How to Choose a Financial Advisor in Canada

How to Choose a Financial Advisor in Canada

Written by Tiffany Woodfield, Associate Portfolio Manager, CIM® CRPC® and John Woodfield, Portfolio Manager, CIM® CFP®

Deciding how to choose a financial advisor in Canada can be daunting. You might not have a clear understanding of what the measuring stick is.

What do I mean by that?

The result is clear if I hire an estate lawyer to prepare my will. Likewise, if I hire an accountant to prepare my taxes, I know what I should be getting.

But when you hire a financial advisor, what is your desired result?

Should you hire a financial advisor to get you the biggest return? If not, what is the measuring stick? That's what we'll cover in this article.

You need to know what to look for and what matters most when seeking a financial advisor in Canada

TABLE OF CONTENTS

1. What to Look for in a Financial Advisor
2. How to Find a Financial Advisor
3. Financial Advisor vs. Financial Planner in Canada: What's the Difference?
4. Why Work with a Financial Advisor?
5. What Designations Should You Look for in a Financial Advisor in Canada?
6. What Is the Cost of Working with a Financial Advisor?
7. How Do You Typically Pay a Financial Advisor in Canada?
8. Ten Critical Questions to Ask a Prospective Financial Advisor
9. How to Know What Type of Advisor Fits Your Needs
10. How to Do a Financial Advisor Background Check
11. Should Your Financial Advisor Be a Fiduciary?
12. With Whom Should You Work If You're a Dual-Citizen or Green Card Holder?
13. Common Questions about Capital Gains Tax in Canada
14. Summary of Key Points
15. Next Steps

What to Look for in a Financial Advisor

It may be difficult to pinpoint the results you are looking for from a financial advisor. But here are some of the questions you should ask and things you should look for in a financial advisor:

1. Are they fiduciaries? In other words, do they have a legal responsibility to put a client's needs first?
2. What are their qualifications?
3. How do they keep up to date with new information?
4. Do they specialize in helping clients similar to me? For example, if you are a U.S. person living in Canada, does the advisor know the tax impact of this, and are they dual licensed?
5. How do they view their practice? For example, are they an employee of a bank, or do they take ownership of their client relationships and business?
6. Do they have a network of professionals they can refer to if you have a more complex financial situation?
7. What other services do they offer? For example, do they help with estate planning and financial planning?
8. Are they licensed to invest in individual stocks or only mutual funds? In other words, are they portfolio managers?
9. What would happen if they were to leave? Who replaces them?

None of these questions are about whether they will get you the biggest return. Although a big return might seem like a logical measure of success, a return should be based on the amount of risk you are willing and able to take. The greater the risk you're willing to take, the higher the potential return needs to be to compensate you for the additional risk you are taking.

The risk you can take on will vary depending on your situation. So not all clients working with a portfolio manager will get the same return. Your portfolio is tailored to you.

How to Find a Financial Advisor

Google has made it much easier to find a financial advisor these days. And if an advisor has a robust website, you can get to know a financial advisor before meeting them.

I always recommend digging around on a financial advisor's website. Ask yourself these questions about their website:

• What does it tell you about the financial advisor and how they run their business?
• Can you understand their values and the typical clients they deal with?
• Can you identify their level of expertise?

If you look at two advisors with the same credentials and similar backgrounds, you will want to know how to distinguish between the two. For example, at SWAN, one of our foundational values is education. We believe in continuing to educate ourselves and our clients.

Through education, we can be empowered to make decisions with more confidence. Education doesn't mean talking over clients. It is about explaining the essentials and simplifying them. If, for example, someone isn't familiar with the complexities of investing and tax planning, they will feel they know who to lean on to get the information.

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Independent Financial Advisors in Canada

When someone is an independent advisor, they have the benefit of running their practice with all the resources of a full-service investment firm. The independent advisor runs their practice and does not have to sell proprietary investments. Instead, they can focus on your long-term success as a client, and they can help their clients achieve their financial goals.

You can specialize in helping clients in a particular field and become an expert. There is a sense of pride and responsibility when you think of your own business and what you are building. As the client of an independent financial advisor-client, your goals align with your advisors' goals. When someone runs their own business, they take ownership and want their clients to do well.

A financial advisor at a bank may feel pressure to "sell" bank products. When you are a financial advisor at a bank, you are more restricted in terms of specialization. And you are limited to the bank's structure. Finally, clients are coming to the bank because of the bank's name and not for the individual advisor or advisory team.

Financial Advisor vs. Financial Planner in Canada: What's the Difference?

Sometimes you can find a financial planner that does a financial plan but doesn't manage your investments. I usually do not recommend this because you are paying for a service that gives you a plan but doesn't include a guide to keep you on track to your destination.

As we all know, life happens, and plans change. So a one-time plan can become obsolete as quickly as the following week.

I recommend working with a financial advisor who manages the entire picture. Make sure that as part of their services, your financial advisor creates a financial plan and then creates a strategy with your investments to keep you on track with your goals.

If your life changes due to a move, a new job, inheritance, etc., your advisor can alter the plan and investments to go in the new direction. Usually, having a financial plan prepared is part of the cost of working with a financial advisor.

Why Work with a Financial Advisor?

It's easy to make mistakes like selling your investments. You think the market will go to zero or purchase when the market is high because everyone else thinks so. These mistakes can lead to a loss in wealth that you never recover. In addition, there are investment and tax planning strategies for when you are in your high-income earning years. You're losing out if you don't know these strategies.

When you work with a trusted financial advisor, you aren't at the whim of what the financial talking heads are saying on the news. You have trust and a plan. And you know someone has your back.

What Designations Should You Look for in a Financial Advisor in Canada?

I would recommend looking for a financial advisor who is a portfolio manager. A portfolio manager is a fiduciary with the education and expertise to manage a fund, pension, foundations and individual portfolios. Portfolio managers have a fiduciary responsibility to put a client's needs first. Instead of purchasing mutual funds, a portfolio manager often purchases the individual holdings, which would make up a mutual fund.

In addition, I recommend working with a certified financial planner (CFP). To earn this designation, an advisor needs to have shown the skills, experience, knowledge and ethics to review a client's entire financial situation. A CFP typically indicates the highest level of expertise as a financial advisor.

As SWAN Wealth Management, we are wealth managers, portfolio managers, CFPs, financial planners, chartered retirement planning counsellors and trust and estate planning affiliates.

What Is the Cost of Working with a Financial Advisor?

The cost of working with a financial advisor varies depending on the firm and the services offered. Usually, if you pay a portfolio manager to manage your investments and build an individual portfolio, you will pay between 1-2 per cent.

Meanwhile, if you were investing on your own, you would usually pay between 1.25-2.5 per cent for a mutual fund and not receive any additional guidance or services.

The cost of a portfolio manager is tax deductible, so you can pay less tax while also getting the guidance and expertise of a professional. In contrast, a mutual fund fee is not tax deductible.

When meeting with financial advisors, you will want to ask if there are additional costs, such as trading fees and commissions. You will also want to know if you have to pay an hourly fee for a financial plan.

How Do You Typically Pay a Financial Advisor in Canada?

There are three main payment structures when working with a financial advisor in Canada.

Commission

In this case, you pay for every trade that the advisor makes. It comes directly off your trade. So if a trade is $10,000 and you pay two per cent, you will pay $200 for that trade. The incentive, in this case, is not planning. There is a trading incentive, so your goals may not be aligned with your advisor's goals. However, your trading costs are tax-deductible.

Built-in Commissions

Many packaged products like mutual funds have a commission built into their expenses. Thus, you do not see exactly what you pay your advisor because the commission is part of the cost of the mutual fund. Also, the commission is not a tax-deductible cost and typically adds one per cent to the cost of the fund.

Percentage of Assets under Management

In this case, the advisor charges a percentage of assets under management. The cost is tax-deductible except for a registered account such as an RRSP or a TFSA. There is no cheque to write to your advisor as the cost comes off your account directly, monthly or quarterly. You get a summary at year-end so that you can deduct this cost from your taxes.

Ten Critical Questions to Ask a Prospective Financial Advisor

It's important to have a clear picture of how things work before you get started with a new financial advisor. These are the questions I recommend you ask:

1. What type of client do you deal with?
2. What is your specialty?
3. What is your account or client minimum?
4. What are your core values?
5. Are you licensed as a portfolio manager?
6. Are you a certified financial planner?
7. What is your planning and investment philosophy?
8. Do you have a team?
9. What other services do you offer?
10. How are you paid, and what is your compensation structure?

How to Know What Type of Advisor Fits Your Needs

As you increase your wealth, you will likely have complex needs due to a more significant tax burden. A highly specialized team focused on your particular needs becomes a necessity. These teams generally include portfolio managers, certified financial planners, accountants and other support personnel who are highly trained in higher net worth planning and investment. These teams have experience in trust and estate planning as well as corporate planning, gifting strategies and insurance. Suppose you have $2 million or more in invested assets. In that case, I recommend you work with a team who understands high net worth planning.

If you have yet to attain $2 million in investable assets but still need higher-level planning, many options are available. Finding someone who specializes in helping clients like you is important. For example, if you have investments in the U.S. and Canada, make sure you find a dual-licensed advisor. Try to work with someone who is an expert at helping people like you.

How to Do a Financial Advisor Background Check

If you want to run a financial advisor background check, you can go ahead with relative ease. There are two primary resources.

1. For an advisor licensed in Canada, go to the Canadian Securities Administrators' National Registration search.
2. For an advisor licensed in the U.S., you can use FINRA's BrokerCheck.

Finally, you can also check on enforcement against an advisor in Canada.

Should Your Financial Advisor Be a Fiduciary?

Not all advisors are, so it is essential to ask if they are. And whether you feel you need to work with a fiduciary is a personal preference. A portfolio manager is a fiduciary because they have a legal obligation to do what is right for their clients. However, not all advisors have this legal obligation.

In Canada, outside of Quebec, anyone can call themselves a financial planner or financial advisor. So it is crucial to check if they have certifications and a legal responsibility to put your needs first.

With Whom Should You Work If You're a Dual-Citizen or Green Card Holder?

You should work with a cross-border licensed financial advisor if you are a dual-citizen or Green Card holder. Your advisor needs to understand the tax issues you face if you are a U.S. person living in Canada. Your advisor also needs to know how to manage your investments if you have Canadian accounts and move to the U.S. A cross-border advisor has the licensing to provide advice and manage your IRAs, Roth IRAs or RRSPs, whether you live in Canada or the U.S.

Common Questions about Capital Gains Tax in Canada

What Should I Look for When Choosing a Financial Advisor?

When looking for a financial advisor, the most important thing is to find someone with the expertise and knowledge necessary to help you with your specific needs. For example, if you’re a small business owner, perhaps you’d like an advisor who has experience helping other small business owners. While if you have investments in the U.S. and Canada, then you need a dual-licensed advisor. Find a financial advisor who helps people with situations similar to yours.

Which Canadian Bank Has the Best Financial Advisors?

You may wonder which Canadian bank has the best financial advisors. The answer might be different than you expect. In Canada, people often think it’s important to have a financial advisor at a bank. Whereas elsewhere, people consider it more important to have an advisor affiliated with financial institutions with a global presence. I recommend you look for a financial advisor working for an independent firm. Why? Because independent advisors own and run their practice like their own business and use the back office for private investing and estate and financial planning. In other words, you can get personalized service and advice backed by a global financial institution.

How Do I Know If My Financial Advisor Is Good?

When trying to figure out if your financial advisor is good, you should ask yourself a series of questions. Do they understand my needs? Do they communicate in a way I understand? Do they use their knowledge and experience to help keep me on track with my financial goals? If the answers to those questions are “yes”, you’re in good hands.

Summary of Key Points

• It may be challenging to choose a financial advisor.
• There are significant differences between an independent firm and a bank. Make sure you understand the advantages of working with an independent advisor.
• If you have a complicated situation, work with a team with experience and knowledge in helping clients like yourself.
• It is essential to understand the certifications of your financial advisor. Find out if they are a CFP or portfolio manager.

Next Steps

If you’re a Canadian resident or are planning on moving to Canada and need assistance with moving and optimizing your investments, estate planning, wealth management and portfolio management, please get in touch. At SWAN Wealth, we specialize in Canadian financial planning, cross-border financial planning and cross-border wealth management.

More Canadian Financial Planning Articles and Guides

If you’re planning a cross-border move, these articles and guides will help you simplify your move and ensure you’ve covered everything.

Cross-Border Estate Planning Guide

Roth IRA Canada: How to Manage Your Investments across the Border

The Ultimate Financial Planning Resource for Dual Citizens or Green Card Holders Living in Canada

401k in Canada - How to Stay Onside with the IRS and Avoid a Large Tax Bill

Retiring to Canada - A Financial Planning Guide

Financial and Tax Planning for U.S. Citizens Living in Canada

Canadian RRSP Facts for Dual Citizens, Expats and Canadians

About the Author

Tiffany Woodfield is an Associate Portfolio Manager licensed in Canada and the USA, and the co-founder of SWAN Wealth Management, along with her husband, John Woodfield. Tiffany advises clients who live in Canada and the United States and want to simplify their cross-border financial plan, move their assets across the border and optimize their investments to minimize their tax burden. Together, Tiffany and John help their clients simplify their cross-border finances and create long-term revenue streams that will keep their assets safe whether they live in Canada or the U.S.

John Woodfield is a Financial Management Advisor (FMA), a Chartered Investment Manager (CIM) and a Certified Financial Planner (CFP). In 2007, John was inducted as a fellow of the Canadian Securities Institute (FCSI). As a portfolio manager and CFP®, he works with clients across Canada. John’s clients are families, individuals and business owners who understand the importance of comprehensive wealth and investment plans driven by the lifestyle they want to lead.

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