Where can I get financial advice?

There was a very interesting question posted on our local community Facebook page the other day.  The original poster was looking for a financial advisor recommendation.  Specifically, someone that could help with retirement planning and to help answer big questions like paying down a mortgage versus saving.  In this case, the poster also made it clear they were not looking for commission-based help that would “push products”.

The comments section of the post was quite lively and largely civil.  I reviewed all the responses and most of them fell into four main categories:

1. Specific advisor recommendations (i.e. precisely answering what the original poster had asked).  Good job to those posters!
2. Suggestions to use “free” advisors such as big bank or institutional advisors
3. Suggestions that advisors were not needed and that you can just “do-it-yourself”.  This was often accompanied by a suggestion to watch Youtuber “X”, read book “Y”, or consult website “Z”
4. Specific, some good but most bad, advice on what the original poster should do with their money (e.g. Pay down your mortgage)

It was fascinating to me that the discussion was a microcosm of the personal finance industry itself – very complex, somewhat chaotic, and filled with both good and bad information.  Anyone reading the thread would likely be more confused about what to do after doing so.  This led me to ponder the question where can I get financial advice?

Below is a primer that tries to answer that question.

Full disclosure:  As a fee only advisor I am, of course, biased towards that choice but I’ve tried to remain as objective as possible listing the common pros and cons for each strategy.

1. Seek the advice of posters, friends, and family

As the title implies, this method relies on ad hoc advice from friends, family, or even strangers.  In short, I suggest you not take this route.  Things are not going to end well and it is very unlikely you will get a holistic picture of your financial situation.  If you do get advice from this type of source and it does make sense to you, then please do some due diligence – ask others or research the advice in detail before taking any action.

Pros

• It’s Free

Cons

• Lack of qualifications or industry knowledge
• May provide only specific “hot” stock tips or investments
• Lack of due consideration in general
• Don’t understand your specific (and usually complex) circumstances
• They may or may not have your best interests at heart

2. Do-it-yourself

There can be a powerful draw to do-it-yourself personal finance management.  All the resources needed to educate yourself are out there.  Discount brokerages with simple, low fee, and elegant financial products (such as all-in-one asset allocation ETFs) are available to anyone.  The downside is just how complicated personal finance is – goal setting, cash flow, investing, insurance, tax planning, estate and retirement planning, asset location, asset allocation…the list goes on and on.  It is very easy to miss something and to let a narrow focus or pre-existing biases colour your judgment.

There is a DIY middle ground that I think can work for many.  First educate yourself without making any firm financial decisions by reading a book or two (see this list for my recommendations).  Second, employ a fee only planner to help build a plan and educate yourself further as part of that journey.  They will help also by offering a second viewpoint and opinion.  Third, implement your plan based on the direction agreed upon and DIY your investments (thanks to low-cost index funds this is a lot easier to do than most people think).

Pros

• Inexpensive
• You are in full control of your decisions
• You will educate yourself in personal finance.  Knowing more is always a good thing.

Cons

• Personal Finance is very complex and can be overwhelming – it requires considerable knowledge and experience to make sound financial decisions
• There is a limitless supply of financial resources to sift through (websites, blogs, podcasts, books, videos, news articles, seminars) and much of it has self-serving interests or is just plain wrong
• Between research, education, and implementation DIY can be very time intensive
• You may suffer from a “narrow focus” at some point – simply not understanding all the options available
• You may continue to hold certain pre-existing biases which may prevent optimal decision making

3. Bank and Institutional Advisors

These are advisors from major banks and other financial institutions such as insurance companies.  While their services may be “free”, more than likely you will “pay” via the high fee products they will sell you.  Many of these advisors may also provide little in the way of additional services such as a comprehensive financial plan, insurance analysis, etc.

There is an additional worry with major banks as recently uncovered by CBC Marketplace (and previously in 2017/18 also as little seems to have changed) where bank employees may mislead customers and push products that help them meet demanding sales targets.

Pros

• Will manage your investments
• Will maintain some level of ongoing relationship

Cons

• Between management and/or product fees the approach will be very expensive
• May not provide much in the way of comprehensive financial advice
• May provide only limited investment options and/or product bias

4. Commission or Assets Under Management Advisors and Investment Firms

These are professional financial advisor firms that will typically charge a fee based on “assets under management”.  For example, if you have $500,000 invested with them, they may charge you, say, 1% per year (so, in this case $5000 per year).  In my experience, there are a handful of very good advisors in this space – they truly have the best interests of their clients at heart and they earn every penny they charge by way of comprehensive investment, planning, and advisory services.  Unfortunately, that is not true for many advisors in this category – there are some that will charge high fees while ultimately delivering average to poor investment results, and provide little in the way of comprehensive planning services.

Pros

• Will manage your investments
• May provide comprehensive financial advice
• Will maintain some level of ongoing relationship

Cons

• May require a minimum level of assets, often starting at $500,000
• Between management and/or product fees it will likely be very expensive
• May not provide much in the way of comprehensive financial advice
• May provide only limited investment options and/or product bias

5. Fee Only Advisors

Where, years ago, there were just a handful of fee-only financial advisors, today they are a fast-growing group and much easier to find.  And with good reason.  Fee only advisors will typically charge a modest one-time fee to understand their client’s needs and build a comprehensive “point in time” financial plan.  This will typically include all facets of personal finance from goal setting, cash flow, debt management, insurance, asset allocation, asset location, estate and retirement planning and much more.  Fee only advisors are not licensed to sell specific products and are thus generally free from bias and will place their client’s best interests first.

However, there are some downsides.  Fee only advisors can set you on the right path but they will not manage your investments.  You will have to either do that yourself, use a robo-advisor, or use an investment firm.  The good news is thanks to excellent financial products such as all-in-one asset allocation ETFs, being a DIY investor is a lot easier than most people think.

Pros

• Expect a modest one-time fee between, usually between $1000 to $3000
• You will obtain a comprehensive financial plan and roadmap
• Unbiased advice that is free for product bias

Cons

• There is a visible and upfront cost for this type of advice
• Will neither manage your investments nor recommend specific ones

While it is common for people to find an advisor through a referral from friends or relatives, you may run into issues where that advisor uses a fee model you are not happy with.  Maybe they work at an institution that offers only their products, or maybe there is a mismatch in personality or philosophy to your own.  So, regardless of what type of advisor you ultimately choose and how you find them, one thing you should do is select carefully.  This means at least two things:

a) Get and check references

b) Interview potential advisors by asking these questions:

1. What is your fee structure – how do you get paid?
2. If there is a conflict of interest, how can I expect you to manage this?
3. What services can I count on you to deliver?
4. What are your qualifications and experience?
5. How do you describe your ideal client?
6. What is your investment philosophy, and how do you justify it?
7. Will you question my decisions if you think they are contrary to my best interest?