Finding the perfect financial planner…

A discussion limited to remuneration models is certainly not a definitive discussion of how to find your perfect financial planner.

I was just reading a Preet Banerjee article in MoneySense.ca and wanted to make some comments.

The article, “Finding the Perfect Financial Planner”  focuses overwhelmingly on remuneration models and largely ignores issues such as service, expertise, processes and accountability. 

Critically it fails to address the one major issue of our times, that of best interests standards and the need to find advisers that operate and are bound by such standards.   Any advisor that provides an advisory service, in Canada, is not bound by best interest standards and investors need to know that they bear a very high degree of responsibility for accepting their advisor’s recommendations.

It also glosses over one of my pet peeves and that is financial planners making asset allocation recommendations without an accountable investment discipline and process.  The asset allocation process is one that should tie in an investor’s liability profile, risk preferences and the adviser’s investment discipline and portfolio construction, planning, asset and liability modelling and management, and asset management processes.   All recommended asset allocations need to tie in these main components and financial planners, on their own, are not always trained to do this. 

Risk management is also very important where portfolios are being set up to meet financial needs over time and if you are relying on an adviser for investment advice, explanation of their risk management process, and making sure they have one, is a critical foundation of the relationship.  A simple case of using return assumptions that are too high and planning that ignores the impact of significant risk events can blow a portfolio wide open.   A failure to address high management and transaction costs can be more damaging, over time, than bear markets and recessions.

No mention is made of making sure that the adviser clearly communicates (in writing) their investment discipline and portfolio management processes, or that the performance of the portfolio should be appropriately benchmarked to assess portfolio risk and return.  

The article also smacks to me a little of DIY couch potato portfolio bashing, and while I agree that many investors lack the discipline and expertise to DIY properly, I do not see the relevance of this in the discussion.  Moreover, if you have a DIY couch potato portfolio you will most likely have read much of the background and rationale and will have made a specific decision to follow this discipline for the clear reasons noted.

Financial planning and asset management tend to be separately managed activities for some and what you are looking for are advisers that can integrate their financial planning with their asset management processes.   Integrating financial planning and asset management means that portfolio decisions and financial planning decisions are closely aligned, reducing costs, enhancing forward planning and better managing risk to the ability of assets to meet financial needs.   No mention is made of advisers capable of providing professionally managed integrated processes.

And if you are looking for good advice, my advice is to steer clear of any adviser/advisor that relies on commission (because investment products are not the only means of overcharging you), that recommends active funds without a clear rationale for return enhancement and risk minimisation and whose advice is not firmly rooted in a disciplined investment process.   Good advisors will focus on the costs of asset management and will therefore have well defined and well disciplined financial planning and investment processes.  

A discussion limited to remuneration models is certainly not a definitive discussion of how to find your perfect financial planner.   And yes, for those with smaller sums of money available we need to find more, not less, disciplined lower cost options for them.

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