How well does your advisor really know you?
It might seem odd for the roughly one-third of Canadians that work with financial or investment advisors that they could be getting advice that does not fit their personal needs.
But after years in legal limbo, advisors are only now formally required to know relevant details of their personal lives.
In March, investment regulators gave final approval to force registered advisors to follow the know-your-client rule (KYC).
The move is part of sweeping legislation giving them legal authority to determine who is, and who is not, a financial advisor. Specifically, it determines who is qualified to provide investment advice.
Before receiving final approval, industry titles and definitions were all over the map. Anyone could technically hang an “investment advisor” shingle and there was no legal requirement for the advice they gave to be in the best interest of the investor (other than a registered fiduciary, which is rare).
The national self-regulatory investment body, the Canadian Investment Regulatory Organization or CIRO, now requires members to earn a defined title of financial advisor.
The new rules require wannabe advisors to meet minimum standards of education, and abide by a code of conduct.
How the “know-your-client” rule empowers investors
Canadian regulators have been dragging their heels on licensing investment advisors for decades, but one legal line of defence that has stood its ground for average investors is the know-your-client rule.
The new legislation calls for all advisors to complete and regularly update a form with each client to determine the client’s general understanding of investing, tolerance for risk and investment goals before determining “whether a recommendation is suitable for a client and puts the client’s interest first”, as they age and move toward retirement.
A common example of the KYC rule that has held up in court prohibits advisors from putting clients in high-risk ventures the client doesn’t understand.
Investment firms must also ensure the rule is being maintained and enforced on behalf of their advisors.
Advisors should be more than just suitable
Canadians who invest their retirement portfolios through investment advisors, or financial advisors for broad household finances, should already be familiar with KYC forms but they are entitled to much more.
The next time a questionnaire comes along, here a few issues beyond what is required that should be clear to clients:
- What is your advisor’s long-term investment strategy and asset allocation to get you to your retirement goals?
- The advisor’s access to credible research to find the best investments in the best sectors and geographic regions.
- Tax saving strategies that effectively utilize registered accounts such as registered retirement savings plans (RRSP), tax free savings accounts (TFSA), and in some cases non-registered investment accounts.
- A clear breakdown of how fees are generated and a strategy to lower them as the portfolio grows. Wealthy clients often pay less than one per cent because they generate higher fees for the advisors that helped make them wealthy. If a portfolio grows as it should, there should come a time high mutual fund fees give way to low-cost alternatives and direct investing.
- Most important, advisors should keep in touch more often than the basic KYC requirement through regular client newsletters or one-on-one contact in times of market volatility or major life changes.
To be fair, good advisors also need good clients who commit to saving, do their homework, remain engaged, and develop realistic expectations.
