Ins and Outs of Using a Financial Adviser in Canada

For some people the DIY approach to planning personal financial matters may not work, whether due to a lack of time, interest or knowledge. Many of my friends and family would rather do something else with their time than read up on tax laws, figure out investment alternatives or construct spreadsheet calculations to figure out if they will have enough to retire and not be sleeping under the bridge at age 75. That, I have to admit, is the reality, even when substantial improvements can be effected with the simplest actions - witness the large percentage of people who don't contribute to their RRSP ever year.

On top of that, it seems that the challenges of effective personal planning are growing. Financial instruments are getting more numerous and complicated while governments are always adding benefit programs and laws (funny how they rarely seem to be eliminated). Convenient and simple defined benefit pension plans are in decline and people are forced to provide on their own for their financial retirement future. In short there is a case and a place for professional help in personal financial planning.

So, for those people, I've taken a look at the professional financial planning situation in Canada (and will do so for the UK in a separate post; there are some interesting contrasts). I was hoping it would be a quick look, but unfortunately, there is a plethora of more or less overlapping and confusing titles and designations. Advocis, the financial planners of Canada's association, has an abbreviated list on its website. Here's an even longer list that includes US designations. Some of the titles are downright hilarious for their bombast and pomposity, e.g. the Chartered Professional Strategic Wealth or their careful political correctness e.g. Elder Planning Counselor. It is quite possible I have not uncovered all the possibilities despite several days of searching on the Internet! A good article from the Ontario Medical Association reviews the function of a planner and some of the alternatives out there.

The people with formal designations does not even cover the field since there is no regulation of financial planners in Canada, apart from the province of Québec (see L'Autorité des marchers financiers for their rules about what is required of a financial planner), to restrict those who can call themselves financial planners. Canadians shouldn't feel too bad since there is apparently no regulation of planners in the USA either. Note that such regulation in Canada would happen province by province due to the idiotic and laughable lack of a national financial and securities regulator. There is, however, across-the-country regulation of the provision of advice with respect to investment in securities. For instance, the Ontario Securities Commission regulates anyone who is what they term an Investment Counsel ''... in the business of advising others as to the investing in or the buying and selling of specific securities ... on the basis of the particular objectives of each client'' or a Securities Adviser '' ...in the business of advising others either through direct advice or through publications or writings, as to the investing in or the buying or selling of specific securities, not purporting to be tailored to the needs of specific clients.'' (see this page for details) Such people must register with the OSC, pass formal specific educational courses like the Canadian Investment Manager, the Chartered Financial Analyst and go through several years of supervised work experience. The Ontario Securities Commission has a database of people registered to work (in Ontario only) along with the type of services they are authorized to provide. The National Registration Database has a contact list of all the provincial and territorial securities regulators through which one can find out who is authorized to provide similar services in the other provinces.

The Canadian Securities Administrators website has a handy guide that explains what is and is not regulated in Canada. The guide also explains the difference between advisers in investments, sales people for mutual funds or insurance and financial planners. The essence of a financial planner is the ability to incorporate all aspects of a person's financial situation - income, budgets, investments, taxes, mortgage, investments, insurance, trusts, pension, retirement - into a coherent, balanced integrated plan that supports the person's life goals. The planner is somewhat akin to the general practitioner / family doctor. Some simple or common situations are treated directly, but it may be necessary to call upon specialists.

Financial planners have been trying to raise their occupation into a profession like that of accountants and lawyers. That's the stated aim of Advocis and the Financial Planning Standards Council (FPSC). To do this, they are setting requirements for education, experience and ethics, which seems to me to be a good thing, though I think there is some improvement to be made in the actual requirements as they exist today. This recent article in Investment Executive reviews the current status of the professionalization efforts.

The Certified Financial Planner title granted by the FPSC appears to be the designation with the most adherents in Canada (almost 17,000 according to the FPSC). As an apparent tactic to gather all planners into its fold, the FPSC accepts a multitude of training courses and other designations as adequate proof of meeting the educational requirement. However, everyone must still write the FPSC's CFP exam. That's a good step, I believe since it ensures everyone has the same knowledge base. The problem may be the depth of knowledge. If one starts from scratch with the Advocis course, there is perhaps 300 hours of study to pass all the courses. That's not much compared to what professionals like doctors and lawyers have to do. The fact that most of the education programs for the CFP are offered by community colleges attests to the fact that the assumed level of knowledge is not university degree level. When I look at the curriculum covered for investing ''Module 1: Time Value of Money Fundamentals'', '' Module 16: Investments - Products'' and ''Module 17: Investment Planning'', it looks pretty basic. I doubt very much it covers even a fraction of the content of the standard university level text on the subject, Investments, the 900 page tome (5th Canadian edition) by Bodie, Kane, Marcus, Perrakis and Ryan.

I can understand the challenge of the FPSC and Advocis in not reaching too high on the educational ladder, as such insistence would cause a revolt among practising planners who would have to go back to school in a major way. There's also the fact that planners can do a whole lot of good for people applying those basic techniques and strategies. I've certainly noticed that amongst my friends and relatives. The on-going requirement of 30 hours professional development per year that FPSC requires to maintain the CFP helps raise the level of knowledge somewhat.

Truth be told, other designations look quite similar in their educational requirements, so the above comments don't mean CFP is deficient. In fact, the CFP seems to be better in protecting the designation by policing its members and disciplining transgressors as seen on the front page of the FPSC website. I could not find any such indication of policing on the Institute of Canadian Bankers website, which hosts the competing designation, the Personal Financial Planner. Nor is there any mention of continuing education obligations to keep the PFP. The same goes for the Financial Management Advisor of the Canadian Securities Institute.

The CFP is the best of the lot but it has another element where it could use improvement. That relates to the disclosure of fees. A CFP is not necessarily a fee-only adviser, which is the most impartial type in my view - you pay only for the advice, no commissions or fees paid by mutual fund companies. In other words the adviser is totally on your side and has no incentive to have you buy anything, if that isn't good for your financial health (I'm thinking especially of insurance and mutual funds). I don't know what proportion of advisers in Canada are fee-only but it must be a small minority (see this discussion on the Financial Webring regarding the challenges of being a fee-only adviser) since the fact that the client does not actually see the commissions being paid in the background creates a psychological preference for that type of arrangement. All this to say this - although the ethics policy of the FPSC requires that the CFP disclose on what basis the adviser is being paid under rule 401, it does not, but should, require disclosure of the amount of the commissions and fees paid to the adviser by the companies. It is interesting that the consumer advice section of Advocis in its recommendations of questions to ask a potential adviser before signing up, says you should ask ''Can you give me a dollar estimate of what those fees and costs would be for someone with my needs?'' Why not require that disclosure of a CFP then?

Overall, the CFP seems a reasonable place to start. Advocis provides a search tool to locate an adviser, oops, advisor (why can't they even agree on a spelling!?). However, the key is to find someone on your wavelength and whom you can trust.