How and when to switch financial advisers

Q: Overall, we are unhappy with the performance of our financial adviser. My wife and I have been investing in mutual funds, with the same adviser, since we got married 13 years ago. While I understand the markets’ ups and downs, we have been disappointed with the performance of our adviser. We do not get regular updates—ones that encourage calm in the bear storm that is right now, or just regular check-ins when the bulls are out (earlier this year). We are contemplating a switch, so my question is, do we move everything, or start new and wait out the DSC charges that will apply?—Kevin

A: You’re not unlike a lot of Canadians, Kevin—underwhelmed by your adviser. I want to give you some independent advice on your situation so that you can validate your concerns and act accordingly.

I think that all investors should measure their investment performance against benchmarks. Whether you’re a DIY investor or work with an adviser, you should monitor your performance, but do so with a grain of salt. Short-term underperformance is going to happen. Long-term underperformance is a cause for concern. And with fees what they are and interest rates so low, underperformance for mutual funds is becoming that much more common. It’s making it tough for the mutual fund industry these days.

In much the same way individual mutual funds are tracked against a benchmark, you can benchmark your overall investments. If you’re invested 65% in Canadian stocks and 35% in Canadian bonds, for example, you might compare yourself to 65% of the return of the Toronto Stock Exchange (TSX) and 35% of the return of the Bank of America Merrill Lynch Canada Broad Market Index (a bond index), so you have a frame of reference. If you’re in foreign stocks as well or your bonds are not broad-based, but just government bonds, for example, you might need to consider different benchmarks. Appropriate benchmarks are the key.

I suggest benchmarking because I often encounter investors who are wrongly critical of their investment advisers (who are otherwise performing well) or unjustly satisfied with underperformance (because they are looking at absolute instead of relative returns). You can’t assess performance without a benchmark.

I’ll assume you’ve done your due diligence, Kevin. If your adviser is truly under-performing, you might consider a change, but know that the grass is not always greener.

• Ask a Planner

  Leave your question for Jason Heath in the comment section below or email [email protected] and he may answer it in an upcoming column.

It’s hard for advisers to be in touch all the time. It’s also hard for them to know when you’re going to need them. You might read a headline that has you worried when it’s not otherwise a big deal in the grand scheme of things. And if something does worry you, it’s incumbent on you to reach out as well. Make sure that in any adviser relationship, you set ground rules on contact and communication.

I think one key to investing is that you shouldn’t react to ups and downs in the markets. Other things being equal, your investment strategy shouldn’t change that much just because markets are up or down, other than potentially rebalancing.

The Deferred Sales Charge (DSC) fees on your investments are frustrating. DSC fees are penalties to sell out of your mutual funds. Advisers can generally offer you mutual funds with no deferred charge, but often sell funds with a deferred charge to incentivize you to keep your money with them.

I’ve always thought that if an adviser was doing a good job, they wouldn’t have to penalize you financially for leaving, but that’s just me.

If you do decide to leave your adviser, typically each year a portion of your DSC mutual funds become available to sell without penalty over a period of five years. So if you transfer out, you might consider starting fresh by selling the mutual funds you can sell without penalty, but staying invested in the ones that have a penalty until the deferred charge disappears. You can often continue to hold your DSC mutual funds with a new investment adviser or in a discount brokerage account if you’ll be investing your own money, so you don’t have to leave the investments with your old adviser.

In summary:

– Benchmark your investment performance so you know how you’re doing;

– Evaluate performance over the long-term, not the short-term;

– Don’t be too quick to blame your investment adviser for not contacting you if you’re not reaching out to them either;

– Try to control asset allocation, fees and taxes because these are black and white, while many of the other components of investing are grey at best;

– Avoid DSC fees—a good adviser shouldn’t need to sell mutual funds with deferred charges

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever. 

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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