apart from others. Education, training, and experience tell a lot about the abilities of an advisor.

Financial planners, a type of financial advisor, are usually given one of three designations:

• Certified Financial Planner (CFP): This is the most popular designation. It is also the most comprehensive. It is granted by FP Canada, and it is required of candidates to complete a 40-hour course either online, or at a post-secondary institution.

The course is offered by the Financial Advisors Association of Canada, the Canadian Securities Institute (CSI), the Canadian Institute of Financial Planning, and several universities and colleges.

• Personal Financial Planner (PFP): This is a designation given to individuals who work at banks, and also wish to be financial advisors, investment advisors, or investment managers.

To get this qualification, candidates have to have at least three years of industry experience, complete the Canadian Securities Course (CSC) offered by the CSI, and then take courses towards writing the PFP exam.

• Registered Financial Planner: This designation is granted by the Institute of Financial Planners, and is usually given to experienced advisors, whose major expertise is creating comprehensive financial plans.

RFP candidates must show industry experience by submitting a financial plan for review. They also have to provide referral letters from three industry professionals, one of whom has to hold the RFP designation themself; and they have to pass two exams at the end of their course, during which they will be mentored by current RFP holders.

RFP holders are more likely to use the fixed or hourly fee structure for their services.

Deciding which of these designations to work with can be quite the task, but at the end of the day, alignment plays a big role.

While RFP and CFP holders are usually independent advisors, PFP holders are always associated with banks.

This association can lead to conflicts of interest, where your advisor influences you to make a decision or a purchase that isn’t right for you, but works in favor of either them or the financial institution to which they’re tied.

Types of financial advisors

There are two types of financial advisors; fiduciary financial advisors, and non-fiduciary financial advisors.

Fiduciary advisors are bound both legally and ethically by a standard called the fiduciary standard, which states that an advisor must put their clients’ interest above their own.

This means that they must follow the course of action that most benefits their client, no matter how it affects them or their income. They have to act in your best interests no matter what.

Non-fiduciary advisors, on the other hand, are bound by a standard known as the suitability standard.

The only legal requirement of the suitability standard is that advisors follow a course of action and provide investments that are suitable for the client; not necessarily the best option.

It’s usually better to go with a fiduciary advisor, because you can be rest assured that they are acting in your best interests.

Financial advisor vs financial planner vs robo advisor

Financial planners are a sub-type of financial advisors who have earned a certification or qualification like the CFP or RFP.

They differ in a number of ways. Some of them include:

Range: Anybody that manages your money for you can be called a financial advisor. A financial planner, however, helps you reach your long-term financial goals by providing you with services such as budgeting, retirement planning, helping you save money on taxes, and a lot more.

Registration: Financial planners are members of professional organizations which regulate their actions, increasing the level of protection given to their clients.

Regular financial advisors, however, have no regulatory bodies.

Education: Certified financial planners have to take courses and exams, as well as have industry experience before they can get their certifications; financial advisors have no such obligations.

Fiduciary vs non-fiduciary: Non-certified financial advisors can choose to extend fiduciary duties towards their clients, but can also be non-fiduciary if they so choose. CFPs, however, are legally and ethically obligated to put your financial needs first.

Commission: Financial advisors can choose to market products to clients from which they make a commission. This is a leading cause of conflicts of interest between advisor and client.

CFPs are legally and ethically barred from making a commission off their clients’ purchases, thereby making it a safer option to use certified planners.

Robo advisors are what their name says they are. They aren’t actual robots, but they are automated investment services, and they’re run by complex algorithms.

What a robo advisor does, is create a risk profile for you based on information you provide it. It then creates a highly specialized investment portfolio for you based on your risk tolerance and investment preferences.

Robo advisors have lower management fees than other types of financial advisors—sometimes less than half the price—but usually don’t offer full financial plans unless you pay an additional fee or invest a large sum of money.

Robo advisors also offer the least amount of human interaction of any kind of financial advisor, and that can make getting support more difficult.

 

Hybrid advisors were made to bridge the gap between physical and robo advisors, and essentially bring out the best of both worlds.

They are low-cost, automated services like robo advisors, and they grant users access to human advisors, who can guide them through confusing situations.

There, unfortunately, is a drawback to this solution—its two components seem to oppose, rather than complement each other. This is because the two parts are often hosted by separate firms, which means that you have to co-ordinate the two aspects by themselves.

This can lead to you having disorganized or disjointed financial plans.

Where to find a financial advisor

There are a couple of places you can go to find a financial advisor in Canada. Financial institutions, such as banks, credit unions, and caisses populaires; brokers that deal in mutual funds and stocks; insurance companies; as well as independent consultants and financial companies.

Financial institutions: Banks, credit unions, and caisses populaires are all institutions with members and staff who have a high degree of knowledge, skill, and expertise in the financial sector. They can help you understand the core concepts of certain investments, such as mutual funds; and they can also guide you through the process of buying them, or even buy them on your behalf.

Another thing they can help you with is buying registered savings plans, such as registered retirement savings plans (RRSPs), registered education savings plans (RESPs), tax-free savings accounts (TFSAs), and registered disability savings plans (RDSPs).

Brokers: Stock brokers and mutual fund dealers are individuals who are licensed to help you buy or sell investments such as stocks, bonds, mutual funds, and exchange traded funds (ETFs).

They can also help you buy registered savings plans.

However, it is important to note that stock brokers are paid on commission, and can therefore be biased in their decision making process.

They are not fiduciary advisors, and therefore you need to exercise caution when you work with them.

Insurance companies: Insurance companies have employees that are licensed to sell you financial assets such as mutual funds, segregated funds, and annuities. They also offer a variety of insurance products.

They are non-fiduciary, however, and so care should be taken when buying products from them.

Independent companies and consultants: These companies or individuals give financial advice and help you purchase financial assets. Some of them may also have licenses to sell financial products to you.

Independent advisors may either be fiduciary or non-fiduciary, depending on their certifications and alignments.

Non-fiduciary advisors will typically take a commission on products they sell you. Their fiduciary counterparts, on the other hand, will usually charge you a flat fee or an hourly fee.

Before you work with an independent advisor, it is important to ask them questions about their pay structure in order to know what kind of advisor you’re dealing with.

Navigating through the massive number of banks, brokers, and consultants on your own can be challenging. Here are a few ways you can find brokers that meet your specifications:

NAPFA: The National Association of Personal Financial Advisors (NAPFA) website has a search feature that can help you find certified financial planners in your area.

To use the feature, you enter your location or zip code into the search bar, and it provides you with a list of advisors close to you who are certified CFPs.

Word of mouth: Asking friends, colleagues, and family members for recommendations can go a long way in helping you make the right choice of financial advisor.

They will let you know what it was like working with the advisor or company, and they are more likely to give you honest reviews.

It also helps to ask for advice from people with similar goals or in similar situations as you.

Another source of information is Google searches and online reviews. They will bring out both the upsides and the downsides of working with each advisor.

A few things to remember

There are some questions you need to ask, and some things you need to do when you’re trying to choose a financial advisor.

It might take a little longer to decide when you have to stop and think about these things, but it will be worth the wait in terms of your long-term financial goals.

1. Interview multiple advisors: Don’t just jump right in with the first advisor you meet with, no matter how good their terms seem. Shop around, compare terms, and try to find the best match you can.
2. Check their credentials: You can check whether or not an advisor is registered using the Canadian Securities Administrators’ National Registration search You can also ask them about their credentials, and look them up on the internet.
3. Check their disciplinary history: There are a number of organizations that keep track of whether or not disciplinary action has been taken against an advisor in the past.

You can search the databases of the IIROC, Canadian Securities Administration, or l’Autorité des marchés financiers (if you’re in Quebec) to find out if any disciplinary action has been taken against the advisor you’re going to work with.

4. What kind of clients the advisor usually works with: The usual demographic of the advisors’ clientele can say a lot about whether or not they’re right for you.

An advisor that works mostly with people in their 20s will be ill suited to advise people nearing retirement age.

Other factors like net worth, income, financial goals, and credit situations can also be contributing factors to whether or not you and your advisor are compatible.

5. Which services they offer: Which services the advisor is licensed to offer, and which ones they choose to offer are an indicator of whether or not you’re compatible. Your goals need to align with their services in order for you to have a good working relationship.

For example, if you need help making a payment or refinancing plan for a loan, or you want to take out a loan to build a new line of credit; you need to find an advisor that offers those services, and is experienced enough in the field that they can create a comprehensive and effective plan.

Conclusion

Choosing a financial advisor can be tricky. However, if you have clear financial goals, know the different kinds of advisors to choose between, and take the time to do the research and ask the right questions; you’re guaranteed to make the choice that works best for you.