Picture this scenario
It’s RRSP season. You see advertisements in all the metro stations, all the TV stations and all the social media. You have until March 1st to make your RRSP contribution and to get that tax break you have been hearing about.
You make an appointment with the financial adviser at the bank. You get one hour. In that one hour, your financial adviser, anyone who happens to be available at the time, gives you a questionnaire. From this questionnaire he’s supposed to assess your risk tolerance and present you 5 or 6 mutual funds which fall into your risk tolerance. Sing here, sign there, initial here and here and we are done, thank you very much. Next…
Asset allocation is one of the most important decision an investor must make and yet, we give it so little time, so little consideration.
There are a few problems with this scenario.
- The client and adviser don’t get to know each other. The adviser don’t discover anything about the client’s goals, knowledge nor expectations.
- The adviser only show the client the products offered by the bank. Most of the time the adviser will try to nudge the investor into actively managed funds, these are the funds which offer the highest revenue to the bank and thus the lower revenue for the client.
- If it is a Financial Advisory firm, not affiliated with a bank, the firm will definitely push actively managed funds. They would never suggest index funds nor low cost ETFs and on top of that, they will charge an additional management fee. They will do what I call “double dipping.”
What’s the solution?
- The solution is to look for a fee-only financial adviser. These adviser will charge you for their time. They have no conflict of interests, they won’t try to sell you products.
- Have a long conversation with your adviser. Let him know about your plans, your goal, your knowledge, your expectations.
- Take a holistic view of your situation. Are you planning to work after retirement? Do you have other investments? Are you planning to leave a money for your heirs?
- Build a long term relationship with your adviser, but continue informing yourself. If at any moment you detect conflict of interest, you suspect that he is charging but getting a commission somewhere else, his opinion in no longer unbiased and you should question his decisions.
- Make sure that the products he offers you don’t have trailer fees, or other kind of compensations. You want to make sure there is not even the perception of conflict of interest.
Finding a financial adviser without conflict of interests is very difficult but not impossible. If you find him, don’t be afraid to pay him his hourly fee, in the long run you will save a ton of money.