For busy pharmacists with very little spare time, choosing the right financial advisor may seem impossible. There is certainly no shortage of companies and individuals willing to manage your money, so this article is intended to give you a basic understanding of the various options available to help you make an informed decision.
1. Do You Need an “Investment Advisor” or “Financial Planner” or both?
Before you start looking for an advisor, it is important to identify your needs. Some people want to delegate all their financial needs to a trusted advisor, while others are more hands-on and only need advice in certain areas. Whatever your requirements are, it’s important to understand the difference between an “investment advisor” and a “financial planner.” In some cases, the role of investment advisor and financial planner is performed by the same person.
- Investment Advisor: Investment advisors have many different titles, like financial advisor, mutual fund salesperson, vice president, portfolio manager etc. However, they all do the same thing: invest your money. This function may include determining your return goal, assessing your risk tolerance, setting up the portfolio, buying and selling securities (i.e. stocks, bonds, or mutual funds) and rebalancing when necessary. An investment advisor can only recommend, buy and sell investments that are permitted by their regulator. For example, some advisors are only registered to buy and sell mutual funds, while other advisors are registered to buy and sell stocks and bonds.
- Financial Planner: By contrast, a financial planner helps you answer questions like: How much money do I need to save for retirement? How can I reduce the taxes I pay? Can I afford to buy a bigger house? How much life insurance do I need? The title “financial planner” is used widely in the financial services industry, so it is important to check a practitioner’s credentials. The Certified Financial Planner (CFP) designation is the most significant credential among financial planners.
2. How Will You Be Paying? Commission or Fee for Service?
It’s sometimes hard to tell whether an advisor is a trusted professional or a just a good salesperson. To help you gauge trust, it’s crucial to understand how your advisor is paid. Most financial advisors are paid either through commissions or fee for service. A commission is a fee paid to the advisor whenever an investment is sold. Many investments like GICs and mutual funds pay commissions, so a conflict of interest may arise between your needs and the compensation needs of the advisor. Conflicts of interest occur in many other professions (i.e. dentists are paid based on the work they recommend to patients), so the existence of a conflict is not necessarily bad. What is important is having an open discussion with an advisor regarding any conflicts that may exist and how they are handled.
The other payment method is fee for service. These arrangements are charged either as a flat fee, such as $1,500 for a financial plan, or an annual fee, like 1% charged on the assets invested. Some advisors charge by the hour, like lawyers. Unlike commissions which are embedded in the price of the investment and not directly visible, fee for service arrangements are fully visible to the investor.
3. The Different Types of Investment Managers
The following are the most common types of investment advisors in Canada. Again, investment advisors may also financial planning services.
- Portfolio Managers: Portfolio managers (PMs) are firms that create and manage investment portfolios for individuals, trusts, foundations, endowments and pensions. Most managers in PM firms hold the coveted Chartered Financial Analyst (CFA) designation and abide by a strict code of ethic. Portfolio managers have a “fiduciary duty” over their clients affairs, which means that they are required by law to put their client’s interests ahead of all else. This compares to the majority of insurance and investment advisors who have a “duty of care” obligation to their clients (i.e. they are not mandated to put the client’s affairs first; they are only required to do what is “appropriate” for the client). PM firms typically charge a fee for service. Fees are also deductible in some cases.
- Brokers and Investment Dealers: Brokers and investment dealers are companies that mostly buy and sell stocks, bonds and other securities on behalf of their clients. Advisors of these firms are largely compensated by commissions on investment sales. Brokers and investment dealers are regulated by a self regulatory group called the Investment Industry Regulatory Organization of Canada (IIROC).
- Mutual Fund Dealers: Mutual fund dealers are companies that buy and sell only mutual funds. Mutual fund advisors are compensated by commissions earned on mutual fund sales. These commissions include an initial payment on the original sale of the mutual fund (the “sales commission”) and an ongoing service fee (the “trail commission”). Mutual fund dealers are regulated by a self regulatory group called the Mutual Fund Dealers Association (MFDA).
- Insurance Companies: Investments sold by insurance companies are mainly guaranteed investment certificates (GICs), annuities and segregated funds. These investments are actually contracts that provide a certain guarantee (i.e. a life annuity guarantees a certain payment for life). Insurance investments are sold by insurance agents who are paid commissions on product sales.
