If you have any financial knowledge then you should probably manage your money on your own. That being said, it’s definitely worth seeking out an advisor or planner if you have certain goals, such as retirement or estate planning or you want to make sure your portfolio is on the right track. Here are some quick tips on how to find a good financial advisor.

Understand that titles don’t mean a thing

You might think you’re in good shape since you work with a financial planner at your local bank or at an investment firm, but those people are often just salespeople trained to sell you their company’s product while getting rich on fees.

Markus Muhs an Investment Advisor and Certified Financial Planning professional with Canaccord Genuity Wealth Management confirmed with me that job titles generally are completely meaningless.

“A Financial Advisor can be anything from a personal banker to an investment banker making multi-million or billion dollar decisions. Outside of Quebec anyone can call themselves a Financial Planner.”

Be weary of some designations that some people put on their business cards: PFPC, CSC, IFIC are not designations, they are courses. If you see these on a business card, RUN, as it says something about the “advisor’s” desperation or their company’s lack of standards.”

Know how your financial advisor is getting paid

Financial advisors aren’t cheap. Your initial consultation could cost a few hundred or even a few thousand dollars. Some advisors charge a flat fee (“fee only”), while others charge a commission or fee as a percentage of assets (“fee-based”). You need to look at your individual situation to decide what the best solution is.

For example, if you have a moderate portfolio of say $100K, it probably makes more sense to just find a fee-only planner to set you up with a financial plan. On the other hand, those of us with a vault full of money ($1 million+), could benefit from a fee-based advisor according to Muhs.

“Because of their high net worth they can negotiate a lower percentage fee (1%, possibly less) and they can attract the truly top-notch advisors/portfolio managers/planners out there.”

If you’re a first-time investor with zero knowledge, I guess it’s okay for you to purchase mutual funds, however, you need to be aware of any upfront fees and possibly trailing commissions. “If investing in a discount brokerage you should ensure you choose the D-series version of the fund, which has a reduced trailing commission built into the MER, or the completely commission-free F-class, if available.”

Do-it-yourself investors are better off using Tangerine or TD e-Series funds which are low-cost index mutual funds. You can also very easily build a diversified portfolio with just a single ETF purchase, using Vanguard’s asset allocation ETFs.

Where to find a financial advisor

A couple of directories exist to get you started finding a financial advisor. If you’re looking for a fee-only advisor near you, Holy Potato’s directory is a simple Google Docs spreadsheet where financial planners have entered their own details of their practices. Another option is checking out the Financial Planning Association of Canada. They have a wide array of qualified, experienced advisors who are vetted based on their commitment to always act in their client’s best interests.

Generally speaking, I would avoid advisors associated with a bank or any investment firm which creates and sells its own mutual funds since they are primarily commission based and incentivized to sell their own products. Admittedly some of them can be great but I would only work with them if you knew for sure they are superstars (for example, through a referral from a friend or family member, not a referral from a bank rep). You should never walk into a bank and blindly ask to speak to a financial advisor.

“For the vast majority of us, looking for help both on the financial planning side and managing our investments, a commission-based advisor might be the only choice” says Muhs. “In that case, make sure their compensation aligns with your goals: that at all times they’re able to recommend the products that are best for you and not the ones that pay them the highest commissions or that bear the branding of a parent company.”

Final thoughts

A Chartered Financial Analyst (CFA) is the gold standard when it comes to designations but if you know someone who’s obtained their CFA they’re probably only managing multimillion-dollar accounts so they’re out of reach for the majority of us.

Generally speaking, the designation most commonly seen behind good, qualified advisor’s names in Canada is the CFP (Certified Financial Planner) and/or CIM (Chartered Investment Manager designation. If you find an advisor who has achieved both, you can be sure that you’re in good hands. Either way, you want someone you can build a relationship with.

“Advisors in Canada are not bound to a fiduciary duty (not required to put the client’s interests ahead of their own or their company’s) in Canada” says Muhs. “However, holders of some designation are encouraged (based on codes of ethics) to put the client’s needs first.”

Markus Muhs, CFP®, CIM® (www.muhs.ca) is a Portfolio Manager at Canaccord Genuity Wealth Management, located in Edmonton, Alberta. He provides comprehensive financial planning and wealth management to families with assets over $300,000 across Alberta, British Columbia, and Ontario. Markus alternatively provides fee-for-service (fee-only) financial planning to non asset-based clients.

So why does your MER matter? Canada has the highest average management expense ratio in developed markets at 2.14%. For most of us, paying an average of just 2.14% for a mutual fund sounds like good value, but over your investment lifetime, those fees could up costing you tens of thousands of dollars, if not hundreds of thousands. That’s why you need to know what is a management expense ratio and how you can reduce it.

What is a management expense ratio?

A management expense ratio is a fee that investors need to pay to the investment provider for running certain investments such as mutual funds or exchange-traded funds (ETFs). A quick example would be if you invested in a mutual fund with a 2.5% expense ratio, your cost would be $25 for every $1,000 invested. Sounds pretty straightforward forward but it’s a little more complicated than that.

MERs usually consist of a few different things with the management fee for the portfolio manager usually being the largest fund expense. Since someone actually has to run the fund, that’s where the management fee comes in. What gets tricky is sometimes your advisor may tell you they get a very small percentage for their services; well that price is part of the larger management expense ratio that you pay which obviously adds up over time.

The MER also includes operating expenses such as transaction costs, office supplies, record keeping, administrative costs, legal fees etc. Although the MER covers most expenses, there can be separate fees that we pay such as front or back-end loaded funds which are commissions paid separately from the MER. This doesn’t apply to all funds so always ask for the details.

Management expense ratios are different from management fees. MERs are what the fund charge while other companies such as robo advisors may charge you another management fee on top of the MER. This management fee usually isn’t more than about .50%, but if you combine that with an index fund that charges a .50 MER, your total fees for that found would be 1%. That’s still much lower than mutual funds.

How does the management expense ratio affect me?

Some of us still believe that we’re getting value for paying a small percentage of our investments, but let’s take a look at how the MER eats into our returns. The following chart assumes the following:

• $100,000 initial investment
• $5,000 annual contribution
• 5% annual rate of return

Obviously, the lower your MER, the more money you have in the end. The MER percentages I’ve chosen are actually the average of the most common investments and are broken down as follows:

• 2.5% – Average mutual fund MER
• 1% – About the cost of using a robo-advisor or Tangerine investment funds
• .50% – About the cost of using TD e-Series index funds
• .20% – About the cost of a self-directed ETF portfolio

As mentioned, there are a few other costs associated, and if you’re a self-directed investor you will incur some trading fees so the above chart isn’t an exact science. The idea is to give us a general idea of why we should pay attention to our MER.

The difference between paying 2.5% and .20% MER over the course of 25 years would be $168,452.00 in our above scenario. Think about how far that money could go in our retirement years.

It’s also worth mentioning that the most expensive funds don’t necessarily mean you’ll get better returns for your funds’ investment portfolios.

When people see the potential savings, they start thinking about transferring their TFSA and RRSP.

How much am I paying?

Now let’s look at it strictly from a fee perspective. The following chart shows how much money we pay for our management expense ratio.

An average mutual fund will cost you $182,909.94 in 25 years, is that not insane? It’s impossible to get our MER down to zero, but you can see what a HUGE difference it makes on our bottom line. Most of our investment timelines last longer than 25 years, so by the time we retire we could have paid hundreds of thousands of dollars in fees if we stuck to regular mutual funds.

I’m not expecting everyone to become DIY-investors, but there are so many different options such as robo advisors and Tangerine investment funds, there’s no reason we can’t reduce our management ratio. Seriously, it’s so easy to transfer your RRSP to a robo advisor such as RBC InvestEase, Justwealth and Wealthsimple.

How do I find out my MER?

Every mutual fund and ETF has a prospectus available to potential shareholders that lists the MER. In addition, you’ll also find the following information on the prospectus:

• ​Fund name
• Portfolio manager names (if any)
• Fund’s assets
• Net asset values
• Summary of fund goals
• Historical data on the fund
• Distribution fees

The prospectus will give you a clear idea of what the funds’ goals are and how it’s performed since its inception. Note that the MER is automatically factored into the gains. For example, if the fund is showing a return of 5% in the last year, the MER has already been subtracted.

If you’re new to mutual funds and WTFs, a good place to start is Morningstar. They provide market research for investment products. You’ll quickly be able to research different equity funds, total fund assets, any transaction fees, and even what the administrative fee is for different brokers. 

Should you switch funds because of the MER?

Since mutual funds have an average expense ratio of 2% to 2.5%, you should definitely consider switching to funds with lower expense ratios. Better yet, switch to an ETF since there will be no sales charges or sales loads to pay.

There are so many all-in-one ETFs these days from reputable companies such as Vanguard that charge an MER of less than 0.50%. Why pay a high mutual fund expense ratio when you don’t have to? As I’ve already pointed out, the savings can be considerable. That said, you do need to do some basic research first to understand why buying index funds with a low MER is the ideal solution. You would also have to open an account with a discount brokerage so you can purchase the funds on your own. For reference, all of my investment accounts have a single ETF.

However, if you’re a high-net-worth individual who gets additional services from your financial advisor such as estate and tax planning, then the additional fees may be worth it. That said, if you’re getting those kinds of services, you’re probably better off paying a fee-only planner.

Final thoughts

I understand that the majority of people have no interest in managing their money, but I do believe most people would prefer to have more money when they retire. Now that you know what is a management expense ratio, don’t you want to start saving money? The purchases you make and a fund’s expense ratio can have a huge impact on your investment objectives. By reducing your fund fees, you could potentially increase your net worth.

It doesn’t surprise me that many people still prefer to work with a traditional advisor. The problem is, unless you have a sizable portfolio, financial advisors at the retail level may do you more harm than good. The fees that are embedded into mutual funds will eat into your returns. Now that being said, using a fee-only financial planner offers incredible value, even though they can be “expensive.”

With the introduction of robo-advisors in Canada, Canadians now have more options. WealthSimple, Nest Wealth, and WealthBar (now known as CI Direct Investing) all have established roots and are taking on clients in select provinces. To be clear, robo-advisors aren’t actually robots, they’re online advisors that help build custom portfolios with minimal human interaction. They’re relatively new in Canada, but in the U.S., robo-advisors have been around for years and manage an estimated  $15 billion US dollars!

Why work with a robo-advisor?

The most obvious reason would be the lower fees. The cost of using a robo-advisor falls somewhere between being a DIY investor using index funds and using a financial advisor who recommends mutual funds. The bigger your portfolio, the more you save but think of those long term savings.

“Compared to the average Canadian balanced mutual fund, a forty-year-old starting with $150k and saving $1,000/month will save over $300,000 on fees alone by age 65,” says Tea Nicola, CEO and co-founder of Wealthbar. “This continues to add up all throughout retirement, the fee difference can mean being able to retire 10 years earlier than if you were invested in a balanced mutual fund.”

Since robo advisors in Canada never need to meet clients face-to-face, nor do they have a brick and mortar operation, they’re able to keep costs low and pass on those savings. Technology pretty much automates the mundane day-to-day tasks further reducing costs without compromising the quality of any investment advice.

It’s also a matter of convenience. People’s lives are increasingly busy, so why bother trying to fit in an appointment during banking hours when you can simply do everything from the comfort of your own home. With robo-advisors, you can open an account, create a financial plan, and get financial advice all online.

Why pick robo-advisors over a traditional advisor?

Despite recent changes with regulations, many advisors still aren’t being transparent. Mutual funds often have confusing performance records as well as hidden commissions and costs. Robo advisors in Canada tend to be much more clear and are able to present data instantly online in a clear way. Clients know exactly how their investments are performing and what they’re paying.

Don’t forget, many financial advisors at the retail level lack any serious training, so their financial advice might be limited. When dealing with robo-advisors, you’ll be assigned a personal financial advisor regardless of your portfolio size. Getting solid advice is the key to increasing your financial literacy and making sure you develop good financial habits.

If your portfolio is well into the 7-digit range and you require some more complicated advice in regards to tax planning, and estate planning, then maybe you’re probably better off using a fee-only financial planner. That being said, the services robo-advisors offer is growing. WealthBar dubs themselves Canada’s only full-service online wealth manager and offers services beyond just financial planning and investment management.

“We also offer insurance services and can provide a simple estate legal package (will/power of attorney/living will) through an affiliate for under $100.00,” says Nicola. “For clients who have funds that they cannot transfer (such as Group RRSPs), we will help them select investments within the plan that suits their profile and objectives and are in sync with their WealthBar’s accounts.”

The ETFs used by robo-advisors are industry leading and selected based on performance, track record, holdings, assets under management, price, trade volume and country of origin. In theory, you could copy the recommended portfolios on your own but with robo-advisors the process is simplified and you get access to a financial advisor to guide you through the steps.

Final thoughts

Using a robo-advisor is a unique experience since your investments are automated, yet you still have access to a financial planner. If you do need to talk to a live person, you’ll always be able to talk to someone over the phone. Any changes to your portfolio or a financial plan review will only take about 20 minutes.

Robo-advisors pride themselves on helping Canadians understand their household finances, that’s how they differentiate themselves from traditional advisors– that and lower fees of course. That being said, online or in person, no 2 advisors are alike so be sure you ask a few questions in advance so you’re completely comfortable with your advisor before making any investment decisions.

I suppose you could say I became serious about money a few years earlier since I knew the engagement would come eventually. I wasn’t very happy with the services that my bank was providing at the time so it didn’t take much convincing to move my money to an investment firm when a former co-worker of mine became a financial advisor.

My advisor had slick presentations, was always in communication and he made me feel rich. He seemed like a completely normal person. He outlined a plan for me and invested my money in a few mutual funds, best of all the fees were minimal. I had complete faith in him, but fortunately for me, a random encounter saved me from a lifetime of fees.

Thanks to a stranger

For a little while, I was obsessed with the site Redflagdeals.com and would frequent the message board on a regular basis. One of the forums covered personal finance and in there was a thread where a member was asking about the services of the investment firm where my advisor worked. I wrote about how thrilled I was with the service and that I wasn’t really being charged much so it was worth switching.

A few other members started to give their input and started to talk about the high management expense ratios (MER), but I was adamant that I wasn’t paying that much because that’s what my advisor told me. I took him at face value, this was supposed to be a friend after all right?

A random stranger privately messaged me and explained to me what MERs were and how I was definitely paying them. He took the time to explain how MERs worked and how they would affect my returns in the long run. Deferred sales charge (DSC) was also a new term that he introduced to me; if I wanted to pull my funds out I would lose some of my money. Of course, he encouraged that I check on my own and to call the firm’s customer service line to find out what my fees were.

Getting serious about money

I called my investment firm and inquired about the fees, they confirmed that the funds I was invested in had an MER and DSC. After the initial shock, I realized it was time to get serious about money. My advisor didn’t technically lie to me, he did get paid a tiny commission, which was part of the bigger MER. He also never mentioned what a DSC was since I never asked, to be fair, I should have done my due diligence.

I decided to ask my advisor about the fees and lack of transparency and he responded with he could switch my portfolio to more aggressive funds if I wasn’t happy with the performance. That was totally irrelevant to my questions so I took it to a level above him and provided evidence that my advisor had deceived me. There was a quick internal audit, and I had my deferred sales charges waived with the condition I do not further seek compensation, nor do I speak about the firm or advisor involved in public. This is why I’ll never publicly disclose which firm I was with or who my advisor was.

Final word

It was pretty clear to me at that point that the only person that would care the most about my money was me. I took the time to educate myself and put myself on the path to where I am now. That being said, I now recognize that it’s just fine to get a little help if you’re uncomfortable becoming a do-it-yourself investor. You could also work with a fee-only financial planner which is totally worth your money. Just know that everyone needs to get serious about money one day.

Personally, I think you’re better off reading a book and managing your finances on your own but I’m not going to argue with someone who wants to save now. If your portfolio is small, or you need someone to hold your hand, that’s okay, just be aware that there are questions to ask your financial advisor.

Ask the right questions

What’s your title/education ?

This may be hard to believe but there is no formal credentials required to call oneself a financial planner. That’s right, you could put financial planner on your business card right now, and it would totally be legal. That being said you still want to ask if your advisor has any professional designations, and what training they have.

What experience do you have?

We’ve already established that education and titles are irrelevant so experience is a bit more important. Find out how long your advisor has been working, and what companies they’ve worked for. Have they worked with clients that are in similar situations to you? If this is their first job or they recently changed careers, maybe they aren’t the right fit for you.

What are you licensed to sell?

As you can imagine someone who is only licensed to sell insurance products will push you hard on insurance. If they’re only licensed to sell mutual funds, then of course they’re going to sell you those. You want to make sure that your advisor is able to offer you a wide range of products, and can explain the pros and cons of each.

How do you get compensated?

I keep hating on bank salespeople, but to be fair banks, employ qualified financial planners that provide great service and advice. You want to find out how many clients they have, and what their average client size is. Ask them if their compensation is on an ongoing basis, or do they make up front commissions?

Advisors at the retail level usually get paid a straight salary or on an hourly rate; their main goal is to make a sale and move onto the next customer. If you’re going to purchase mutual funds through your bank, you might as well do it through one of their financial planners so at least you can get real advice.

[fusion_builder_container hundred_percent=”yes” overflow=”visible”][fusion_builder_row][fusion_builder_column type=”1_1″ background_position=”left top” background_color=”” border_size=”” border_color=”” border_style=”solid” spacing=”yes” background_image=”” background_repeat=”no-repeat” padding=”” margin_top=”0px” margin_bottom=”0px” class=”” id=”” animation_type=”” animation_speed=”0.3″ animation_direction=”left” hide_on_mobile=”no” center_content=”no” min_height=”none”][icon name=”share” class=””] Related: 6 Bank secrets to be aware of

What are the fees I’m paying?

All products carry a fee which is referred to the management expense ratio (MER), you want to find out exactly how much this MER is. Mutual funds average about 2-3% which doesn’t sound like a lot, but that’s a lot of money when you compound it over 30 years. You should also find out if there are any fees to be paid if you decide to pull out your funds early, this is referred to as a deferred sales charge.

What’s your approach to financial planning?

This is one of those questions to ask your financial advisor where you’ll probably not be satisfied with the answer. Retail advisors don’t specialize in taxation, insurance, investments, or anything really– they’re pretty much selling you whatever is popular at the moment. That being said, you still want to ask if the advisor is able to advise a plan, and how they plan to implement it.

What is your decision making process with my investments?

When working with someone at the retail level, you want to know how they are coming up with their recommendations, so ask. Do they have access tools, or do they make their decisions based on what the research team recommends? Are the funds all actively managed? Are there lower cost options? The reality is, you’re going to have limited choices.

[icon name=”share” class=””] Related: Signs your advisor doesn’t know anything

Final word

If you haven’t figured it out by now, advisors with banks and investment firms tend to have limited knowledge– they don’t have a required fiduciary duty. Financial planners however have an implied fiduciary duty so if given the choice, use their services. Regardless of who you decide to work with, the key is to start saving now and do your due diligence.[/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]