Looking for a financial adviser? Here's what to seek out, and red flags to avoid

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Here's what to seek out, and red flags to avoidJohn De Goey: If you ever find yourself in front of an adviser who does any of these things, leave the office immediatelyLast updated 2 hours ago You can save this article by registering for free here. Or sign-in if you have an account.Finance team and Investment consultant analyze data insight and financial planning strategy for investment portfolio stock market growth. CREDIT: utah51/stock.adobe.com Photo by utah51/stock.adobe.comWe independently select everything we recommend. Buying through us may earn us a commission, which supports our work.You’re looking for a financial adviser. In addition to the usual laundry list of attributes, let’s explore what to avoid. In investing, as in life, the phrase “winning by not losing” comes to mind. While there are certainly empirical markers one can look for and while empathy and bedside manner are often crucial, there are nonetheless several serious red flags — although difficult to reliably quantify — that constitute serious impediments to financial progress.Subscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.Subscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountorIt has been a decade since some jaw-dropping information about financial advice was released in an academic paper that looked at how advisers’ faulty perspectives could result in bad advice. In 2016, a working paper entitled The Misguided Beliefs of Financial Advisors looked at 14 years of trading and portfolio data from more than 4,000 advisers and nearly 500,000 clients at Canadian financial institutions. In 2020 the peer-reviewed Journal of Finance published it.Canada's best source for investing news, analysis and insight.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Investor will soon be in your inbox.We encountered an issue signing you up. Please try againThis may be the first time you heard about it and you can’t protect yourself against bad industry practices if you’re oblivious to them.The paper detailed the three things Canadian mutual fund registrants overwhelmingly did wrong: they chased past performance; ran concentrated positions and didn’t concern themselves with product cost. All three transgressions run contrary to basic personal finance principles. If you ever find yourself in front of an adviser who does any of these things, leave the office immediately.Specific examples of these transgressions include:Recommending funds with high management expense ratios (MERs) when cheaper comparable funds are available;Recommending two or three funds in one asset class as a means of diversification;Making large bets on a sector (such as cryptocurrency, cannabis, artificial intelligence);Recommending funds based on one-, three-, five- and/or 10-year returns.Those are the kinds of things people should avoid as obvious tells that the adviser is not inclined to make recommendations based on evidence or best practices.Instead, look for a financial adviser to whom you can talk about hopes and dreams. Solving specific problems is always great. Offering alternatives (for instance: CPP now or later? Keep the pension plan or take the commuted value?) is also critical, since so much of financial life involves sound decision-making. To that end, the explanations you get for the recommendations are also a great way to differentiate good advice from the kind that’s not so good.You should also try to find someone who is a good fit. For instance, is it important to you that the adviser be local? Do you want someone from your community (which can be defined by geography, religion, ethnicity or other factors) or someone who is decidedly outside of it (for confidentiality purposes)?How complex are your needs? How complex are they likely to be down the road?There are different types of advisers and the fit is often critical. For instance, people in small towns might have to make do with a mutual fund registrant — either through an independent firm or through a local bank branch. If you want more and have enough by way of assets, you could likely find a good securities licensed adviser in any medium-sized city. If you’re an accredited investor, you may want to work with a portfolio manager, who works on a discretionary basis and has a fiduciary obligation to clients.It should be obvious, but I should add that the types of training that advisers get varies primarily by registration. Obviously, there’s a case-by-case situation that needs to be explored but having at least one industry-specific designation also shows a commitment to continuing education and professionalism. The most widely accepted and respected of these is the CFP (Certified Financial Planner) designation, which is held by about 17,000 Canadians. Some CFPs work on an advice-only (fee for service) basis where they cannot sell products but charge by the hour or by the deliverable and send investors off to do the portfolio management elsewhere (often, that’s what do-it-yourself investors opt for).There are many other tests of what to look for. However, instead of fretting over the elements that are nice to have, it is often easiest to screen for the obvious red flags that should be avoided at all costs.Most advisers are well-intended and decent people. Alas, some of them are so misguided that they themselves fail to recognize their own biases and wayward behaviours. It’s great if you can win by finding a proverbial adviser who is perfect for you. However, there is much to be said by satisficing and choosing the option that meets your acceptable criteria. Avoid the lemons and you’ll likely be fine. At a minimum, you should aim to win by not losing.John De Goey is a portfolio manager with Designed Securities Ltd., regulated by the Canadian Investment Regulatory Organization and a member of the Canadian Investor Protection Fund. Join the Conversation This website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here. By continuing to use our site, you agree to our Terms of Use and Privacy Policy.