Part 2: Choosing a Financial Advisor is Like Choosing Lingerie

Original: Oct 27,2017; Updated March 18, 2018

Deciding on an accountant and financial advisor are critical decisions for your financial success. In my last post, I talked about the choosing the right accountant. Having an accountant is like underwear – not really optional for most people.

A financial advisor is more like lingerie:

  1. It tends to be more sexy. Seriously – I have not met very many advisors who were not attractive and well quaffed people. Be careful, it may look better on the model in the store than it does when you take it home.
  2. It can be an optional item and the need for it may change at different points in your life.
  3. You might go for a bit more “racy” when younger, but going a bit more “conservative” as you age is likely for the best.
  4. You can save a lot of money if you have the confidence and know-how to go without it. I should also mention the discipline to stick to a financial plan, but talking discipline and lingerie is a bit too riskée even for me.
  5. The cost does not necessarily correlate with the size of the merchandise. You could pay a lot for very little if you are not careful.
  6. You generally should be careful about buying lingerie from the bank.

Do you need the help of some lingerie?

This new dental floss is amazing!

If you already have large assets and lots of experience, then you may not. However, most of us start out with neither. We need to either gain knowledge and experience on our own using our brains, books, and blogs – or with the help of a teacher/advisor. There are good arguments for both approaches. There is also the option of a third way using an advisor intermittently for the cohesive expert planning part while managing your portfolio on your own. Let’s explore the anatomy of these approaches.

An advisor can provide an objective and broader view of your finances.

While you may be fixated on your debt, or your retirement, or insurance protection, or saving towards some specific stuff or experiences — a good advisor will help you look at and balance all of your needs in all of these areas. A good professional financial advisor should have a broad and deep knowledge of personal finance. There may be areas, aspects, or options that you had not considered because you didn’t even know they existed.

I don’t fully understand how this product works, but I am pretty sure I don’t need it!

On the other hand, you can also learn about each of these aspects of financial health via numerous books and the internet. No one knows the balance and prioritization of your needs as well as you do. Also, while the number and variation of financial tools available are vast and can be overwhelming, you don’t need them all. A solid financial plan can be built around a few simple tools and I have always been leary about using tools that I don’t actually understand well myself.

Having a layer between you and making snap investment decisions can help stop you from making impulsive mistakes.

Our brains are wired to make us failures as investors. Fear is one of the strongest drives and is so deeply seated in our make-up that it is hard to overcome. While this probably served us well when we needed to flee from saber-tooth tigers, it sabotages us as investors. People tend to sell prematurely due to fear of losing the profit they have made to date or put off buying when things are a bargain – usually because that coincides with a fear-driven sell-off. Having to call someone to make purchases or sell from your portfolio can be a good safety check.

Of course, another approach would be to consistently buy and hold a balanced portfolio. Rebalancing once or twice a year. That is quite simple and does not require a financial advisor. This of course is nowhere near as exhilarating and titillating as going with the lingerie, but let’s face it. I am forty-ish, married, and at this point there is really something to be said for simple good consistent returns. The key to this approach is to stick with it and not sabotage yourself by trying to be an active investor. That is easier said than done for many professionals/business people because it is in our nature to think, analyze, and try to be smarter than the average person. Know yourself.

A financial advisor or portfolio manager could actively manage your portfolio to get greater returns.

This is part of what makes financial advisors sexy like lingerie. They may even come with glossy pamphlets or webpages with lacey frills to accentuate their desirable traits and curvy graphs that draw the eye away from their fine print. Like lingerie, when you peel off the layers what you find beneath may better or worse than you anticipated. Let’s peel and have a look at the Full Monty.

  • Can you pick the advisor or portfolio manager who can consistently beat the markets every year? I can’t. The stock markets are a zero sum game and the biggest influences are still large funds rather than individual investors. For everyone who beats the market by 3%, another has to lose by 3%. It is like betting on horses. The best guess you have on any manager is their past performance and it is true that past performance does not predict future performance. Very few are able to consistently beat the market for even a few years.
  • To actually put you ahead, your manager has to not only beat the market, but they have to beat it by more than the cost of their fees. An active manager costs money. For an individual advisor, this may be around 1% of your assets under management (AUM) per year. If you have a larger portfolio, you should be arguing for a lower % of AUM because it does not take more time or cost more money to manage one million compared to two. Most mutual funds have to pay for not only their money managers, but also their salespersons, business infrastructure, and business taxes which get rolled into the management expense ratios (MER). Most mutual funds have a MER between 1.5-2.5%. For contrast, a passively managed index tracking ETF, usually has an MER of 0.05-0.5%.
  • So, an advisor needs to consistently beat the market by about 1-2% per year to be financially worth it from an investment standpoint. That is incredibly hard to do. The literature comparing the performance of active versus passive investors is actually complex and mixed beyond the scope of this post. In general, most actively managed portfolios do not beat the market when fees are accounted for. This is especially true during bull market years when any idiot (like me even) can look like a genius just by spending time in the market. Over the past 90 years, the stock market has spent much more time in bull mode than bear mode. In that setting, the most time in the market with the least drag from fees and taxes generated by turning over your holdings does the best.
  • Be leery of getting seduced in by a sexy financial advisor. Almost all advisors dress well. It is part of being a professional and you don’t want a bum managing your money. However, beware if it is excessive. Some wear expensive clothes and drive expensive cars to exude financial success from their pores like pheromones to draw clients. This will also be coupled with some stroking of your ego about your own success and innuendo about your future financial triumphs. It is hard to resist – these folks are pros and part of being a successful advisor is indeed being able to woo and attract clients. But also remember this. Rather than reflecting financial success, an overly expensive suit or car may reflect a lack of fiscal discipline or an overemphasis on appearances. They get the money to buy those things from their fees mostly and usually they get paid whether they make you money or lose you money. I would want an advisor with depth, their priorities in the right place, and who will honestly tell me if my lingerie makes me look fat.

The real value of a financial advisor often lies more in the general financial planning and advice than in their investment management. So, you want to make sure that you pick an advisor that is going to give you good advice and good value for your money.

Features of an advisor more likely to give you good advice:

1. They are qualified.

Many “financial advisors” are simply mutual fund salespeople which does not require extensive training and certification. For a financial advisor, you should look for someone who is a Certified Financial Planner (CFP). That means they have at least three years experience, have taken training approved by the Financial Planning Standards Council and passed an associated exam. If they are going to handle my investments, I would also want them to have a Chartered Financial Analyst (CFA) designation which means that they have at least four years of related investment experience and have passed as series of three exams.

2. They are up-to-date. 

Ask them what their most recent training or course was about and how they keep up on recent tax or regulation changes.

Whatever their designation and training, it also pays for you to know some of the basics about financial planning and investing. Despite the improvements in the industry, there are still many advisors who are misguided, as recently described by Robb Engen.

3. They have fiduciary duty to give you the best advice with your best interests first.

“You’ve been a very very naughty advisor.”             -photo attribution: Dominatrix on Trial byTerry-Jean Bedford, CCBY3.0 WikiCommons.

While we would all hope that financial advisors would have a fiduciary duty to put their clients first, this is not tightly regulated. Most advisors are classified by the Canadian Securities Administration search engine as Dealing Representatives which means they are required to recommend products that are “suitable” to their clients – suitable does not necessarily mean best. There are very few people registered as an Advising Representative. An Advising Representative has a fiduciary duty to put their clients first, but are also going be costly – they are mostly found in Toronto based firms dealing with high and ultra-high net worth clients. A CFP, while not registered as a fiduciary, has a code of ethics that they are to follow which includes providing objective advice that puts clients first and a complaint can be filed against them. While I think most people want to be good and want to be helpful, they are also human. So, it is also important to ensure that the environment they work in re-enforces good behaviour and doesn’t provide temptation or pressure to be naughty.

4. Their incentives are aligned with giving you the best advice.

This is a big one. Be careful to find out and consider how your advisor is paid.

  • Some are paid direct commissions for products (like mutual funds or insurance) that they sell. Others may not receive direct commissions, but they get performance bonuses from their employer that sells the products and the commission cost is buried in the MER of the product. You are more likely to get unbiased advice from someone who is not paid this way. This is why I don’t buy lingerie at the bank.
  • Some are paid commissions for the brokerage of stock transactions. The cost of buying or selling stocks or ETFs this way can be in the hundreds of dollars per trade rather than <$10 with a discount brokerage. The bias of an advisor here is to have you buy and sell more frequently rather than buy and hold. Churning a portfolio usually only makes the advisor/brokerage rich while eating into your returns with fees, taxes, and possibly poorly timed trades.
  • Others are fee based. This can be a flat annual or hourly rate for providing advice. This is likely to yield you the most unbiased advice if you are using an advisor for general financial planning advice on its own.
  • When you add in management of your investments to a fee based advisor, that adds in a couple of other potentials for bias. If you have an advisor that is paid based on commission from trades that are made, you have the bias to churn your portfolio noted above. If they are paid based on a percentage of your portfolio, that is usually preferable. On the plus side, it gives the bias that the bigger your assets under management (AUM) grows, the more they make – aligning their incentive with your goal! Be careful that it is not a linear relationship – your fee should not double as your portfolio doubles unless the work to manage it also doubled. With smaller accounts, this may be true. However, as you get up over $100000, while the cost still rises, the costs as a percentage of AUM should shrink. One potential bias that advisors who are paid via %AUM could have is to steer you away from assets that wouldn’t be under their management (and fees) like real estate and other alternative investments and rather to put that money to work under their watchful eye. That said, real estate can be both risky and have a high potential to be a pain in the butt – think landlord with deadbeat tenants or toilette explosions. Alternative investments can also be complex and risky – there may be some wisdom in its own right to steer away from them.

5. They take the time and effort to understand your situation and goals, so that they can give advice tailored to you.

If you are going to buy lingerie, you want to make sure that it fits you for your goals. Some like it snug and curve hugging and others benefit more from illusion and imagination. One size does not fit all. It is helpful if your advisor specializes in or has a large clientele of people with a similar professional or financial situation to you. That helps give some broad stroke perspective and experience in optimizing your financial plan. Even if they have hundreds of similar clients, your individual situation and preferences will be unique. You should expect that they will spend at least an hour or two getting to know these nuances before coming up with a plan for you. They also need to take in what you have discussed and tailor a plan to you – that should also take more than a few seconds if they aren’t simply listening and then giving you the cookie cutter plan. Your life and financial situation is not static and your advisor should also be reaching out to meet and revisit your plan with you annually. You should also contact them to revisit your plan if your situation changes radically.

6. They are part of a co-ordinated ensemble.

A good financial plan includes not only personal finance or investment planning, but also tax planning, insurance, and estate planning. Like a sexy outfit, you want to make sure that all of the parts and accessories compliment each other. You do not want your earrings to clash with your dress – and of course you need the right shoes. You want a team of experts in financial planning (a CFP), investing (a CFA), tax planning (a CPA), and the legal structures used for your planning (lawyers). They need to work closely together to make sure each aspect of your plan is compatible and complimentary to the others. You also want to make sure that these experts are also experienced with your specific situation whether that is an incorporated professional, business owner, or an employee.

You want value-priced valuable advice.

You probably don’t want to get the cheapest advice that you can find – there may be some lingerie at the thrift store, but you don’t want to get any bonus guests. What you want is the best value. On one side of the value equation is getting the best advice, but on the other side is not paying more than the advice is worth to you. The WCI refers to this balance as the “Good advice for the right price” and has a great article in the American context.

The first thing to consider is how much an advisor will cost you.

As mentioned in item #4 of getting good advice, you need to consider how your advisor is paid and specifically how much it will cost you. Below is a table comparing the general approaches and their cost. Yes, there can be more variations in advisor fees depending on what you negotiate, but these are typical.

Approach Advisor Fees* Investment Fees Total MER Annual Cost on…
$100K $1 Million
Fee-based Advisor and ETFs 0.5-2% 0.05-0.5% 1.1-2.5% $1500 to $2500 $10000 to $15000
Fee-based Advisor and Mutual Funds 0.5-2% 1.5-2.5% 2-4% $2500 to $3500 $25000 to $40000
Free Advisor” and Mutual Funds 0% 1.5-2.5% 1.5-2.5% $1500 to $2500 $15000 to $25000
Free Advisor” and ETFs 0% 0.05-0.5% 0.05-0.5% $50 to $500 $500 to $5000
Flat-fee Advisor and DIY ETF Investing Expect $100-$400/h 0.05-0.5% 0.5-0.5% plus advice cost $1500 to $5000 $5000 to $15000
DIY Advice and ETF Investing 0% 0.05-0.5% 0.05%-0.5% $50 to $500 $500 to $5000
*Advisor fees drop with increasing portfolio value. Average fee is 1.5-2% for 1st 100K and 1.0% for a million, and 0.5-1% for multiple millions. It is also worth noting that advisor fees for taxable accounts are deductible against your income. If you are in a high marginal tax bracket, then that can lower the effective cost when you account for tax saving by about 50%.

The above table is really based on simple math, but it is useful to illustrate a few points:

  1. Mutual funds are the most expensive route regardless of the quality and cost of personalized advice you receive because of the fees baked into the funds.
  2. A fee-based advisor with ETFs provides a good balance of advice and cost. The larger your portfolio and the higher your marginal tax rate, the better the deal gets.
  3. There is a broad range of cost for the same type of strategy. There is generally a relationship between cost and service, but make sure the level of service justifies the cost. High range costs better have amazing service to be worth it.
  4. A high quality “free advisor” with ETFs is the cheapest way to get advice. It is also hard to access for many. Most “free advisors” are generally sales personnel. It also would probably be considered a bit crass to go into a store to monopolize the sales personnel and “take the lingerie for a spin” with no intention of buying.

A good option may be to separate the “Financial Advisor” role and the “Portfolio Manager” role.

This option gives you the benefit of professional planning advice as needed and saves on portfolio management costs if you decide that aspect is worth your time.

You could use a flat-fee or fee based advisor where their expertise is most valuable – to help give you a comprehensive plan and get you started. Remember that advisor fees on taxable accounts are deductible against your income. Mutual fund commissions and MERs are not. You also cannot deduct advisor fees that are purely for non-portfolio related advice.

As you gain experience, you can at some point decide to take over and maintain your plan on your own. On the other hand, as your portfolio gets larger, your relative fees for managing it may also shrink (even though the absolute cost still rises).

You can also learn about personal finance and set up your plan yourself de novo – there are lots of resources out there. Dr. Networth gives a good round-up of the basics of passive index investing recently on his site. It is a matter of choice and the right answer is different for everyone.

Now that we have explored the sexy and complex world of financial advisors, the big question is:

Is it worth your time to learn to be your own financial advisor or should you find a good fee-based advisor?

This is a tough question and the answer is different for everyone. You need to consider:

  • How hard it is to learn enough to do a competent job?
  • Are there simple parts that you can do and parts that you should outsource to an expert?
  • Can you afford to make mistakes?
  • How much do you detest or enjoy doing it?
  • How much is your time worth?

My own answer to those questions has changed over time just like my relationship with lingerie. I’ll talk about that in my next post………Managing my own portfolio is way better than dialysis.

To clarify, my next post will be about the “is it worth your time to be your own advisor part”! I am pretty much done with lingerie.


  1. Vanguard’s asset allocation ETFs are a one stop shop. Just pick your asset mix (3 options and your done)
    Management fee 0.22 for a global balanced equity and fixed income portfolio.
    I consider myself fairly knowledgeable but it’s the emotional part that usually gets me. Selling winning stocks too early and Holding on to losers too long.

    1. Thanks Jeff. I had the same emotional control issues when I started too. We are strongly hardwired for sure. I learned to be more hands off and stick with my allocations, but it was an expensive lesson. There are lots of good ETF portfolio options out there. A simple one stop portfolio like you suggest could be helpful to get people started rather than being overwhelmed and doing nothing.

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