Helping Your Clients Select an Investment Advisor

In an investment advisory marketplace where individual professionals’ value propositions may be difficult to put a finger on, a barrage of referral requests can be stressful. This article will work through a non-exhaustive list of things to consider when choosing an investment advisor.

As an accounting or tax professional, you may have at one time or another been asked by a client or acquaintance for an investment advisor referral. Even more likely, you’ve been asked by one of these financial services professionals to refer business their way. 

In an investment advisory marketplace where individual professionals’ value propositions may be difficult to put a finger on, this barrage of referral requests can be a stressful one: how do I determine the best fit for my client? How do I avoid referring a client to an advisor who is simply a poor fit or who won’t have my client’s best interests at heart? 

The core issues surround cost, benefit, and the duty of care advisors owe (or are not legally mandated to owe) their clients. We will work through a non-exhaustive list of things to consider in this article.

Services offered

Although sound investment management is critical in the scope of reaching financial goals, it is only a piece of holistic wealth management, with other activities such as tax planning, estate planning, insurance planning, and risk management all playing significant roles in client outcomes. 

Determining which services will be offered and the competency of the professional in delivering those services is a crucial part of due diligence when selecting an advisor. The wealth management marketplace features perfectly competent advisory teams providing all or many of the above services for an all-in fee of 1.5% per year, but on the other side of the spectrum, there are plenty of examples of clients paying 2.5% per year for nothing beyond investment management. 

Furthermore, analyzing whether the advisor offers a suite of services that appropriately complements what you offer as a tax or accounting professional is an important consideration. You may even want to know how the advisor approaches the year-end process. Will they communicate with you proactively to let you know which tax slips the client should be receiving?  Are their year-end reports conducive to efficiently completing the client’s return and financial statements? Will the advisor add value to the tax planning process or will they hinder it? Which supporting professionals does the advisor have on their team?

Fees

Canadians pay the highest mutual fund fees in the developed world. This is likely a function of the concentrated nature of our financial institutions and lack of investor education regarding alternative options.  It’s not uncommon for a Canadian investor in a retail mutual fund to pay in excess of 2.5% of their assets under management on an annual basis. The compounding effect of these high fees over time is staggering. For example, consider an initial investment of $500,000 invested at 2.25% annual fees versus 1.5% annual fees over a period of 25 years, assuming 6% annual investment returns:



This provides a simple and intuitive criterion for selecting an investment advisor: all else equal, minimize fees. It’s important to note that fees charged are not always fully transparent. Products, particularly mutual funds, may have annual fees as well as deferred sales charges that are levied if the client redeems units before a certain date. An advisor using these funds is typically paid via trailing commissions from the organization that manages the fund. Alternatively, the advisor may use what are called F-class funds (which still feature an investment management fee but do not have trailing commissions) and then charge the client a separate fee of their own.  It’s critical to clarify all relevant fees at the outset of a relationship with an investment advisor.

Types of Investment Advisors

Education and regulatory requirements as well as products and services offered differ greatly depending on the type of financial service provider one is dealing with. Incentive structures vary significantly as well.  Professionals registered as portfolio managers (PMs) have the highest educational requirements among investment advisor categories- they are required to hold the Chartered Financial Analyst (CFA) or Chartered Investment Manager (CIM) designation as well as achieve other proficiency requirements. Important to note, PM professionals are subject to a fiduciary standard of care when dealing with clients, meaning they must place clients’ interests before their own. They may manage investments on a discretionary or non-discretionary basis and often have lower fees than other types of advisors. PM firms may have investable asset minimums depending on the market that they serve.

Mutual fund dealers are regulated differently. Most notably, these registrants are not held to a fiduciary standard of care and are not required to meet the stringent educational and proficiency requirements that PMs are. Mutual fund dealers are required to complete examinations offered by the Canadian Securities Institute. They are more commonly compensated via commissions (though are increasingly moving to annual fee-based compensation structures) and the all-in cost to their clients is generally higher. Importantly, they do not manage investments on a discretionary basis, meaning all trades must be confirmed by the client prior to execution.

Certified Financial Planners (CFPs) focus on holistic wealth management issues such as tax planning, estate planning, insurance planning, and retirement planning. They are required to complete rigorous examinations in these areas to receive the credential. In Canada, CFPs are commonly cross-registered in one of the registration categories noted above, as the CFP credential alone does not afford one the right to manage investments from a regulatory standpoint.

The registration category of a financial services professional can be found at securities-administrators.ca. Simply type in the professional’s name and their registration status will be displayed.  It’s important to note that there are highly competent professionals holding various designations in each registration category. The information presented is meant to provide useful rules-of-thumb but is general in nature.    

Bottom line

As a CPA, immense trust is placed in you to help guide many aspects of your clients’ financial lives. 

This extends to helping them select an investment advisor. Not only does a great advisor referral make your life easier and even add value to your practice, but a referral that goes poorly may sour the relationship you have with your client. 

The above points should go a long way in helping you assess whether an advisor is the right one for your client’s situation.

About the Author

Emerson Savage, CPA

Associate Institutional Portfolio Manager
Emerson Savage is an Associate Institutional Portfolio Manager at Louisbourg Investments. Emerson joined the firm in 2016 after working in the finance division at a multinational conglomerate. In his role, Emerson helps lead institutional relationship management, guiding investment policy and asset allocation decisions for the firm’s pension, insurance, endowment, and foundation clients. Emerson also helps lead content generation and marketing efforts at the firm, having written in the past on issues such as stock buybacks and quantitative investment management. He holds accounting and finance degrees from the University of New Brunswick as well as the CPA designation.