I know you know that financial services in make tens of billions of dollars in profit every year, and where there is profit, there is bias. You’ll run into your fair share of aggressive sales pitches, not so caring advisors, or the smooth talker. Knowing how the financial advisor is paid can either remove this bias or at least keep you fully aware of when your best interests may not be aligned with the interests of the professional you are working with.
Primarily: know who you’re dealing with – There are as many as hundreds or thousands of people across the country who call themselves financial planners, consultants, or advisers but that’s not to say that they’re all doing the same type of work.
Here’s a designation list:
CFA – Chartered financial analyst CFP – Certified financial planner
CHFC – Chartered financial consultant CIM – Canadian investment manager
CLU – Chartered life underwriter CMP – Certified management professional
RFP – Registered financial planner TEP – Trust and estate practitioner
Next Step – your needs: When choosing a financial planner you have to think about what your needs are. Are you struggling with debt and would benefit from a cash flow expert? Are you looking to invest and in need of investing advice? Are you unsure what to do with an inheritance? Do you know what you want to do, but are just unsure how to execute the financial plan?
If you’re interested in stock tips, for example, or getting somebody to sell you the right kind of insurance, or to help you consolidate your debt, your best bet is someone exclusively skilled in those areas, like an investment adviser, stock broker, credit counsellor, or insurance agent. A more generalized financial planner, on the other hand, deals with broader questions like whether you should put money into an RRSP in the first place – as opposed to, say, paying down a mortgage or saving for a child’s education. They will help you figure out overall goals and a basic workable strategy to meet them, but they’re not likely going to be able to execute the entire strategy for you.
Payment: Fee versus commission
CFPs and RFPs are regulated by the Financial Planning Standards Council and the Institute of Advanced Financial Planners, respectively, and can theoretically lose their licenses for unethical behaviour. But at the same time, both are legally allowed to sell products, and as such could be biased towards a product that benefits them more than you in terms of fees. Generally, financial planners get paid in one of two ways. Some earn commissions on the products you end up buying. Others work on a fee-based model where the customer pays an hourly rate for unbiased opinions, and the planner has no financial incentive to steer them one way or the other.
In my experience, process is far more important than product. While implementation is an important part of a comprehensive financial plan, I believe that the education process is critical to helping a client achieve their financial goals. Being aware of the principles that will lead to an empowered financial life is far more important than the blind purchase of a mutual fund.
Feedback from clients these past few years has confirmed my belief that the best way for someone to improve their financial position (regardless of the tax bracket they might be in, or the challenges they may face) is to improve their own financial literacy. Trusting someone else with your financial future – who might profit from the decisions made – is dangerous. Remember, what is better for the seller is often worse for the buyer. And vice versa.
In summary consider what your needs are, what experience, expertise and qualifications you are looking for in a professional, interview a few different professionals to determine fit and comfort, know how someone is paid and do your best to minimize bias in the process, and consider the benefits of a fee-only financial planner.