You want to get your finances in order and start planning for the future, but meeting with a financial advisor at a bank or investment firm can be intimidating. How can you be sure they have your best interest in mind?

Despite recent news, most advisors have chosen their profession because they’re passionate about helping people like you reach their financial goals. They want to see you succeed! Banks and their employees are working hard to earn your trust, but we know you need reassurance. Understanding how advisors are compensated, whether or not they have to abide by regulations and what red flags you should watch out for can help set your mind at ease.

We’ve compiled four questions (and why you should ask them) that you should ask of your investment professional to determine the right fit for you and give you some peace of mind in the financial planning process.

Four questions to ask your financial advisor

1. How can I be confident you are going to act in my best interest?

   There are potential conflicts of interest that exist in the investment industry. At a minimum, all investment professionals owe a duty of care and have a suitability responsibility. This means they are required to provide guidance that is suitable to your situation. Some investment professionals are held to a fiduciary duty, which is a legal obligation to act in your best interest. The vast majority of Canadian advisors are held to a suitability standard by their regulator.

   Regulatory organizations enforce rules that protect investors. The Canadian Investment Regulatory Organization(CIRO), Mutual Fund Dealers Association (MFDA) and the Alberta Securities Commission (ASC)  are the primary regulatory organizations in Alberta. While regulators do all they can to protect you, we believe that investment companies should also ensure their clients come first.

   Contrary to reports, CIRO has a rule that requires advisors to put clients’ interests before their own if there is a conflict of interest. This is why there is currently a debate that a "statutory best interest standard" isn’t needed for all advisors. Where your advisor is hired under a discretionary arrangement (where an advisor takes care of all the investment decisions on your behalf) a fiduciary standard still applies for an CIRO registered advisor.

   As or more important than the regulatory framework an advisor operates under, they should be able to explain exactly what they do to put your interests first. They should also disclose their own potential conflicts of interest that may influence them to put their interests above yours. The rest of the questions below will help you learn more about how each advisor and investment firm will behave, regardless of the common set of rules that govern them.

2. How will I be charged?

   What you are charged is different from how your advisor is compensated. Every firm has a different approach to fees, and they vary with each type of investment. Things to watch for are transaction fees, front- or back-end loaded funds, deferred sales charges and other fees you may not expect or know of. Often these extra fees mean extra compensation for the advisor as well. The extra fees and compensation may make sense if there is extra value provided, but the advisor must describe that value they provide in building your portfolio or guiding positive investor behaviour.

   A recent regulation called CRM2 was introduced to obligate investment firms to be more transparent about how much you pay an advisor to manage your investments and for their financial advice. Your advisor should be able to give you a dollar amount of the fees you will pay on an annual basis based on the amount you invest. If they answer with “it depends”, be wary as there are likely fees that aren’t being disclosed. You need to understand how an advisor constructs your portfolio, what is their pricing model and investment framework.

   Most mutual fund products have a Management Expense Ratio (MER) attached to the fund. Depending on things such as how the fund is managed, the types of investments in it and the risk level, MERs can cost as little as 0.5 per cent to over three per cent. Paying more doesn’t guarantee you a higher return. In fact, the opposite is true: because fees are paid out of the investments in the fund, paying more results in lower actual returns. You can look up various mutual fund MERs in the prospectus documents provided to you or using online tools like Globe Investor or Morningstar.

   It’s also crucial to note that the fees you pay (and the ones you will see on your CRM2 fee reports) go to the investment firm, not directly to the advisor. Advisor compensation is discussed further in the next question.

   A lot of work and research is required by fund managers to grow and protect money in a fund, so there is some truth to “it takes money to make money”. But more expensive doesn’t necessarily mean better when it comes to mutual funds. Your best bet is to invest in a fund with MERs between one and two per cent that comes with the services of an advisor.

3. How are you compensated?

   This is the million-dollar question – and there could be almost a million different answers! How financial advisors are compensated depends on the type of investment business they’re in, how their firm pays its employees and on the different types of investment products they sell. For example, some mutual fund or investment companies provide a bonus to advisors for selling certain products.

   Get the advisor talking about compensation by first asking them if they are simply paid a salary (and nothing else). This is unlikely. They probably receive commissions or bonuses, so a good follow-up question is, “What are these commissions or bonuses based on?” Ideally, you’ll want to hear that their compensation isn’t linked to the products or investments they place in your portfolio or the number of transactions (buys or sells) they complete. The more you get them talking about fees and compensation, the more you will learn about potential conflicts of interest related to their pay.

   You can also ask the advisor if they interact with mutual fund wholesalers, who are hired and use various tactics and perks to influence advisors to sell their products. If they can’t explain this clearly and honestly, keep looking for an advisor who can.

4. What is your (and your firm's) investment philosophy?

   Some investment firms follow an approach that no matter who you meet with, you’ll get the same sound advice. Why is that important? It means the firm is able to train a group of mostly independent individuals, like financial advisors, that there is a right way to provide advice and guide clients to help reach their goals.

   In essence, you should be able to visit two financial advisors from the same firm and receive the same advice from both of them. If you’re getting two different recommendations, it is possible the firm doesn’t have or enforce a consistent philosophy and advisors will likely behave in the way they’ve grown up and been trained in their career.

   A consistent inv​estment philosophy defines the risks the advisors take, but also the clients’ performance and amount the fees they pay. This may, in turn, drive the compensation an advisor earns – again creating a conflict of interest.

   Investment philosophy can be defined in different ways depending on who you ask. An advisor should be able to explain this to you in clear language, so you can understand how they plan to manage your investments and interact with you.

You should have a clear understanding and feel comfortable that the advisor can answer all of these questions (and others!) you might have. You need to find a partner and consultant who will be transparent and educate you along the way. This will help you make confident decisions and ensures you’re on the right path to meeting your financial goals.​​​​​