Some grifters are hard to spot

Last fall I bought a house, and wouldn’t you know it, I didn’t even make it through my first spring without the roof leaking. So I called a big-name Toronto roofing company and they sent out an estimator to have a look.

I liked the guy as soon as I answered the door—he was affable and Irish, with a bit of a twinkle in his eye. He did a very thorough inspection of my roof before putting together a detailed written quote.

He took me through it carefully, and answered all my questions knowledgeably. By the time we got to the end of it, I was thinking I wouldn’t bother to get any more quotes. But then he told me the cost, and I almost fell over. In a calm and steady voice, he informed me that getting my little row house’s roof redone would cost me $26,000. “Thanks,” I choked out. “But I think I might get a couple more quotes before deciding.”

I did get a few more quotes, and they all fell within the $5,000 to $7,000 range. Clearly, the guy from the big roofing company was a con artist. The fact that a roofing company was trying to fleece me shouldn’t be a huge shock, but what did faze me is that I didn’t see it coming. It made me realize that some grifters are hard to spot.

You should keep that in mind when you’re evaluating your financial adviser. It’s tempting to think you’d know if you were being taken for a ride, but I wouldn’t be so
sure. I’ve met advisers who seem professional, yet routinely pad their fees with overpriced mutual funds. Can you trust your adviser? Try asking these three questions to find out:

How much am I paying you?

The amount matters, and so does the speed and clarity of the response. If you get a clear annual figure and it’s in a reasonable range (say, between 1% and 1.75% of the amount invested with your adviser), then you’re good. If the amount is exorbitant (say, 2% or above), or your adviser won’t give you a clear answer, watch out. If he tells you he isn’t paid at all (and this happened to me once, when I was posing as a potential client for a story), run for the hills: your adviser is lying to your face.

How are my investments performing?

A good adviser should be able to quickly show you your average annual return, after fees, and how it compares to a benchmark. So if your money is invested in 20% Canadian equities, 20% U.S. equities, 20% international equities and 40% bonds, your adviser should show you how your portfolio performed relative to a portfolio made up of the appropriate underlying indexes. If you just get a percentage annual return without a benchmark, be wary.

What’s my long-term financial plan?

If you have a portfolio of $250,000 or more and you’re paying 1.5% to 2% in fees, then I think you should expect a proper written financial plan. A full plan should outline your current financial situation, list your financial goals, include a simple net worth statement, lay out the steps to reach your goals and include a description of your investment strategy. If your plan doesn’t measure up or you don’t have one at all, I’d look for a new adviser.

When you ask these questions, try to take a step back and analyze the answers you get objectively. Few advisers will outright lie to you, but some are adept at sidestepping your queries by talking fast and using industry jargon. If you’re getting a stream of bafflegab or hurt looks, it means your adviser honestly doesn’t have answers or he’s trying to conceal basic information from you. If that’s the case, maybe it’s time to ask yourself a question: Is that the kind of person you want to trust with your life savings?