Choosing a financial advisor: Advisor-client relationship

All relationships are a two-way street based on openness, transparency, respect and the ability to communicate. When choosing a financial advisor, understand the advisor/investor relationship can be especially tricky as it involves money, often the client’s life’s savings. New regulations are providing a basis for a new level of conversation between the two parties.

The advisor-client relationship

All relationships come down to the connection between two people, and when the relationship involves your money, things are bound to get a bit more complicated.

That’s why it’s not only important to take great care when choosing a financial advisor, but to also pay attention to how the interaction evolves – and to gauge whether at some point, it may be necessary to say goodbye.

New disclosure rules that started being phased in mid-2015 provided an excellent opportunity to test the ties that bind the investor client and the advisor.

Those changes, implemented by the Investment Industry Regulatory Organization of Canada (IIROC), are being brought in gradually to provide greater transparency about the performance of investment products and the fees charged by the adviser.

IIROC thinks the enhanced disclosure regulations should “result in more meaningful conversations between advisors and their clients.”

These conversations could also be the most candid the client and advisor have ever had and could result in a reassessment of the whole relationship.

It certainly provides a good opportunity to reflect on what is good and bad about the relationship and an assessment of whether expectations are unrealistic.

That’s hardly surprising as the interaction is very much like any other interpersonal relationship.

“There’s a lot of emotional investment in that because we’re talking about people’s money and people feel very close to their money,” observed Norman Raschkowan, senior partner at Sage Road Advisers in Toronto.

“What can go wrong in any sort of interpersonal relationship, even where both parties enter into the relationship in good faith, and with the best of intentions, (is) it may not last.”

And like any potential breakdown in a relationship, the problem often comes down to the two parties talking at cross-purposes.
That, in turn, can be traced to problems that took root at the start of the relationship.

“Sometimes, clients go into a relationship with an advisor with unrealistic expectations,“ added Raschkowan.

“They think that now that they have an advisor, he or she is going to make them lots and lots of money and they’re going to get to invest like Warren Buffett and they don’t have to do any work themselves and I think that is perhaps the biggest mistake.”

Raschkowan pointed out that the investing relationship, like any other, is a two-way street.

At the outset, the advisor’s responsibility is to ensure that the client’s expectations are realistic.

She should outline levels of expectation, including services from the advisor, the level of returns and the types of investments the client is buying.

At the same time, it’s the client’s responsibility to articulate financial goals, a time horizon and realistic returns.

But the relationship could be in trouble from the start if the two personalities just don’t fit together.

“There has to be a good match,” added Raschkowan.

“An advisor who likes to sort of deal with academics and talk about all sorts of theories and stuff is not going to be able to relate to a client who is not interested in the minutiae of investing. Similarly, a client who is really very aggressive in terms of their investment approach and wants to make a lot of money fast … is going to get very frustrated with an adviser who is focused on the very long term and making sure you’re participating in the growth of companies but not in fly by night or higher risk ventures.”

At the same time, when choosing a financial advisor, the investor should know that maybe she’s not viewed as the perfect client.
“An experienced professional advisor will recognize that there is a mismatch,” said Raschkowan.

“And a client should recognize that while there is a relationship, that at the end of the day the adviser is running a business. And that adviser might just not be able to provide the attention that a client feels they need or deserve.”

5 years ago