Financial adviser and client
If you're a typical Canadian trying to manage your money, you may recall the words of Avril Lavigne: "Why do you have to go and make things so complicated?"
It does feel exceptionally complicated today. In Canada, we're still having a sluggish recovery. Stocks are consistently volatile, interest rates are at record lows – making returns on investment low, too – and Canadians hold record levels of household debt.
To add to the complication, the real estate market, while still hot in centres such as Toronto and Vancouver, is showing signs of softening. Our biggest trading partner, the United States, just saw its economy contract slightly in the last quarter, yet some analysts predict it will outpace Canada in the years ahead.
How do you tell which way is up? You need a plan, and you need to talk to your advisers, says Lori Livingstone, a portfolio manager at ScotiaMcLeod, a division of Scotia Capital, in Toronto.
"The important thing is not to be complacent," she says. "We all want to get fit and exercise more, and we all want to save, but you need a plan."
In Ms. Livingstone's view, "a goal without a plan is just a wish," and you need more. Here are the top questions you should be asking your advisers:
1. Do I actually have a plan?
An annual investment poll published by the Bank of Nova Scotia in January found that two-thirds of Canadians say they can't afford to invest as much as they feel they should, and of these, 70 per cent have no financial plan.
Buying and selling a few stocks now and then is not a plan. Ask your adviser whether you have a systematic way to save and invest for your future.
Your adviser should be able to explain your plan clearly. Ask what your overall performance was for 2012, as well as for the past three years, five years and longer. Make sure you understand your statements – the papers you get in the mail or the information online. "Any good adviser should already be giving their clients statements that are fully transparent," Ms. Livingstone says.
2. Does my plan make sense for me?
You go through your clothes to weed out the duds from time to time, and you should do the same with your financial plan, too. Which investments are working well? Which are taking too long, or scaring you because they swing up and down? Ask your adviser how he or she plans to update your investment portfolio for the coming year.
Ms. Livingstone says your adviser should give you a good explanation of what you hold right now – not just a list of your stocks, funds and bonds, but the implications for your portfolio if you opt to keep them or if you choose instead to sell some of them.
3. How much does my plan cost me?
Don't be afraid to ask questions about fees, Ms. Livingstone says.
Your adviser should be able to tell you exactly how he or she gets paid. In some cases, advisers get commissions for financial products they sell – you should find out how much these commissions are costing you, so you can make sure they are reasonable and fair. Other advisers get paid for each transaction they make on your behalf. For some investors, this may be a better way to pay, but you should find out how much each transaction costs. Ms. Livingstone notes that in Canada, only 20 per cent of advisers have fee-based compensation, while in the United States, 60 per cent do.
4. Is the plan on track?
The closer you are to retirement, the more you need to pay attention to your investment plan and the more you need to deal with a skilled professional, Ms. Livingstone says. This should include a discussion – which may be painful for you – about how you actually spend your money.
You may find the results unpleasant and surprising. To talk about your spending, "you need to have a really good relationship with your adviser," Ms. Livingstone says. "I've had lots of conversations with people who spend too much. It doesn't matter how much money you have, if you spend more than you make, which a lot of people do, you're in trouble."
5. Do you need to prepare for change?
Your plan may be well thought out, but life can throw you a curve. Is your job secure? What about your relationship? "Marriage, divorce, deaths in the family – these are all important," says Brian Quinlan, a Toronto-based accountant.
Do you have a family member whose costs are going up, such as an aging parent or a special-needs child? Are you considering buying property? You should discuss these kinds of life-changing issues with your adviser, because you may need to adjust how much you save and what types of products you invest in.
6. What's the guarantee?
There are no guarantees, but you can buy insurance. Also, you should protect your assets by assuming only the risk with which you're comfortable. "Your adviser should be discussing your returns in light of the market returns, your goals and your risk tolerance," says Ms. Livingstone.
7. What happens after?
You need a plan for when you start withdrawing your investments in your retirement years, and you also need an estate plan for those who will inherit your nest egg. Who gets it? What's the best way to keep taxes down? Talk with your adviser about this now – you won't get a chance later.
Who are you?
In addition to asking your advisers about your investment plan, you should also ask them about themselves – how they are qualified and how they go about their work. Here are some key questions.
What kind of adviser are you?
To be licensed in Canada, qualified investment advisers complete courses administered by the Canadian Securities Institute – the Canadian Securities Course (CSC) and Conduct and Practices Handbook Course (CPHC). This is only the basic qualification, though. Many advisers acquire advanced designations – these include Financial Management Advisor (FMA), Canadian Investment Manager (CIM), Fellow of the Canadian Securities Institute (FCSI) and Chartered Financial Analyst (CFA). The last one requires at least three years of rigorous study about investment. Check the letters beside your adviser's name and ask what they mean – they could make a difference in the quality of advice you get.
How do you work?
In addition to asking how your advisers get paid (by fees or commissions), you should ask about their business. How many clients do they have? Many have more than 400, and if you're not in the first tier of clients you might not get the service you expect. Do all of your advisers' clients have the same mix of assets, or are they tailored to individuals? Identical programs may be okay if they're simple and successful, but you might want or need to be treated differently.
What do you sell?
Are your advisers able to recommend a variety of funds and investment programs? And if they do, can they explain their pros and cons? Some advisers will offer a wide, well-considered variety, while others seem to push the same mutual funds consistently, which may be because of the commissions they can reap.
Your returns?
The TSX had a total return of 7 per cent in 2013 and a three-year annualized return of 4.8 per cent, says ScotiaMcLeod portfolio manager Lori Livingstone.
The Standard & Poor's 500 had a total return of 16 per cent last year (in U.S. dollars) and a three-year annualized return of 10.9 per cent. The bond market was up from 3 to 8 per cent, depending on the bonds. Your own investments may have performed better or worse, but they should be in the ballpark, Ms. Livingstone says. "Given these numbers, every investor should be seeing positive returns regardless of asset mix."