Episode 2: Do You Really Need a Financial Advisor?

Welcome to episode 2 of the Retire Ready Podcast, the podcast that helps Canadians prepare for all that retirement brings. I am your host Scott Sather, Founder, President, and Financial Planner at Awaken Wealth Management, and Portfolio Manager with Awaken Investments of Aligned Capital Partners in Regina, Saskatchewan. Today we’re going to talk about if you really need a financial advisor or planner and if so why?

So for the sake of simplicity I’m going to be saying Financial Advisor throughout the show but really I should be saying financial planner and for that manner I should be using the word Real in front of both of these titles as there is a difference and a Real Financial Advisor or a Real Financial Planner is who you would actually want to work with, but we’ll talk through what that ”real” means in this episode.

Now you might be asking why this topic now? Why are we talking about this on a retirement podcast? Well, a lot of people come to advisors for retirement planning, I would say the vast majority of Canadians look to  talk to an advisor about retirement planning. And so I think you need to be prepared on how to find the right advisor for you, making sure that that person is understanding your situation. This is also comes from over the last two or three years, seeing posts on social media, folks reaching out on Facebook or Twitter, looking for an advisor. And well-meaning people giving out names of their advisor or advisors that they know of as a recommendation, many of which are more salespeople than Real financial Advisors. Because a lot of advisors in today's day and age in Canada, not all of them mind, but a great number of them are just glorified salespeople.

They're there to sell a product, get a commission, and move on to the next person or sale. They don’t take the time to get to know you, your situation, your goals. They don’t do any real planning. They are transactional. And while that may be better than nothing, most people could and should do better. Many of these salespeople are focusing on high cost products or their only offering one type of solution so people aren’t getting what’s best for them. So I really wanted to help folks to be able to make a more educated decision on what to look for when it comes the search for a real financial advisor.

Today we're going to be chatting about if you really need a financial advisor and what value an advisor provides?

The goal is to be able to summarize these episodes into a white paper and a checklist that you can use when looking for an advisor. So you'll be able to visit awakenwealth.ca and download these documents that will talk about the various things we're about to talk about over the next couple of episodes. These will be available on the site at the end of the series.

So, the first question, do you need a financial advisor? Now, I should start by saying I am a financial advisor, financial planner, and believe that I’m one of those real Financial Planners, so obviously, I might be a little bit biased, but from my experience with over 25 years in the financial services industry, I would say most, and if I had to put a number to it, I would say 95% of Canadians would benefit from working with a real financial advisor. That’s net of the cost of hiring the advisor as there is a typically a cost, whether you see it or not, as most people don’t work for free. From what I've seen people need someone there, that's going to guide them, to be that third party that can help them steer them away from making bad money decisions. And I have seen way too often where people have made decisions that have hurt their financial situation, where if there was some sort of barrier there, that being an advisor, they probably wouldn't have made that decision, someone there to be able to say, hey, here's the consequences of making that decision, are you're sure you want to do this.

I can think of a number of examples of hand, from conversations I’ve had with clients or acquaintances, both at the time or after. The first one that comes to mind was back in my bank days, during the 2000-2003 bear market. I had made the change from working with a brokerage to back with the bank, due to not making any money- I was too young and it was definitely an interesting time- but that’s a story for a different episode. Now I had gone back to the bank and had some folks come in to see me as their investments were down in value and they just wanted out. They were scared. We were in the middle to end of the bear market and it was the first time in a while where we saw negative returns over a few years. Now I knew getting out was not the best thing for them but it would make them feel better. I shared some of the limited resources I had at my hands at that time as to why this was the worst decision they could make but I was only an order taker and really the decision was there’s. I wasn’t working as a real advisor but more of a guided order taker. Now again they were scared, they had been put in to a portfolio with more risk than they were comfortable with and they were never educated on the volatility that they might see. At the end of the day they ended pulling out and moving their money to a GIC. I was able to at least get some of the money into an index-linked GIC, again not the best solution but at least something that would give them some exposure to the market while limiting the downside and hopefully help gain some of those losses back when the market came back up, which it did.

Now most of the time we like talking about the winners- the times we’ve made money but I’ve also had a number of folks throughout the years tell me about changes they made on their own to their investments or pensions, by increasing risk when times were good or reducing risk when markets got rough, again making more emotionally driven decisions but essentially timing the markets at the wrong times. Places where an advisor could help show how actions like these in past events would’ve ended up. Two off hand were a few folks that increased their equity exposure past their recommended asset allocation when things were good, right before 2008, only to feel the great financial recession that much more. The other one being during the beginning of Covid. Markets fell fairly quickly at the news of the pandemic but rallied quickly to make up the losses. Again this was close to the same story as before, folks got nervous and decided to move their pension to cash and wait things out only to be on the sidelines watching as markets came back up. These are just a few memories that come to mind.

Ok, so after all of that I’m still not sure I’ve answered the questions- do you need an advisor? I think to help answer that we need to first answer what value does an advisor truly bring to the table? Historically most of the perceived value that people would hire an advisor for would be to picking investments- whether that be managing a portfolio of stocks or picking the best managers out there in a mutual fund. The evidence proves that realistically neither of these add much of the value you’re paying for. All you have to do is look at the S&P Indicies vs Active report otherwise know as SPIVA for Canada and see that most managers, after fees, underperform their index. So then where does the value come from? Thankfully we do have some research that speaks to where an advisor provides value. We have research from a number of places but we’re going to talk about some of the articles and research from Vanguard, Morningstar, and Russell investments, that talks to where that value is and even quantifies how much in percentage terms an advisor can provide. Vanguard’s research has stated an advisor can provide up to 3% or higher of value while Russell most recently had said that number was closer to 4% at 3.85%.

So on the investment front an advisor can provide value but not not so much in what we’ve previously mentioned but instead by focusing on finding and recommending low cost, evidence based, solutions or strategies, like mutual funds and exchange traded funds or ETF’s- and yes mutual funds, despite their bad reputation, which many have earned due to the high fees and active management approach, mutual funds can be low cost and can be the best solution. So advisors recommending these types of investments and  applying your risk tolerance to your portfolio through asset allocation and rebalancing,  using asset location- meaning where different assets are held to minimize taxes, focusing on total return instead of income investing. These are the places an advisor adds value on the investment front. Vanguard has quantified the portfolio construction provided by an advisor in the range of 86 to 128 basis points. So that .86% to 1.28% with a lot of that coming from advisors focusing on lower cost products or solutions. Right there is where we see the real financial advisor come out. While the index or evidence based funds and ETFs have the cost advantage, those advisors believing in active strategies can still find lower cost options. And at the end of the day despite some saying fees don’t matter, they do- it’s the simple math of investing. As Vanguard founder Jack Bogle says in his book The Little Book of Common Sense Investing ”The More the Managers take, the less the investors make”

Where an advisor truly adds value is by knowing their clients through meaningful conversations and meetings, then going through the planning process, and then helping them to make good financial decisions by sticking to the plan or making adjustments as needed. Think of it along the lines of going in to see your doctor. You, hopefully, don’t go in to your doctor and say something is wrong and instantly walk out with a prescription. You want a thorough diagnosis. Ideally, the physician takes the time to know you and your situation, or already does through years of meeting. They have some background on you and your families health history. They then looks at some tests or analysis to help them make a diagnosis, and are then able to prescribe a remedy. The same idea applies to a real financial advisor. They shouldn’t just be selling you a product, especially in the first meeting, and even more so without putting a plan together as to why the product or solution makes sense. This salesperson mentality is what’s given advisors a bad reputation in the past and unfortunately is what many Canadians still experience today.

Planning is another way an advisor provides value- notice how I said planning and not a financial plan. There is definitely value in the financial plan but the true value comes in the process of planning that leads to the plan. Usually, the actual physical printed plan is outdated before the ink even dries from the printer. So ongoing planning is a huge value- talking about retirement, passing on your estate and legacy, managing the risks while alive, and reducing your tax burden. This can also include talking about efficient retirement income strategies- meaning where to draw your income from in retirement to meet your goals as this isn’t always as simple as just draw from your RRSP or RRIF.

That leads to the probably the largest value add, that being the behavioural coaching side of things. A real advisor provides tremendous value in helping clients to make better financial decisions and helping to avoid costly mistakes. This can include avoiding fad type investments, staying invested during good and bad times, even when it doesn’t feel good. Carl Richards, best known for his back of the napkin type sketches, which clients will recognize from being hung in my office over the years and now in the background in our Zoom meetings,  he’s also the author of the Behavior Gap, had one of those sketches that I’ll share in the episode notes if you visit our show page, that showed a You, then Your Advisor, and on the other side the advisor the big mistake, which depicts just that, the advisor standing in between the client and the big mistake, and that in and of itself is a huge value add.

Ok Scott, so let’s reign this back in. Do I think most people can benefit from working with a real advisor? Meaning the advisor that focuses on providing these places where we see there is value- Yes, yes, I do. Do I think most people should work with a real advisor? Yes, I do. Now, don’t get me wrong, there are folks that don't need to work with an advisor. They are able to stay disciplined and in control of their finances. I will often say that if you can do it yourself you probably will be ahead as you will save the cost of having an advisor involved. But I think from my experience in working with individuals, even after paying these costs, they will be further ahead. And like I stated before, most people need an advisor. Those that can do it themselves will still reach out ot get that second opinion just to make sure they are doing it themselves.

But an advisor can bring you that value by helping you, you know, one, create a plan, help you stick with that plan, and help you make those course corrections along the way. And then just make sure that you're aware of all of the different things because you, you just don't know what you don't know.

So, to answer our question, who needs an advisor? Well, really anyone who is uncomfortable with making the day to day financial decisions or wants to hire someone to do the heavy lifting that comes with wealth management.

Or anyone who feels they can benefit from an objective third party that can provide insights in determining when they can retire, or paying less tax, or reducing the fees they pay on their investments currently. As I’ve already said, there is value and advisor provides. You just need to find that real advisor that fits for you. And that’s where the next couple of episodes come in.

I think that is it for today’s episode. Be sure to subscribe and give us a review on your favourite podcast player. If you have questions or would like any retirement related questions answered on future podcasts please email us at info@awakenwealth.ca. You can also check out the Wake-Up semi-monthly newsletter at the Awaken Wealth site, which is awakenwealth.ca.

Be sure to check back in two weeks for our next episode on advice, that talks to what to look for in your search for a real financial advisor.

Thanks again for joining us today and I look forward to seeing you back for the next episode.