Hiring an investment advisor:
10 compelling criteria you
should check first

An insider’s guide of what to know and what questions to ask when you’re in the market for a new financial advisor or money manager. Get it right, and you may only ever need to do this once.

By Kelly Willis

For the past nearly fifteen years I have worked as a marketing and communications specialist to the financial services industry. My work has given me an inside perspective on many of the companies and over a hundred financial advisors that aim to manage the wealth of high net worth Canadians. I know that choosing from among them can be challenging.

It’s not enough to choose a friend of a friend – you need a disciplined selection process that will help you find an expert who can understand and serve your needs. Investing a little time in your search now could save you years of regret. To guide you, I have compiled a list of 10 Cs – 10 compelling criteria that can help you identify the right financial advisor, along with sample questions to help you seal the deal.

Credentials: The investment industry has a broad spectrum of professional accreditations and registrations. Start your search by deciding what specific services you need, and then determine which credentials are best suited to providing them. From a pure investment perspective, the credential held by most institutional money managers, analysts and investment counselors is Chartered Financial Analyst (CFA). But that may be more firepower than you need if you’re just looking for an advisor to help you invest in mutual funds.

For more comprehensive advice, a Chartered Accountant (CA) or even a Certified Financial Planner (CFP) will have expertise in tax and financial planning. A Masters of Business Administration (MBA) provides a solid business background, but is no indicator of investment acumen. You probably want a combination of the right credentials and experience. Some questions to ask potential advisors: Why are you qualified to advise me? What are your educational credentials and experience? How long have you been in the business? How do you stay current in your field? How long have you been with your current firm, and why are you there?

Competence: Credentials are only an indicator of the advisors’ ability to do the job you want. What about their actual results? You should ask: What do you invest in and why? What is your area of expertise? What’s your track record? How does your investment performance rank against benchmarks, or peers? How do you define risk, and how do you manage it?

Beware of individual advisors who say they do everything well. There are too many specialty areas of investing, such as high-yield bonds for example, for one person to know it all. And watch out for advisors who say their approach is like Warren Buffet’s. Ask if their performance is like his, too.

Choice: When your goal is to earn a good return on your capital, you want as many arrows as possible in your quiver. A broader asset mix is proven to deliver better returns and withstand volatility. Ask prospective advisors: How large is the investment universe you have to choose from? Do you have access to investments outside of stocks and bonds, such as real estate or private equities? If so, how are these selected? Whose expertise do you rely on in these areas?

If an advisor is limited to proprietary products or an in-house investment-management team, ask how you can spread your risk. What happens if the team is in a slump? Or if their investment style or asset class goes out of favour? What independent sources do they consult in making investment decisions?

Consolidation: Some people spread their assets among different advisors; others like to consolidate with one advisor for simplicity’s sake. If you wish to deal with multiple advisors, recognize that it means more work for you: communicating with each, avoiding duplicate investments, comparing results. The best solution, if you can find one, may be an advisor who can oversee your entire financial picture, but accesses different investment managers to spread the performance risk.

Clients: One of the most important (and least-asked) questions is: What types of clients do you work with? Make sure the advisor is practiced in handling clients with your types of issues. The size of the advisor’s practice should also concern you. Some may serve 500 or 600 clients, usually with the help of a support team. Make sure you find out who on the team will manage your account, and that you are equally comfortable with their capabilities. Enquire about the rate of turnover on the advisor’s support team, as these positions are often viewed as training grounds for new advisors. If you have $1 million or more to invest, your advisor should probably have no more than 100 to 150 clients.

Finally, it’s always good practice to request a list of clients willing to provide references.

Contact: Research says more people leave their financial advisors due to poor service than poor performance. Most common complaint: lack of communication. Establish up-front how much contact you expect and in what form. Ask: How often will I hear from you? How often will we sit down to do a formal review? How will you keep me up-to-date on the factors that are impacting my wealth? How often will I receive statements? Who else will be part of the team servicing my business?

Comprehensiveness: Investments are only one component of your total wealth. You may feel, as I did, that you need access to a comprehensive set of financial capabilities. Ask your advisor if you will receive a written analysis of your financial situation with recommendations. (See point #1 for their credentials to provide this). Do you want someone who will offer broader advice, including non-related financial issues such as insurance, or wills and estate work?

Cost: Always ask, how do you get paid? There are basically two remuneration structures in the investment industry: commission and fees. Advisors may earn commissions on the products they sell, such as stocks, bonds or mutual funds. Under this structure, advisors are paid only when there is a transaction, not directly for their advice. If you plan few transactions, this may be the least expensive model. Given the possible conflict, however, be certain the advice you get will be in your best interests, and that you will get attention even when there are no transactions to be made. Check if there are any financial incentives for the advisor to recommend certain products.

In fee-based structures, advisors are paid an annual fee for their advice and investment management, generally expressed as a percentage of assets under management. As your assets increase or decrease, so goes the advisor’s compensation. (This way, your interests are aligned.) Individuals with $1 million or more to invest likely shouldn’t pay more than 2% of assets under management for professional management. Mutual funds, by comparison, are relatively expensive: the average management expense ratio of a balanced mutual fund in Canada is about 2.5% (Source Globefund.com Dec. 31/08).

Compliance: It may be a touchy subject, but due diligence requires that you ask about each advisor’s compliance record. An advisor with a strong compliance record generally presents less risk to clients, compared to an advisor with few or ineffective compliance controls. Questions to ask: Have you ever been disciplined by any regulator for unethical or improper conduct? How does your firm ensure proper practices and procedures are followed?

Chemistry: You’ve done your homework. You’ve checked the facts and asked all the right questions. Now your decision is simple: who makes you feel most comfortable? An ideal relationship may last for years, so you want an advisor whom you like and trust. Let your instincts guide you. You’ve prepared well.

Newport Partners™
469 King Street West, 4th Floor
Toronto, ON
M5V 1K4

Newport Partners carries on its business through Newport Partners LP and its subsidiaries, including Newport Investment Counsel Inc. ™Trademark of Newport Partners LP

416-867-7555