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Do you really need a financial advisor?


Richard Morin

Update :
Update :
April 19, 2017

Nothing is free and financial advice is no exception to this rule. Depending on the size of your portfolio and the type of products in which it is invested, you pay, directly or indirectly, between 0.25% and 1.00% of your capital annually to remunerate your financial advisor (these fees are in addition to the 0.20% to 1.3% that you pay in management and transaction fees).

These fees are not insignificant: $2,500/year for a $250,000 portfolio, $10,000/year or even more for a $1 million portfolio. You may wonder if you really need an advisor and if you are getting value for your money.

The 10 jobs of your financial advisor

Your advisor plays multiple roles. If you're thinking of going without a financial advisor, you need to be able to handle each of these roles yourself:

  1. Understand your personal and family goals and, subsequently, your financial goals. Whether it's your children's education, retirement, tax reduction, protection in the event of illness or death, or your estate, it's important to clearly define your goals before putting a plan in place to achieve them.
  2. Establish your current situation and make your financial assessment. This important exercise is the basis of your financial plan. Family situation, retirement savings accounts, pension funds, real estate, professional practice, debts, protection needs, everything must be considered.
  3. Establish your investor profile. Your attitude towards risk and your ability to absorb market fluctuations without compromising your financial objectives is the basis for managing your portfolio. Done properly, this exercise will prevent you from making costly mistakes during the inevitable stock market corrections.
  4. Develop your investment policy. The investment policy is the instruction manual for managing your portfolio: which asset classes to hold in which proportions and in which accounts, how to select securities for each class, when to rebalance the portfolio, etc.
  5. Build your portfolio. Opening and managing brokerage accounts. Selecting and purchasing securities.
  6. Lower your tax bill. To minimize your tax bill, you not only need to hold the right securities in the right accounts (U.S. stocks in RRSPs or TFSAs?) but also take advantage of opportunities to "harvest" tax losses when they arise.
  7. Regular monitoring and rebalancing of the portfolio. The value of your portfolio and its asset allocation will fluctuate with the markets. You need to regularly monitor and rebalance according to the rules you have established in your investment policy. Will you be able to buy back stocks when they have fallen by 50% as they did in December 2008 or will you be tempted to sell?
  8. Insurance and risk management. What would happen in the event of a serious illness or death? Do you have the necessary coverage for you and yours?
  9. Estate. Are all aspects of your estate covered? How will taxes on death be paid? Should you set up a family trust?
  10. Legal aspects. Do you have a will, a mandate in case of incapacity? Do your aging parents have one? Do you need a cohabitation agreement? If you are in business, do you have a shareholders' agreement?

If you can't handle all of these tasks on your own - as probably 9 out of 10 people can't - you need a coach. Failing to do any one of these tasks - because of lack of knowledge or discipline or because our emotions get the better of us at the wrong time - can be very costly in terms of performance and jeopardize the achievement of your goals.

On the other hand, if you currently have a financial advisor but are not convinced that he or she is doing these 10 jobs for you, it may be time to look for another advisor!

Is financial advice a good "investment"?

Good financial advice will have an impact on your long-term performance and on achieving your goals. Can we quantify this impact? In a study published in May 2015 Vanguard estimates the "value added" associated with best practices in wealth management at 3% annually. The main sources of this added value are reduced management fees (through the use of exchange-traded funds), coaching client behavior (including staying the course during market corrections) and disciplined portfolio rebalancing. So even if you pay 1% annually for (good) financial advice, if you get 3% added value, your "return" on investment will be 300%. Not bad!

Source: Putting a value on your value: quantifying advisor alpha, Vanguard, May 2015.