What to look for when choosing a financial advisor

Q. Our portfolio is approximately $1 million and is split almost equally between two advisors: one at a major bank and the other at a private firm. I have been considering consolidating our investments with one advisor. My question is, do we go with the bank or the private service? What’s the benefit of each? Should I get an independent review of our accounts to understand performance and associated fees to help me with a decision? Thanks in advance for any guidance or advice. 

— Ali

A. Before I offer my advice, Ali, I need to declare my bias as a fee-based portfolio manager with an independent investment firm. I feel strongly that advisors should be paid a transparent fee and should not accept commissions (especially hidden ones) from the products they use, as this latter model is rife with conflict of interest. But I don’t think it’s helpful to judge advisors by the firm that employs them. There are fee-based and commission-based advisors at both bank-owned and independent investment dealers. There are also excellent and terrible advisors at both, so “bank vs. independent” isn’t really the most important question.

That said, I agree with your decision to consolidate your accounts. Many people believe that using two advisors provides an additional layer of diversification, and in some cases that might be true: for example, if you work with someone who focuses on picking Canadian stocks, then a second advisor might help you add more foreign equities and fixed income to your portfolio. Or maybe one advisor is an investment specialist while the other is more skilled at retirement planning. But if you can find a single professional who can do it all, then you should.

There are a few advantages to using a single firm. First, a good investment advisor can set up your portfolio in a tax-efficient way by placing different holdings in your various accounts (RRSP, TFSA, non-registered), but only if he or she is actually managing all of those accounts. If one advisor manages your TFSA and another has your RRSP, this is much more difficult, and you end up receiving less value from both.

Things get even messier if you have non-registered accounts in two different places. For example, if both advisors buy the same stock, fund or ETF, you will be responsible for calculating the adjusted cost base based on the transactions in both accounts, which will make your bookkeeping a nightmare. Indeed, any tax planning becomes extremely difficult with two cooks stirring the soup.

Another advantage: you can usually negotiate a lower fee if your portfolio is all in one place. Ali, I would expect that both of your advisors will offer to lower their fee if you consolidate your accounts with them.

So if you agree that one head is better than two, how do you decide which advisor to go with? Cost is certainly an important consideration. Ali, I don’t think you need to hire an independent consultant to review your two portfolios, but you should ask both advisors to provide a breakdown of all the fees you’re paying so you can compare them. Make sure you explicitly ask for the advisor’s own management fee, the fees on the investments themselves (fund MERs), and any commissions, administration fees, and taxes that apply. If either of the advisors is less than transparent about this, that’s a red flag.

If you’re going to compare investment performance you need to be careful if you want to do this fairly. One advisor, for example, might have built an aggressive portfolio, while the other might have taken a more balanced approach. The aggressive portfolio would likely have earned higher returns over the past several years, but its risk level might be inappropriate for you. The other advisor should not be penalized for being more prudent.

Finally, remember that advisors should provide more than simply investment management. A full-service advisor should also help you with saving strategies, tax planning, retirement projections and other advice that goes beyond picking funds for your portfolio. This is where the quality of service in the industry diverges widely, even among advisors who charge similar fees: some do virtually no planning, while others make it their top priority. Consider what services you need, Ali, and what your two advisors deliver for the fees they charge. Then choose the one that offers the best value.

Compare the Best Savings Accounts in Canada* >

Dan Bortolotti is a contributing editor to MoneySense and an investment advisor with PWL Capital in Toronto.

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