Build Your Financial Team. Lead it.

Terminator fixing his own arm.

Besides the physical impossibilities and Physician College objections, I would not want to operate on myself or my family. I would want a qualified surgeon. Both for their higher skill level and their increased objectivity. Having a team of financial professionals involved in your financial planning has analogous considerations.

This post gives a quick overview of some of the professionals that you may interact with. It is important to know what they do and what you need to do. You are the common link and must ensure that you are delegating tasks rather than abdicating responsibility for your finances. You are the one who is ultimately responsible for the outcome and bears the consequences.

Like a patient, you will get better outcomes if you educate yourself and participate. You may even decide, after educating yourself, that there are tasks that you wish to delegate and tasks you want to take on yourself.

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Who are the main advisors & brokers on your team?

Your financial team will have advisors. These are professionals with expert knowledge in a specific area that they can advise you on and they may also implement the associated tasks.

Lawyers:

Credit: Breaking Bad (Sony Pictures Television 2008)

A lawyer can ensure that you have the proper structure and legal documents related to your business and estate. For example, how to set up a small corporation and the shareholder structure. They can help you review contracts for work you take on. Similarly, they can advise on contracts and labor issues for your employees. A personal will, advice on whether a secondary corporate will is beneficial, and establishing a formal trust for your family are all within the realm of lawyers. Different lawyers may specialize in different areas.

Accountants:

Accountants are experts at analyzing financial data. That could be for preparing financial statements, setting up a payroll, or looking at where the revenues and expenses of your business come from. They are experts on taxes and can advise about appropriate expenses and deductions for tax planning.

We most commonly hire an accountant to take the financial information that we give them and prepare our taxes for filing. They sometimes advise on long-term tax strategies. However, the focus is usually on the near term. It is also important to note that accountants are not usually investment advisors. Long-term strategy is usually the realm of a financial planner and investment advice that of an investment advisor or portfolio manager.

Financial Advisors:

A variety of professionals such as financial planners, investment advisors, insurance brokers, mutual fund salespeople, and financial coaches call themselves financial advisors. There is a dizzying array of different certifications and professional designations with significant cross-over in knowledge and skillset. Despite some common considerations, they generally gravitate to either broader financial planning (making and implementing a financial plan) or the management of a specific aspect of a plan . Here are some of the big ones:

  • Certified Financial Planner (CFP): Focused on financial planning
  • Registered Financial Planner (RFP): Focused on financial planning
  • Chartered Financial Analyst (CFA): Focused on analyzing potential investments and portfolios
  • Charter Investment Manager (CIM): Focused on managing investment portfolios
  • Chartered Insurance Professional (CIP): Focused on insurance products

Bankers & Brokers:

There will also be people or companies that you work with for specific tasks. They are not focused on financial planning or investment advice. However, they may advise on their products specifically. For example, you may use a mortgage broker or a banker to obtain a loan or mortgage. A banker can help you open accounts, credit cards, or a line of credit for your business. You may use a brokerage to buy and sell stocks, bonds, or funds for your investment portfolio. While sometimes taking the angle of a financial advisor, most insurance advisors function more like brokers.

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Fiduciary Duty & Due Professional Care

Fiduciary duty is the legal duty to advise what is best for a client out of the possible options. That includes acting in good faith, honestly, and with a high standard of competence. Regardless of the side benefits or loss to them or their organization. They also have a duty to broader society. It is a legal standard and a high expectation that few professionals are held to.

Lawyers & Accountants

Lawyers have a fiduciary duty to their clients. Accountants have also been found to have fiduciary duty in Canadian case law. This does not mean that they are expected to be perfect or guarantee success. It is the same as with doctors – they need to have exercised due professional care. That means doing their best, with regard to the circumstances, compared to what a reasonable competent professional would do. Errors can happen in law and accounting, just like medical errors. So, you still need to pay attention to what they are doing.

Financial Advisors

Very few financial advisors are held to the fiduciary standard. When you use the Canadian Securities Administration search engine about 4% come up as Advisory Representatives. Advisors with the advisory representative designation have fiduciary duty. Unfortunately, they can be hard to access as they are usually embedded in firms dealing only with very wealthy clients. They also come at a substantial cost. Most financial advisors are classified as Dealer Representatives. This designation has suitability as the standard.

Suitability Standard

financial team

The suitability standard means an advisor can only recommend investment products that are “suitable” to your risk tolerance and goals. It does not mean that they must recommend the best products for you. That is an important distinction. A high-fee mutual fund may be suitable for you, but not the best option compared to a better performing low-fee fund.

Financial advisors with the Certified Financial Planner (CFP) designation still have a suitability standard rather than a fiduciary duty. However, they do have a code of ethics to provide objective advice that puts clients first. A complaint to their regulatory body can be filed if it is breached.

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Why Fiduciary Standard Is Still No Guarantee

Your advisor will have incentives and biases that may differ from your own. Advisors are not evil. They are usually well-intentioned, but human, with human biases.

Given the subjective nature of planning and broad options that meet the suitability standard, it is important to be aware of potential bias. Most advisors will likely try to do the right thing. However, they are human and subject to incentives and biases.

That can be helpful to bring a different perspective that may differ from your own. However, it is also vital to educate yourself. That allows you to uncover and consider their biases. It also allows you to have your own informed opinions to weigh their advice against.

Most advisors genuinely believe that what they are offering is the best. They usually invest in a way that mirrors how they invest on their client’s behalf – even after they have left whatever firm they worked for. In a large Canadian study, advisors underperformed the market by 3%/yr – just like their clients.

Know how they get paid and by whom.

A dealer representative advisor may get commissions for sales of some products over others or experience pressure to sell the products of their employers. A study of mutual fund sales in Canada suggested that clients were steered towards funds that would generate more commissions.

Even advisors who get paid as a percentage of your assets instead of direct commissions may have some bias. For example, there could be bias to over-invest since that means more assets under management. There could also be a bias towards products included in their formula – like real estate for a real estate advisor/manager or towards stocks, bonds, funds for an investment advisor.

Financial advisors get the most internet flak, but all of your advisors or brokers are selling you something. Your lawyer gets paid to make you more complex legal structures like trusts, companies, and estate plans. Accountants get paid more to do corporate taxes than personal or sole proprietor taxes. The more you keep in the corporation and grow, the more capital dividends you will eventually take out later (for a fee). Bankers will lend you as much as they think you’ll pay back, regardless of the other sacrifices you’ll need to make to do so. Brokers make more money the more you use them to trade.

Understand how they have been trained.

A financial advisor may have been educated by the company whose products they sell. Even those with an independent education to achieve an advanced certification, like a CFA or CIM will have a potential for bias. If you learn all about analyzing investments to be an active manager, you are likely to favor active management using those tools. That, in the face of consistent evidence that trading less frequently and using a passive strategy generally yields better results. It is hard to accept that doing less is better when you have invested so much energy into learning to do more.

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The default setting for your financial team is “Silos”

Your advisors can only give you advice using the information that they have. The only central repository for that is you.

financial team

Different team members will usually ask for common information that they need for their task and do their best with that. For example, your accountant will ask for information about your different types of investment income and use that to file your tax return. Similarly, your lawyer will ask for your different insurance policies and investment assets when they advise about estate planning. However, neither advise you on what investments you should buy, how you should organize them to be tax efficient, or how you should use them to fund your goals. They will simply do their best with what you hand them.

Your insurance, real estate, and investment advisors will commonly advise on their aspect of your portfolio and be biased towards it. However, it is uncommon for them to try and put all of those pieces together.

A good financial planner can help you put the different parts of your financial life together into a cohesive financial plan. This is one of the areas where a financial advisor can provide major value. The more that they are expected to do, the higher the cost will be. A strong financial knowledge-base helps you to determine if that is good value for the money you are paying. You are then deliberately delegating the work, not abdicating it. Still, even a good financial planner is limited by the information that you provide them.

Why You Must Be The Link

No advisor knows your situation and goals like you do.

Similar to a medical problem, where there are often many different viable approaches to treatment, there are many ways to approach a financial plan. Just like a patient making health decisions, it is important to be an informed client when dealing with financial experts. It is the only way to get the best possible plan for your situation, your values, and your preferences.

Most of personal finance is not something that someone else can do for you.

Much of financial planning focuses on the procedures, like investing or buying insurance. However, like in medicine, success is greatly affected by lifestyle and behaviour. Only you can live your lifestyle and make the day to day decisions that impact it. You can’t invest if you don’t earn enough and spend within your means enough to set money aside. Further, good financial health isn’t something that you obtain through one action. It is built and adjusted throughout your life.

You are ultimately responsible for the outcome.

If your accountant makes a mistake filing your taxes, who is responsible for paying the difference plus the penalties? You are. Accountants usually have liability insurance, but this is still going to be a pain in the butt. If your portfolio doesn’t perform as you hoped, your advisor still gets paid no matter what. If you buy whole life insurance that you don’t really need, you still bought it and have to pay for it or the penalties to get out of it.

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Summary: Build Your Team & Lead It

You will need input and work to be done by financial professionals.

Learn how to choose an accountant and lawyer. They are vital and not something that you want to DIY. Financial advisors cover a wide range of professionals, ranging from financial planners to portfolio managers to insurance salespeople. You need to learn enough about what they do to be able to delegate effectively and know if you are getting value for your money. With that knowledge base, you may decide that there are some aspects you will manage yourself and others that you will delegate.

Every professional you deal with will have their biases and incentives.

To choose an advisor, you need to consider how these align with your beliefs and interests. Even a fiduciary duty standard does not protect against that as most advisors truly believe they are giving the best advice. You need to learn enough to recognize where there may be biases and what the best evidence-informed options are for your situation.

Bankers and brokers will also do transactions for you, but you need to give direction.

What you want is responsiveness, competitive rates, and convenience. You need to know what you want to buy what you want and avoid being oversold things that you don’t need.

You can delegate tasks to the different members of your team, but you need to lead it.

Only you can provide all of the information needed to ensure your financial plan is cohesive. You are the common link for information flow.

A full-service financial planner can help you with the co-ordination, for a higher cost. However, you still need to bring enough basic knowledge to the table to ensure that they are putting together the best plan for you.

You will ultimately be responsible for the outcomes.

So, it is vital that you learn enough and invest the effort to delegate effectively. If you do not, then you are abdicating the responsibility. One of the psychological benefits of a financial advisor is that if things turn out poorly, you can blame them. However, that is ultimately unproductive as it was your responsibility and you will live with the outcome.

This does not mean that you need to become an expert in all financial realms.

That is why we have experts to delegate to. However, as you learn more, then you may decide you know enough to handle some aspects of your financial plan and to delegate others where you feel there is the best value for money. Regardless of the team that you build, you will need to understand how money works to use it as a tool on a daily basis for you to live a rich life. You need to operationalize it, but I built this basic curriculum to help you.

7 comments

  1. Wow, so much good stuff in this post, LD! When it comes to financial advisors, most doctors use one so it is extremely important that we understand how the industry works. The bottom line is that their timeframes are often not aligned with ours because they are measured against quarterly and/or annual metrics, and their financial interests are not aligned with ours because of their fee and profit structures.

    By advising that we need to think of OURSELVES as the leader of the team, you really get to the core of how we can best use the professionals who are available to us. Don’t be optimistic and assume that they’ll always do what’s right for you. But don’t be too pessimistic by dismissing their utility. Healthy skepticism is the key, I think – which is the topic of the piece I just posted this morning, in fact!

    https://moneysmartmd.com/optimists-pessimists-and-realists-in-life-and-investing/

    1. Thanks Matt,

      I agree. I have used multiple advisors over the years, and still do. In recent years, I have had excellent experiences and delegated effectively. However, when I think back on it, some of my early sub-optimal experiences were partially my own fault. I didn’t really know what to bring to the table. I assumed they were thinking of a long-term co-ordinated plan or would automatically use the best options. Some basic knowledge was also helpful because even the best-intentioned advisors have their biases. Often influenced by training from their employer/product-provider. Only we know what our goals are, financial beliefs are, and have a good view of the whole picture.
      -LD

  2. Hi LD,

    I am not an MD but I follow your blogs “religiously”. Thanks for one more fantastic blog post! Thanks for including a link to the framework on “How to choose an advisor”. Can you please start a page with a list of Financial Team members “certified by LD” with the caveat that users should use it at their own risk? The devil is in deciding, as they say, “… O Lord, please help me recognize right from wrong…” (paraphrasing). Please allow me to explain.

    With excellent information presented in easy-to-digest format from your posts, other blogs, and CRA and IRS portal, I now file all kinds of complex US and Canada tax returns (eg. T2 with eRDTOH, nRDTOH, Capital Gains/losses, T2054 (Capital dividends) etc. etc. The fun of learning is over and I wish I can hand over the repetitive work of filing T2s, T1s, T3s, T4s, T5s, and so many other Ts over to a reliable “team member” (accountant in this case).

    I am not really good at dealing with accountants, part of it being, I usually (learn) to crosscheck their work, and just as you mentioned in “Winter Tire Article” it is much cheaper (time/hassles and money-wise) for me to file it myself rather than deal with repeated errors caused by accountant’s staff in data entry etc.

    As for financial advisors, lawyers etc, I don’t know if there are unbiased (as much as possible) experts in the field who are available to work with sizable but smaller portfolio on as needed basis. I had worked with a good law firm but they wanted to keep milking me and have a retainer on on-going basis even after they got 25K to do the corporate reorg.

    1. Thanks PD for the kind words. The blog is definitely intended for everyone (even though I write as a doc) and I am relieved you find it useful.

      There are good advisors and accountants out there, but it takes a lot of time to find and vet them. I spend a fair bit of time preparing for my accountant too. It is time well spent as less prep time for them should translate into a lower bill and fewer mistakes/miscommunications. Even though I know a lot about the accounting, having them deal with CRA is golden. Helping to connect readers to the “good guys/gals” is actually on my blueprint for developing the site (line 3 of my mission statement). I hope to have a menu for those looking for some fee/advice-only and those looking for full-service for a reasonable cost. I need to do it right because I don’t want it to simply become an advertisement repository.

      I am trying to be very deliberate with the resurrection of the blog. My first task is to build out a basic curriculum (in progress). My goal is that when completing the curriculum, a reader will know enough to make their own financial plan or to make the most out their advisor when making one with them.

      My second is building a step-by-step interactive DIY investing guide to help people get started who want to & to provide mentoring support as needed. I am using Qtrade so that I can put screenshots and can help people get unstuck better since I know the platform well. They also have good customer service which I think is really important (I hate wasting time on the phone). That is about 90% done and I hope to launch it this month.

      My third plank is collaboration and connecting. I have already been doing that with other educators. However, I want to get to the advisor/accountant list as the next step 🙂

      I went half-time this summer to be able to dedicate more time to this, but I want to do it right and it will take a while to plug away at. Thanks for your support, reading, and comment!
      -LD

      1. This reply came, but WordPress was having some problem posting.

        Thank you LD for your detailed response!

        I used to make a trial balance available to the accountant (I believe this is as easy as it can get) and they still made mistakes. Those days, there was no complexity to my T2, simple, US and Canadian revenue, payment to Canadian subcontractors, my salary draw, and usual business expenses (rent, telephone, etc.) . That is it! This accountant came through a respected reference so he must have been good but it seemed like he had lately lost interest and was not managing his staff well. I still would like to hire a competent accountant, especially for long-term tax-optimizing strategic advice.

        Below are my few “tricks” to make it easy to deal with CRA, (maybe I am leaving a little too much money for the government?). I have dealt with CRA a few times and have managed a good outcome every time. I generally find CRA employees to be very professional and ethical, except for once when an officer tried to shell an extra 96K for a GST return and kept throwing one CRA ruling after another at me over a period of 45+ days and few conversations and other communication. I asked a knowledgeable friend for a second opinion and he said my position appears to be correct. The CRA officer only budged after I politely suggested that my only option now is to hire a tax lawyer or tax accountant.

        1) I claim something only if it is 100 % Kocher and hence my business expenses are about 35 % less than my peer group. In my line of business, the business expenses are already low, 35 % of a low number is very low, and Small business tax on that very low number is even ultra-low! The point is, it is not worth spending time with CRA (or hiring and paying an accountant) to save that ultra-low amount.

        2) I pay a bit more (about 10 %) in installments to CRA, that way, even if the “math” on the Tax return is not correct, I get less refund but never a penalty and interest for late payment. I also try to file my tax returns within 15 days of the financial year end so that the Notice of Assessment arrives before the 3-month filing and payment deadline.

        3) I educate myself further when CRA comes back with a matter after filing. I immediately pay whatever CRA says I owe to avoid further interest and penalties and then I make my counterpoint (If I believe I am right). Only once I had to back out when I wrongly interpreted foreign tax credit calculations for personal vs business (I was trying to squeeze a little bit extra that many accountants also probably wouldn’t know). I am not upset with that as I believe everyone including myself should pay their fair share of the taxes else we will end up like a third-world country (of course I also wish that taxes paid from my hard-earned money are spent wisely so that we don’t end up like a third third-world country).

        There is nothing wrong with monetizing your blog /website if that is the plan, my only request is to not let the quality of the information and recommendations on your blog become subservient to the revenue. The information you have shared so far is worth hundreds if not thousands of dollars and I am thankful for your benevolent nature to share it. I came to visit your website for the first time when looking for information on RDTOH and as I had mentioned at that time, it was the best source of information on that topic at that time and might be even today. It didn’t try to scare me, the reader with mumbo-jumbo like many other sources so that the reader becomes a client!

        I might give Questrade one more try. My experience with their customer service was not great during the onset of COVID-19, maybe the wrong time to become a client. BTW – They seemed to have routed my trade to someone for a 1 cent gain per unit of ETF rather than giving me the best possible purchase price. I can’t say 100 % for sure but that is my recollection of what happened at that time. I posted my review here

        Thanks PD

        1. Thanks PD,

          I have a similar approach to CRA. My accountant handles most of the interactions for me. However, I am not aggressive and make sure what I am doing is 100% above board. The only interpretation of grey areas that matters is CRAs. You can hire a lawyer, but that will cost you too and they know it. So, best avoided in the first place. One of the things I find valuable is that he has been in practice a long time with many doctor clients and knows how CRA views the grey-zones and what attracts them.

          You don’t need to worry about my blog becoming a monetized arm of industry. I make my income through my practice and my investments, and I want this site to be a quality resource. I find pop-up ads annoying and distracting. I will only team up with people/services that add value and I do, or would, use myself. That is why I partnered with Qtrade (different from Questrade). Qtrade is their main competitor actually. Qtrade is a bit more expensive (think $15 bucks per quarter) if you have a really small and inactive account. However, that is generally not applicable to my audience and easily overcome. Plus, I use them, and the customer service has been good. There are always hiccups here and there, but they have been minor and fixed promptly. I hate wasting time chasing people.

          I am glad that you have found the articles easy to understand and complete. That was part of why I started this. Much of what is out there is either superficial or scary, followed by contact me for a consult. I work with knowledgeable professionals, but I want to understand what is going on. We sometimes bring up issues that weren’t considered or catch something.

          Thanks for reaching out.
          -LD

          1. HI LD,

            You are the best, not only knowledgeable and generous with sharing your knowledge but also ethical in managing the quality of your content! An exception that proves the rule! !

            Apologies for confusing Qtrade with Questrade.

            Thanks again and again and again …

            PS – I believe in the law of karma (I have my doubts too) based on my empirical observations of my own life and those around me. In general, I feel I am happier in spite of many challenges in my life when my karmas are ethical and vice-versa. Hope you are being rewarded with inner bliss for your ethical karmas.

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