Wanted: One impartial financial planner

Learn to distinguish between sound financial advice and a good sales pitch.

One of the benefits of this column is the feedback I get from readers. One of the questions I am asked frequently is how to find a good financial planner. For example, the Livingstone family wrote: “We believe we need a really impartial financial planner and have now discovered that we really don’t know how to find one we can trust. Our banks tend to want to sell us their products. Ditto insurance companies and most other ‘financial advisers.’”

I don’t speak officially on CARP’s behalf but I can offer my advice. It begins by understanding the semantics of the money management industry.

The terms “financial adviser” and “investment adviser” have gained currency as referring to anyone who provides guidance and/or sells securities to individuals. I believe that’s a fundamental problem. Consider the comments sent by Roy E. Adam, vice-president, Calgary branch manager, Assante Capital Management, after I wrote an article about a couple who had been persuaded to borrow against their home to invest and ended up losing a lot of money.

“The investment industry has undergone a sea change in the past 30-plus years whereby professionals giving technically knowledgeable and prudent advice are now outnumbered by those who may know just 10 per cent more than their client but are enthusiastic marketers of mutual funds and ‘managed money,’” Adam wrote. “There are still many who are competent; however, we face an uphill battle against those who are less so but are better salespeople. The mutual fund companies do nothing to dispel this as they are the primary beneficiaries.”

Adam says investors should ask about the professional qualifications of any potential adviser and points out that those who have successfully completed the chartered financial analyst (CFA) program have much more knowledge of the markets than those who have taken only the Canadian Securities Course.

Although academic credentials are a significant consideration when looking for an adviser, there are other factors to consider. For older people, one of the most important is experience with income-oriented portfolios.

Many advisers focus their business on growth portfolios – stocks and equity mutual funds, in particular. There’s a good reason for that: higher compensation. In the mutual fund business, trailer fees (annual payments based on the market value of funds held by clients) have become the gold standard. The trailer fees on equity funds are much higher than those paid on fixed-income and money market funds so it is no surprise that’s where advisers look first.

If you find an adviser who has a considerable number of clients with income-oriented portfolios, you are on the right track. It’s an indication she is likely putting the customers’ needs first.

You should also look for an adviser who is philosophically on the same page as you. If you’re a conservative investor who is interested in capital preservation and cash flow and all she wants to talk about is the stock market, move on.