Finding a professional financial advisor: a process-driven approach

By Dan Hallett on October 13, 2021

How can you find a great financial advisor – a true professional? This age-old question has long been answered with suggestions of requesting referrals from friends, doing internet searches, and asking standard questions of prospective advisors. Some of those steps can be about as helpful as a coin flip. My advice on this topic is a function of one of our firm’s key beliefs – good processes maximize the likelihood of successful results.

For starters

You need to make sure you’re sitting in front of someone who offers – and can deliver – what you need and want. That means figuring out what type(s) of service(s) you need (e.g., investment management only, financial planning only, both). This will help define the type of advisor you need and which credentials to look for.

Online vetting of credentials – e.g., FP Canada (CFP designation), IAFP (RFP designation), CFA Institute (CFA charter) – and provincial registrations (for securities and insurance in, for example, in Ontario) can help to create a short list of advisors to interview. Asking more finance-savvy people in your network can also yield good prospects. After coming up with a short list of people to interview, here are a few of the more targeted questions that can help find the right advisor for you.

How many clients do you have?

The average Canadian advisor serves nearly 300 households. This 2016 article for Investment Executive walks through how this is only feasible if a segment of clients is largely ignored (or if a true team approach is used). In a 2012 article, American financial planner Michael Kitces wrote that financial advisors can maintain up to 125 meaningful active client relationships. There is no one right answer. Evaluate the answer you receive in the context of the type of client served, the services offered, and the frequency of meetings provided to each client. Simple math will help in this assessment.

Describe the process you will take me through as a new client?

The right answer, in my view, should involve something along the lines of starting with a financial planning process. This will allow the advisor to translate your objectives into measurable goals – important context and inputs to the design of the investment portfolio. You can safely walk away from advisors that boast of “making good money” or fast-forward to recommending investments.

How will you deliver your advice to me? Can I see a sample of how you document advice for clients?

Before you are asked to commit to becoming a client, an advisor should provide a proposal or letter of engagement to clearly state what is being proposed, how the relationship will function, and what it will cost. This is not as common as it should be.

A financial plan need not be a lengthy document, but it should clearly summarize how your assets are expected to fund your future spending plans. The Investment Policy Statement (IPS) details the design of your investment portfolio – and should (among other things) demonstrate clear alignment with your financial plan.

After becoming a client, find out how often you will meet (i.e., in what form and with whom). You should also receive quarterly reports from your advisory firm. Ask for a sample to see the transparency of ongoing costs, clarity of performance reporting, and how (if at all) the advisor tracks progress toward financial planning goals.

Once I am a client, how often will you monitor my portfolio? What exactly are you monitoring? And how precisely is that done given how many clients you have?

Most advisors will speak of “keeping an eye” on client portfolios. Ask specifically how often the advisor ‘looks at’ portfolios. You want an advisor that does more than peek at your portfolio before each meeting. Frequent monitoring but infrequent action is the ideal combination, in my view.

The advisor should also cite what is being monitored and – importantly – how the monitoring is performed. Ideally, you want an advisor using some professional software application to automate much of the process – based on a set of parameters that defined in your IPS. Using spreadsheets is not ideal given the potential for errors but it’s better than an ad-hoc approach. If professional software is used; get the name and look it up as an additional check. In either case, ask for a demonstration of how the advisor uses the spreadsheet or software and how it functions.

How will you and your firm comply with new know your product (KYP) rules

New regulations (i.e., Client Focused Reforms) will require advisory firms to, among other things, properly vet investment products prior to recommending them to clients – and formally monitor each recommended product.

In addition, individual advisors need to be knowledgeable about the products they recommend and demonstrate why they chose the products recommended to clients over others available to them. This, along with their own monitoring, must be documented. This can be time-consuming, so it’s worth understanding how an advisor will address this new rule.

How and when will you rebalance my portfolio?

Rebalancing is one of the outcomes of portfolio monitoring. Your advisor should have a well-thought-out method for rebalancing; with clearly-defined parameters and triggers. Vague answers to this question signal a lack of real thought on this issue. A couple of past blog posts on rebalancing – such as some Dos and Don’ts and why picking a market bottom should never be the goal – can be a guide to what to look for in response to this question.

Finally, it is ideal when an advisor can rebalance for you without first getting your permission – as is the case with a firm registered in the category of Portfolio Manager (a legal fiduciary). If an advisor has to ask first in the throes of a bear market, most clients will be unlikely to approve the rebalance due to fear.

If you want to go deeper on assessing advisors check out:

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