Three questions to help you find the right financial advisor

Right for you

As innumerable Hollywood romantic comedies have shown us, sometimes the one who appears to be Mr. or Mrs. Right, is not necessarily right for you. When it comes to managing your finances, you can’t afford for that to be a laughing matter.

Finding the ‘right’ financial advisor can be a challenging task. On top of confirming that the person has the proper education, license to operate and relevant experience, you’re looking for a personal connection so you can work together effectively.

Here are three questions to ask yourself and your candidates, to help you hone in on who may be right for you.

1. Where are you and where are you going?

The search for an advisor can be an especially scary prospect if you have limited financial experience. What you do have though, is experience in yourself.

Before speaking or meeting with anyone, take a moment to consider where you are at and where you are going in your life – on a personal level – so that you have clarity to evaluate the financial decisions necessary to get you from where you are to where you wish to progress.

This is also the starting point for your advisor-candidates to understand the business engagement you are putting before them. They cannot offer you suitable options without first knowing who they are working with, where they are working from and what they are working towards. Require this as a baseline for all your candidates, and hold your chosen advisor to this standard once you are underway.

2. What are you paying for?

Before asking about how much you may be paying (which we’ll come to shortly below), you first need to know what product or service you are purchasing.

You may be looking for specific investments for your existing portfolio, or … a recommendation for an entirely new portfolio, or … maybe some preliminary questions like, what is a portfolio? Maybe you’re trying to decide whether you should be investing at all, or if there are other more pressing concerns, like paying down debt, managing taxes, protecting family income or making ends meet day-to-day.

Some advisors are paid for giving you access to products, while others are paid for the advice they provide about product choices or broader financial issues. Ask your candidates where they lie in this universe of possibilities, in particular whether they are paid by product suppliers, by salary from an employer, or if they will be charging you directly.

And obviously, inquire about the actual or expected cost. Ask how that’s determined, why it’s calculated that way, and when and how you will pay. Assess whether all that makes logical sense, and whether it is an acceptable cost for what you receive in exchange.

3. How do you communicate?

Ask this of yourself first, then be ready to pose it to the candidates you meet – and you should meet at least three to be able to compare approaches.

In terms of frequency, do you want your advisor on speed dial, or will it be a monthly, quarterly or annual check-in? Then there’s the matter of how, ranging from in-person meetings to phone calls to online video chats, with newsletters and social media in between. Finally, how often will you deal with the advisor personally, and how often will support staff be involved?

Poor communication is one of the most frequently cited reasons why people change advisors. A false start could waste time and money – yours! – so be conscious in those interviews whether the two of you are ‘clicking’. The better the personal connection, the greater the prospects that the appropriate financial products and strategies will be matched up with you and your personal goals.

Robo-advisors: How medical symptom checkers can shine a light on them

The limits of expert systems

The long-running podcast Skeptics Guide to the Universe explores and de-bunks pseudo-scientific claims. One episode raised some flags with the way statistics are used to express the effectiveness of online medical symptom checkers. Though not directly transportable into the financial field, there were many interesting points raised that could help illuminate how we see automated financial advice – or as they are more commonly known, robo-advisors.

Co-host Steven Novella, a medical doctor, introduced the topic by questioning the accuracy of online symptom checkers (SCs). In a related blog post, he summarized the findings of an Australian study that evaluated the accuracy of 27 online SCs. Novella characterized the study’s results as “pretty disappointing.” On average, the correct diagnosis was listed first 36% of the time.

Not bad at first blush to hit it on the head more than one-third of the time, but the correct diagnosis was only listed among the top 10 possible diagnoses 58% of the time. For practical purposes, that means the correct diagnosis was missed 42% of the time, as most patients are unlikely to look beyond the top 10.

More interesting to me, though, were the potential reasons why the diagnoses were so poor.

Parallels with automated financial advice

Though the focus of the discussion was on medical-scientific matters, the observations could apply similarly to the automated tools in the personal finance and investment fields. These include do-it-yourself online brokerages and robo-advisors that offer online investment portfolios, but also advisors’ own tools: from the reference sources that clients never see, to side-by-side processes, to that solo interaction between the client and the evaluation tool.

Wherever the technology lies on that spectrum, it can’t be a proxy for the advisor.

As with the doctor-patient relationship, a financial advisor must understand the client in order to deliver personalized advice. The less the advisor interacts with the client, the more difficult it is to deliver.

And even with the benefit of direct contact, it remains the advisor’s responsibility to apply and explain the tools and their output, so the client’s interests are adequately served.

Points to ponder

Here are some of the podcast panelists’ thoughts on symptom checkers, and how they may apply to the delivery of financial advice:

Quality of input

Patients are often not very good at describing symptoms. People may say numbness when they mean weakness, or they may treat the two as the same, Novella said.

A client may use similarly imprecise language to describe their personal goals or their feelings about risk.

Alternatively, a client may adopt words offered by the document they’re filling out or the platform they’re using, without appreciating nuances. Absent the advisor probing further, the premises for a client’s action (or inaction) may not properly reflect their intentions.

People come to you with a narrative

Both medical patients and financial clients can be biased, frequently responding with their relative feelings anchored on recent experiences. One has to ask questions in multiple ways to deconstruct the objective facts from the narrative, and then reconstruct those facts in the medical or financial arena where they are to be applied.

It’s a dynamic investigative process that requires a lot of insight into how people think and communicate. A focused professional can then use this knowledge to move the relationship forward.

Body language

An experienced physician reads all the signs, including the patient’s body language. Advisors can observe a client’s posture and tone of voice, and how a couple interacts — things you don’t experience through checks in boxes or even the most eloquent text summaries.

Triage function

This is the “Do I go to the hospital?” moment. The SCs reviewed in the Australian study scored 49% on this measure, though they erred more on the side of sending people when it wasn’t necessary.

While there’s no life or death counterpart in financial advice, the accumulated harm of unverified guidance could make it difficult for someone’s finances to recover should problems materialize in later years.

The “why” of the output

It’s not enough to produce an output and expect that it will speak for itself. Newer SCs that use artificial intelligence give reasons for why they predict certain things, as well as how sure they are about the output provided.

That’s a large part of the financial advisor’s value to the client: explaining where things come from and where they are headed. It’s a check against the quality and thoroughness of the inputs that led to the output, and an opportunity to reinforce the client’s confidence and commitment to the plan you are creating together.

As a final point, it should be noted that SCs have no common regulation, if any at all. Comparatively, there is plenty of regulation in the financial field, and compliance departments help advisors stay vigilant and within boundaries.

Still, financial tools can be very complex. It’s incumbent on advisors to fully understand what is at their disposal so that digital platforms are used as tools of the advisor, and not in place of the advisor.

The case for CPP at 70

Why and how advisors can help

_{[A version of this article appeared in Advocis Forum February 2021]}

While playing charades over the holidays, my youngest son stumbled with “a bird in the hand is worth two in the bush”. Eventually we guessed it, and I explained to him that it means accepting a sure thing now rather than holding out for something potentially bigger later.

Coincidentally, that adage also featured prominently in an item on my holiday reading list. It’s a research paper^[1] about delaying Canada Pension Plan retirement benefits, released in late 2020 by the National Institute on Ageing and the FP Canada Foundation.

My long-held opinion has been to take at 65, unless there are compelling reasons to start earlier. After reading this paper, I’m now leaning toward 70 as the default position.

When we’re starting CPP, and why

The majority of Canadians – 7 out of 10 – take their CPP retirement pension at either 60 or 65. Less than 5% take after age 65, and only 1% wait until 70. The study’s author, Bonnie-Jeanne MacDonald, attributes this pattern of early uptake to a combination of lack of advice, bad advice and ‘bad “good” advice’.

The bad advice includes the emotional pull of the bird-in-the-hand: ‘If you die early (so the argument goes), you’ll leave money on the table, so take CPP as soon as you can’. However, the only guarantee is that your payments start sooner, not that you’ll receive more. And ironically, the early uptake may in fact increase the likelihood that you will receive less, as we’ll see following.

The ‘bad “good” advice’ is the mainstream practice of using a breakeven age. It compares two starting ages, say 60 and 65, focusing attention on whether you will reach the age when the cumulative receipts are the same. This plays to our behavioural tendency to favour the near-term (from first age to second age to breakeven age), thereby undervaluing the lifetime income security that CPP offers. On top of that, academic research shows we tend to underestimate our life expectancy, making it even more likely to choose the earlier start.

According to Canada’s Chief Actuary, life expectancy at age 60 is 85.9 for men and 88.5 for women. In my own experience, I’ve never seen a suggested breakeven/crossover age much over 80. This has long been my discomfort with this approach, as you are betting on being in the ‘dies-before’ half of the cohort population. You lose (statistically) simply by being average, and it gets worse the longer you live.

Measuring the dollar difference

Early uptake would not be a concern if it in fact leads to a better financial outcome. To test this, MacDonald departs from the breakeven approach, favouring a calculation of the current dollar value of the expected loss, or “Lifetime Loss”.

For someone with average life expectancy entitled to the median CPP income who takes at 60 rather than delaying to 70, the Lifetime Loss in current dollars is over $100,000.

The model factors-in the drawdown of RRSP/RRIF savings until the CPP begins. Including this component, it finds that most people will still be much better off by bridging this way, than by taking CPP early and stretching their RRSP/RRIF money over the expected retirement years.

Notably among the scenarios canvassed in the paper, someone entitled to the maximum CPP pension who lives close to age 100 (a 25% probability from age 60 according to the dataset used), the current dollar loss can exceed a quarter of a million dollars.

Advisors have a key role

To be clear, Lifetime Loss is not intended to be applied without consideration of individual circumstances. There are many situations where it would make sense to begin early, such as when there is a known life-limiting health condition, or when someone is trying to preserve income-tested benefits or shield against the Old Age Security clawback.

For most people, it’s a challenge just to identify all the contributing factors in making such a decision, let alone evaluate the trade-offs among them. It’s both technically complicated and emotionally charged, which together can be overwhelming.

In addition to being a dependable information source, financial advisors can guide their clients by applying some of the lessons of behavioural finance:

Loss aversion holds that we feel the pain of loss twice as much as the joy of gain, which is what Lifetime Loss illustrates in concrete terms.
It also frames the discussion on the more likely scenario of longevity, as opposed to early death.
Lastly, it anchors at the later age of 70, to be lowered as the analysis warrants rather than having to make the uphill battle from age 60.

Ultimately the decision should be informed by individual particulars and reliable evidence. In the latter respect, I recommend this paper as a helpful resource for all financial advisors.

^{1 https://www.fpcanadaresearchfoundation.ca/media/5fpda5zw/cpp_qpp-reseach-paper.pdf}