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How to choose a financial advisor? - DFSIN - SFL

How to choose a financial advisor

Many studies show that using an advisor can have a significant impact on the amount of wealth a person accumulates. But what kind of advisor, exactly? A brief overview.

November 26, 2021

The latest Canadian Financial Capability Survey by Statistics Canada shows that fewer than half of Canadians turn to a dedicated advisor to inform their investment decisions. And while 41% turn to the banking institution they do business with, almost as many go instead to friends or family members who do not necessarily have the required professional qualifications.

Could this be because it’s hard to sort out all the different types of advisors out there? Here are some criteria to help clear things up.

Six pie charts illustrating the percentage of Canadians who obtain their financial information from various sources. Financial advisor or planner: 47%. Banking institution: 41%. Friends or family members: 39%. Internet: 33%. Newspapers, magazines: 15%. Radio, television: 10%.

Various designations

Setting aside informal sources such as friends, the Internet and the media, financial advice can be offered by various kinds of professionals in Canada. Each one has a specific designation depending on the province and the certification process: mutual fund representative, financial security advisor, financial planner, etc. The financial planner, for instance, is an advisor who can set up a comprehensive plan to help individuals achieve their long-term financial goals. This plan would cover specific areas such as retirement, insurance, taxes and estate planning.

Use of the various designations is supervised by regulatory authorities. It might be a good idea to go to the source to verify the requirements of the designation used by the advisor offering his or her services – starting by ensuring that the advisor is properly registered.

Institutional or independent?

Advisors also differ in how they are associated with one or more financial institutions. Broadly speaking, advisors can be divided into four groups:

  • those who work for a bank, credit union or caisse populaire;
  • those who work for an insurance company;
  • stockbrokers and mutual fund dealers;
  • and, lastly, those who work for independent firms or have their own independent firm.

The specific product offering and the way the advisor is paid may vary depending on the nature of his or her relationship with a financial institution or investment product manufacturer.

How are they paid?

Advisors are paid for their services in various ways. Some of these are incorporated right into the structure of the product – mutual funds being one example – which can make it hard to assess the advisor’s exact compensation. This is why, a few years ago, the industry introduced an annual year-end statement for clients detailing the fees associated with compensation for the advisor or the advisor’s firm.

On the whole, however, compensation typically falls into three main categories:

  • commissions, billed at the time of sale or purchase, or on a deferred basis;
  • management fees, usually a percentage of the assets being managed;
  • and professional fees, billed on an hourly or flat-rate basis, for specific services such as setting up a financial plan.

Is it worth it?

A number of studies tend to indicate that an advisor’s services make a notable difference in an individual’s capacity to grow their savings. One of the most recent, from the Conference Board of Canada, has confirmed the results of another Canadian study done a few years earlier. The researchers found that consulting a professional advisor could enable an individual to end up with 55% to 60% more retirement capital than they would without an advisor, as well as 25% more spending power in retirement. Better still, this ability to enrich individuals could also have a broader economic impact by contributing to higher corporate profits, GDP growth and increased tax revenue.

This type of study can perhaps shine some light on the results of various surveys, such as those from the Investment Fund Institute of Canada (IFIC). In one of the latest, conducted in 2020, 84% of respondents state that they are satisfied or very satisfied with their advisor’s services, and 90% think that their advisor is worth the cost.

Finally, note that the Government of Canada has created a website to help Canadians navigate the realm of financial advice more easily. It’s available here.

The following sources were used to prepare this article: 

Financial Consumer Agency of Canada, “Canadians and their Money: Key Findings from the 2019 Canadian Financial Capability Survey”; “Choosing a financial advisor.” 
Get Smarter About Money, “Annual information about your investment fees.” 
IFIC, “Canadian Mutual Fund & Exchange-Traded Fund Investor Survey.” 
IIROC, “Understanding Financial Certifications.” 
The Conference Board of Canada, “Saving for the Future: Impacts of Financial Advice on the Canadian Economy.”