Part 2 – Taking action to begin investing
In part 1 of our article series on investing, we learned the importance of taking ownership of our investment education. We dove into the concepts head-on, and you now have a helpful set of women-friendly resources to guide you on your journey.
Fast-forward to the future for a moment. Your confidence is steadily building and you feel ready to take action. Is it time to call an advisor and book an appointment?
An advisor might be the right choice for you, or it might not.
The industry is complicated, so this article is comprehensive in scope. My goal is to help you understand the facts so that you can make an informed decision.
There are actually three ways to invest: advisor, robo-advisor, and DIY (do it yourself). We’ll start by reviewing the features of each.
If you do decide to proceed with an advisor, you’ll want to understand the nature of advice and the different types of roles, qualifications, and services to choose from. You’ll want to approach finding your advisor as you would recruiting a new employee. That includes interviewing and verifying their background, so I’ll provide some resources to help you hire the best person for your needs. You’ll be well equipped to create a satisfying and successful relationship.
The 3 ways to invest
Hiring a trusted professional to help you with your investments and finances can be especially beneficial if the relationship makes you feel safe and cared for. This may even be more important to you than getting the best return possible.
There are a range of roles, with different qualifications and specialties, so it’s important to become clear on what those are, and what you need.
Some are focused on selling products, some provide plans only (no products), while others provide comprehensive advice, sell products, and manage your investments. There may be an annual account fee, or the advisor may be compensated through the pricing structure of the products they sell you, or a combination of both.
In the advice world, it’s about minimum investable assets, as opposed to annual income. Some have requirements, while others do not. We’ll examine the different roles in detail shortly.
This form of investing requires a considerable amount of personal knowledge and confidence. If you’re a DIY’er, you’re a personal finance geek. You like reading about mutual funds vs. exchange traded funds, analyzing fee structures to cut costs, and comparing the tax advantages of RRSPs and TFSAs. You enjoy being hands-on with your finances and having full responsibility for your choices.
In between advisor and DIY, we have robo-advisors. Short for ‘robot’, robo-advisors are online investment platforms hailed for their user-friendly interface, cost-effectiveness, and automation. Just answer a few questions to determine your risk tolerance and goals, and the algorithm will recommend a portfolio suitable to your needs.
Robo-advisors mostly use simple index Exchange Traded Fund (ETF) investments and charge a small annual account fee – usually about 0.5%. They typically don’t require a minimum amount to invest. They are a great solution to start with, especially if you only require simple investments and you don’t need or want a human to manage them.
You don’t have to choose one method forever. As you become more confident and knowledgeable over time, and your assets change, you may benefit from switching to a different strategy. If you’re new to investing, you could start with a robo-advisor or advisor, and in time move to a financial planner or DIY.
Education vs advice
So you’ve decided that an advisor is for you, or you think it might be. This section is particularly important to understand.
When we don’t know how the investment industry operates, it’s natural to assume that a financial advisor’s role is to educate and provide advice and act in our best interests. Technically speaking, this is not a legal requirement. This is mostly because of how the industry is regulated and incentivized. That means we as clients need to become more savvy in how we ask questions to arrive at what’s truly best for us. Time to put our CEO skills to work!
Education is of a general nature because it does not consider the specific details of your financial situation such as your age, risk tolerance, debt, goals, or needs. You can learn all about financial topics like saving, budgeting, paying off debt, and investing, including detailed strategies you can apply as a DIY’er. However, because no products are sold, no licenses are required, and no legal liability is undertaken.
Advice involves taking strategies and tailoring it to individual needs by offering financial products and/or a fee for service. Certain financial products require licensing. For example, an Investment Advisor must pass their securities exam in order to recommend stocks that are suitable to their client’s situation. Similarly, an insurance sales person must pass their insurance exam in order to recommend an insurance policy.
Here’s where things get tricky. The term ‘advice’ can be misleading; we tend to think of it as being broad in scope, covering our financial well-being as a whole. Because of the detailed knowledge and licensing requirements, advice tends to be specialized – usually either investments or insurance. This means the person you’re working with might not be qualified to consider your entire financial needs before recommending individual products. The exception is when holistic advice becomes available to you via a true financial planner or a high net worth portfolio/wealth manager who usually anchors a team of specialists.
Just because advice is tailored to your specific situation, that doesn’t automatically mean it’s what’s best for you.
A financial professional potentially faces a conflict of interest because the products and services they recommend may earn them compensation. Their employer will typically select the range of financial products available, potentially limiting what is in your best interest. Today’s DIY (and some robo) investors have access to a vast array of products that may be equivalent or superior in both contents and performance, with potentially drastically lower costs and even, less risk.
Lastly is the subject of fiduciary, which is a legal requirement for advisors to place your interests above their own. Very few financial professionals are fiduciaries simply because the industry doesn’t mandate it. If not, their requirement is to recommend products or services that are “suitable” for the client. However, suitable does not necessarily mean it is in your best interest above the advisor. It typically means the recommended product meets your financial objectives and risk tolerance. These categories are pretty broad and don’t address product fees or human elements like respect, support, and communication.
While this may feel upsetting to read, knowledge is power. Everything here underlies the importance of asking: “who is compensated, and how?”
Types of roles and minimum asset requirements
The titles ‘financial planner’ and ‘financial advisor’ are often used interchangeably, yet they’re actually quite different.
An individual who is permitted to sell investments, or potentially investments and insurance. Their educational and licensing requirements are aligned to the type of products they sell, which may include mutual funds, securities (stocks/exchange traded funds), or insurance, or a combination.
Many of these roles do not require a minimum investment. Of course, there are exceptions, for example Investment Advisors. A stockbroker should only be considered by those with strong securities knowledge and comfort with high risk.
A true financial planner services broad financial needs by creating a holistic, long term plan that addresses budgeting, saving, debt management, investments, retirement, tax advice, family considerations, and potentially insurance. Their educational and licensing requirements are comprehensive, and they are more likely to commit to a fiduciary standard.
They generally operate from one of two business models:
1) Create your financial plan plus sell products/manage your investments. They may or may not have minimums and charge for the plan.
2) Fee for service. Create your comprehensive financial plan while you purchase and manage your own investments. This person is likely an entrepreneur. Their fees may be hourly for their time, or per plan creation, or a combination. The cost of a plan can range from $2000-$3000.
Wealth Managers and Portfolio Managers are a type of financial planner for high net worth clients. These professionals have additional qualifications and access to more exotic financial instruments. They typically serve as the relationship role, anchoring a team of specialists including tax and estate planning. They usually have minimums ranging from $100K to $250K.
Which kind is best for me?
Greatly adding to the confusion, in Canada with the exception of Quebec, anyone can call themselves a financial advisor or even a financial planner, no matter what (if any) qualifications they have or products they sell!
That’s why it’s not the job title that matters. It’s the qualifications.
Ideally you want to hire someone who is a certified financial planner. Look for the “CFP” – Certified Financial Planner, or “PFP” – Professional Financial Planner designation. A certified, fee-only fiduciary financial planner has the most conflict of interest removed from its business model, and so may give you the most trust and safety.
From here, it really comes down to the complexity of your financial needs.
The more comprehensive they are, the more a full financial plan service would benefit you.
If your needs are fairly simple and you are mostly seeking investment advice, someone who focuses on selling investments may be suitable for you. This person may not have a CFP or PFP, and that’s okay. Just be mindful of their approach and be sure to ask all the questions in the interview list. You could also give serious consideration to using a robo-advisor, which removes many of these concerns.
What kind of person do you need?
Now that you’re empowered with the knowledge to evaluate the qualifications, function, and approach of the advisor, it’s time to turn your attention to how you want this person to make you feel.
As the client, you are the CEO, and you get to decide what kind of relationship you want with your financial professional. It’s absolutely possible to create one based on listening, warmth, care, and mutual respect. You have the right to feel valued, understood, and supported.
In addition to these qualities, do you want someone who will spend more time educating you? Are you looking for this person to make more of the decisions, or are you interested in taking a more hands-on role?
Rather than let the advisor lead you with their default style, I encourage you to clearly communicate your desires and expectations. This gives them an opportunity to understand how to best serve you, and for you to assess how able or willing they are to provide you with this experience.
It may take you longer to find the right person, but it will be well worth the extra effort.
You can start by asking for recommendations in your network or researching online directories of qualified, certified individuals.
Once you have some leads, it’s time to reach out.
I’m ready to start interviewing. What questions should I ask?
There are several items you’ll want to cover before making a decision to hire someone. Some of these questions might feel uncomfortable to ask, but it’s far better to find out the truth before you invest your hard-earned money.
Here are 12 questions to ask prospective advisors/planners:
1) What are your qualifications and certifications? What areas are you permitted to advise me in, and what areas can’t you?
2) Are you a fiduciary?
3) Tell me about your experience.
4) What kind of clients do you help? Do you have a minimum investable asset requirement?
5) What products and services do you offer? Do you sell products, manage investments, create a full financial plan? What is not included, or costs extra?
6) How are you compensated? What fees do you charge? Do you pay or receive referral fees? If you recommend mutual funds, are there front or back loads (deferred sales charges), or trailer fees, or lock up periods? If so, for how long? Are there penalties to leave early, and if so, what are they? (You might not want to invest in these products or the advisor based on the fees and restrictions).
7) What is your investment philosophy? How will you determine what is right for me?
8) How will you ensure you meet my satisfaction?
9) Have you ever received disciplinary action or complaints? What happened?
10) What kind of support do you provide? Will I work with you directly, or a member of your team if I need assistance?
11) Can you provide me with 3 client references to speak to?
12) How do you service clients? Online, in person? How often would we meet?
For anyone you’re considering hiring, it’s critically important to protect yourself by verifying their identity. Ensure that you conduct a background check on their qualifications and search their record for any disputes. You can do that here:
How to find out if a prospective financial advisor is legit, from the Globe and Mail
Finally, once you’ve found your person, take your time to review and understand the paperwork you’ll be required to sign. Ask for clarification on anything that isn’t clear, and ensure you get a copy for your records.
Congratulations on sticking it through to the end. I know parts of this article series were challenging and confronting to read as a beginner, and there was a lot to take in. You may not be ready to take action for some time, and that’s perfectly okay.
The world of investing and advice is a complex topic and it’s important that we learn the truth, especially as women. Knowledge is the key to empowerment. You now have the information, resources, and tools to create a successful and rewarding investing experience, whether or not you choose to hire a financial professional to serve you.
The views and opinions expressed in this column are those of the contributor and do not necessarily reflect those of Equitable Bank. Any information provided is for information purposes only and Equitable Bank makes no representations as to the validity, accuracy, completeness or suitability of any content. You should seek the advice of a qualified professional or undertake your own research before making financial decisions.