Many entrepreneurs are so swamped by the demands of running a business, they devote little time to growing their personal wealth. A good financial advisor can be a potent ally in that quest, but, as in any profession, some are superior to others — and can help you achieve superior returns.
To find a winner, ask other business owners for referrals and meet with at least three candidates, suggests Joe Killoran, a former stockbroker turned investor advocate based in Oshawa, Ont. Then, interview them to ensure a good fit and a mutual understanding of goals. Your advisor should interview you, too. “If you don’t know about a client’s life and business, you can’t come up with a financial plan specific to them,” says Jeff Young, a registered financial planner (RFP) and certified financial planner (CFP) with RBC Wealth Management in Toronto.
Here are the questions you and your potential advisor need to ask each other.
Questions to ask potential advisors:
What professional designations do you hold?
Anyone, regardless of their qualifications, can call themselves a financial advisor. Look for a university degree plus a qualification.
If you’re looking for a comprehensive financial plan, opt for an RFP or CFP. Both require education and adherence to a code of ethics, but RFPs have minimum five years of specific planning experience, points out Doug Macdonald, an RFP and managing partner of Vancouver-based Macdonald Shymko & Co. Ltd.
Are entrepreneurs on your client list?
Ideally, the advisor should have several entrepreneurs as clients. “With entrepreneurs, there is a certain degree of complexity to the planning,” says Young. “When you factor in the business and the personal side, a lot of planning concepts and possible strategies come into play that may not be relevant for most clients.”
What range of products do you sell, if any?
Unless they operate on a fee-only basis (most don’t), the majority of financial advisors sell not just advice but also stocks and bonds, mutual funds, segregated funds or insurance products. Determine their specialty, says Killoran: “If they throw everyone into high-risk futures contracts or represent only one family of mutual funds, you should know.”
How are you paid?
Fee-only advisors are paid by their clients according to either an hourly rate or a sum based on the percentage of assets under management. Commission-only advisors are compensated by the firms whose financial products they sell. Some earn both fees and commissions.Macdonald, a fee-only advisor, says the advantage of fee-only is that “you know that you, the client, are the only person that pays me. The perceived advantage for clients is that our only interest is their interest.” The disadvantage: it can be poor value if, say, you simply want someone to tell you how to invest $4,000 a year in your RRSP. At Macdonald-Shymko, a comprehensive plan costs anywhere from $2,500 to $10,000.
Considering a commissioned advisor? Killoran suggests seeking an advisor who sells no-load funds, which don’t charge a fee when you buy or sell, earning a maximum trailer fee — the annual commission paid by mutual fund companies to sales reps — of 1%.
Will you update me on topics pertinent to my financial well-being?
A top-notch advisor promotes ongoing investor education. One advisor favoured by Killoran prints annual report cards that track the average returns of his overall client base and sends out weekly articles for clients to read.
What an advisor should ask you:
What do you hope I can do for you?
It’s important that the advisor determines your needs. If you’re meeting with, say, a broker but you’re looking for a comprehensive financial plan, you’re almost certainly in the wrong place; his job is, first and foremost, to sell you equities. “Sometimes, the first task of an advisor is just to get the client thinking about [their needs],” says Macdonald.
What are your long-term goals?
The advisor needs to understand your life plan — when you want to retire or cash out of your business, who will take over and whether you wish to leave a legacy of some kind — in order to come up with valid financial goals.
Where are you at financially?
Learning about your liabilities, assets and cash flow stimulates discussion and enables both advisor and client to determine if they are a good fit for one another.
What is your risk-tolerance level?
Looking for investment advice? Industry regulators require advisors to assess your stomach for risk. They should also factor in the risk associated with your business itself to create a diversified portfolio.
Can you tell me about your business?
An advisor who understands what your business does, whether your family is involved and what keeps you up at night can tailor your financial plan to your circumstances.