Financial advisor or salesperson
One of the big challenges of the financial industry is that most compensation and profits are driven by the sale of financial products like mutual funds and RRSPs. Unfortunately for Canadians, most financial advisors do not get paid to do financial or retirement plans. In fact most financial advisors are not paid for advice. All of their plans and advice are “FREE”.
Since I am trying new things for my blog, I produced this fun video about the advice given by much of the financial industry.
Although the video is design to be fun and humorous, there is some truth to the information. Let’s dig in on a few comments I hear too regularly:
You need millions and millions of dollars to retire happy
I’ve seen this far too many times where people jump to the conclusion that you need millions and millions of dollars to retire happy and successfully. Do you need a million dollars to retire happy? If you want to travel 365 days of the year, fly first class, stay in 5 star hotels and eat in fancy restaurants all of the time, then you will probably need millions and millions of dollars for retirement. At the same time, I am willing to bet you know people today who are busier in retirement than before they retired, who are retired successfully, living happy and productive lives in retirement without millions and millions of dollars in their RRSPs.
You can’t count on your pensions and especially government benefits
I believe that pensions and government benefits form the foundation of retirement income because it has the characteristics of the perfect income. It’s guaranteed. It comes in every month regardless of the economy, interest rates, or the stock market. And it goes up every year to some factor of inflation. We should never ignore these pensions. Far too often, I have seen retirement plans that generalize or ignore pensions. This makes no sense to me. In fact, I know and have met many people who are living wonderful retirements on their pensions, Canada Pension Plan (CPP) and Old Age Security (OAS). My dad is one of these people and for these people, they may not have needed to invest in RRSPs.
If you think about it, proper RRSP planning requires an understanding of what your future marginal tax rate will be at the time of withdrawal. If you have a good pension, CPP and OAS, you may not retire into a low tax bracket.
We do not charge anything
As mentioned, the primary form of compensation and profits in the financial industry are driven by the sale of financial products like mutual funds and RRSPs. Unfortunately for Canadians, most financial advisors do not get paid to do financial or retirement plans. In fact most financial advisors are not paid directly for advice. Just like in the video, all of their plans and advice are “FREE”. So how do advisors get paid? Canadians pay for this free advice in the form of high product fees like Management Expense Ratios, Front end loads or Deferred Sales Charges.
It’s a win win for everyone
When markets are down, it is not a win for the client because they lose money. When markets are down and the clients are losing money, the financial advisor and the financial institution still get paid. Maybe they get paid less but they still get paid. Is that really losing?
When it comes to the fees, the rate never changes whether the investment gains or loses. When returns are strong, one could argue that the split of profits between the investor, the advisor and the institution is much more reasonable than when the investment is losing money. In that case, the investor bears all the costs.
I look for actively managed funds that beat the market
Everyone wants to beat the markets but unfortunately for investors, the success rate of actively managed mutual funds is very low. Most actively managed mutual funds underperform the market because it’s not easy to do especially when the fees put you at a disadvantage in the first place.
The irony, is lower fee products have a better chance of beating actively managed funds simply because of lower fees. Investors (and Advisors) go to great lengths to try to beat the market with great stories, ideas and strategies but they ignore the easiest and best way to improve performance which is to simply lower fees.
I can show you funds that beat the market
Hindsight is easy. Predicting the future is impossible. Many advisors will look at past performance as proof that funds and managers can beat the markets. The problem is no manager will beat the markets all the time or even most of the time.
The investment industry always uses the disclaimer “Past performance is no indication of future performance.” Despite that disclaimer, it is the most common research for determining future performance. Too much emphasis on past returns is bad research because it is one dimensional. Good research is about employing multi-dimensional research. Bad research leads you to chasing performance.
All advisors are not bad
Although this article may appear to be tough on financial advisors, the truth is there are bad advisors but there are also good advisors. Good advisors give great advice and put together great financial and retirement plans. Good advisors can still sell products as a form of compensation but they will help clients reduce fees and justify their compensation. Good advisors deserve to get paid as long as they deliver value.
Unfortunately for the good advisors, the bad ones make it easy to poke fun at the financial industry and especially at financial advisors. I think good advisors can use this information as an opportunity to stand out in a sea of mediocrity. I’ve seen both good advisors as well as bad ones so hopefully this article helps people recognize some of the differences between the two. Just remember not all advsiors are created equal.
Am I being to hard on advisors? Do you think the truth might hurt a little?
This is a great post. It would be nice to have a survey done of financial advisors and see how they see themselves.
Any advisors want to sound in?
I should also mention this we developed based on a real life client who went to see an advisor that was really trying hard to sell actively managed mutual funds that beat the markets over the past 1, 3 and 5 years. So, as it does have a humorous touch to it, I can say it’s unfortunately reality based.
Great post Jim. Will definitely include in my Weekend Reading roundup!
Your last sentence said it all.
Unfortunately, some “good apples” are spoiled by the many bad fruit in the bunch.
No, you’re not being hard on advisors. No one is being hard enough on advisors. The good ones will prove themselves.
I now have a good advisor after spending ten years with one who grew increasingly defensive with my questions, which weren’t, by the way, unreasonable and involved information to which I was entitled. I was told, “I don’t know” when I asked about the MER of a fund that he was recommending, and “I don’t have a crystal ball” when asked what justified being in some funds, and when one of his junior advisors put me in a fund other than the one I approved, I was told, “I didn’t know about this”. I also asked for a portfolio analysis which I didn’t get, at least to the level I requested. And that advisor has some credentials and is with a large well-advertised firm, which, by the way, is irrelevant.
Investors are becoming more educated, I believe, albeit slowly, and the accompanying raised expectations make some advisors ‘uncomfortable.’ My advise? If you can’t stand the heat, get out of the kitchen.
Best point of the whole article – there are bad advisors, but there are good advisors too! Tough to find I’m sure, but they’re out there.
I don’t know about the fund industry, but I strongly suspect in the insurance industry that while advisors get ‘paid’, I don’t believe it’s less expensive to get insurance where no commission has been paid. In fact, it might be more expensive. I’m hoping to do a study on this in the next couple of months,comparing costs of products offered through advisors vs. direct channels.
Finding a good financial advisor these days is rare because all they try to do is sale you something that you don’t need so that they can make their commission
I am a Financial Advisor with my CFP with 15 years in the industry. I work for a Credit Union in Winnipeg. I am salaried plus I get bonused based on assets under management and growth of said assets. I do not get paid differently for GICs or Mutual Funds so I definitely have no incentive to sell one product or another, but I do have an incentive to sell.
I honestly would love to have my IIROC license so I could add ETFs to my clients portfolios though such a small percentage even ask about them.
My goal is always to provide advice that will best serve the client with the hope that the value they place on the plan and recommendations I provide will mean they will entrust me with their accounts.
I want to see and support the idea of financial planning becoming a true profession even if that means that income can not be earned through direct sales as I think the distinction would help Canadians differ from a Financial Planner, Financial Advisor, Investment Advisor and all rest of the myriad of titles and designations.
Thanks for letting me rant a bit :+)
People still buy shoes from retail stores, even though we know the sales people are on commission. The difference is, we’re aware of it, and shoe sellers don’t market themselves as Footwear Advisors. At least, not yet. And they don’t show us shiny charts of people dancing better and getting lucky while wearing their shoes.
I am an advisor/planner and I agree with most of the stuff above haha The majority of advisors/planners do not create any value and do more harm than good.
I would have to describe myself as a planner that has to sell himself haha I don’t try to sell “products” I sell myself and my philosophy. I do things a certain way (client/myself gives full disclosure, we do an analysis, we do a financial plan, and see if we are a good fit for each other, etc.) and am interested in working with like minded individuals that challenge me as much as I challenge them. It is a great feeling to discuss and soundboard different ideas/concepts/investments back and forth.
Great article Jim. It’s hard for someone to provide an honest and objective assement of their own profession, but you have done it in a balanced way.
The biggest problem I see with the Financial Services industry, especially at the retail level, is the compensation. Often, companies who provide investment products incentivize them to promote the most lucrative (worst yielding) products. That’s why many advisors push the products with the highest fees, which yield the highest comissions, even though they are a poor investment choice for the customer. It’s a built-in conflict of interest.
It takes an awfully honest adviser to overcome these incentives and do what’s right for their customer. Paying a fee-based adviser is one way to avoid this conflict. As Jim said, “Plans and Advice aren’t Free”.
The people who really know how to make signifcant investment returns have no reason to spend time trying to earn a living advising others.
well said. thanks. The only thing I can disagree with is the part about good advisors and bad advisors. This is playing into the misinformation and misrepresentation of the industry, and helping them to fool millions of Canadians.
“advisors” is a word which not only has a government license behind it, but it implies a certain duty of care owed to the customer. This word is misrepresented in this article, but can be slightly forgiven because nearly all people in Canada who call themselves “advisor” do the same. It is part of the “bait and switch” scheme of the industry to misrepresent simple commission driven product sellers as professionals. They generally are not, and they have gone far enough to remove even the requirement to place customer interests first. see more at https://www.youtube.com/watch?v=1WUbDsfZBio&feature=youtu.be
Financial Planning helps you reach financial freedom – a time when you are free to make choices without any financial worries.
Good advisors are always advisors and that has been well said.
Enjoyed reading the post above, really explains everything in detail,the post is very interesting and effective.Thank you for sharing and good luck for the upcoming posts.
Excellent post and well said.
The you tube video is great and so is the text.
But somehow the link in this article has been corrupted. Maybe you could fix it.
I have a reply. I am an honest financial advisor. 10 years ago I had a business that failed and I ended up tens of thousands of dollars in debt with no job, no car, my wife left me and I ended up homeless. I vowed to never let it happen again. I started reading books and taking courses classes and seminars. Over 10 years I became a professional investor and wanted to become an advisor to teach people about finance. I didn’t want to be a salesman of a product, I am passionate about cutting through the BS and loathe the industry’s penchant for ripping people off.
As I was getting licensed I began to notice a bias. The training itself seemed to be geared towards ensuring that all advisors are trained exactly the same way. After getting licensed I did due diligence on at least a dozen firms before contracting independently with one. While working with one of my “mentors” I shared a concern about a leveraged fund and over the next hour he attempted to sell me on that product. I told him its a bad product and I was told that to be successful I need to “get that shit out of my head, your job is not to be a financial expert it’s to sell segregated funds (like a mutual fund).” Whoa, what? I’m a financial advisor but my job is not to be a financial expert? That’s what the dude said! This is one of the company’s leaders and top producers.
Yup, he says when we sell a fund everything they need to know is in the fund fact document. If they choose to not read it that’s their problem but so long as you provided it to them and documented that they received its not your fault if the fund isn’t what they thought. It says very clearly in there that no performance claims are being made.
Wow. The prospectus is a document that allows the industry to rip people off. This particular fund had a maturity guarantee where the principal was protected, but if you add up the fees the MER was 6.0%! Over 25 years that adds up to more than the value of the account!
I know this has been long but just one experience with the industry. Frankly Im disgusted.
By the way the most honest product in financial services from my experience, if you can cut through the lies and BS is life insurance. I have relegated myself to earning my living selling 20 year term life insurance and teaching classes on what real investing means.