Is Your Investment Advisor Biased Towards Stocks?


With the current economic situation, the big question is whether you should stick it out in stocks, or sell some stocks now and raise cash?

Before you ask an investment advisor this question, you want to find out if their answer will be filtered through the most dangerous bias in the investment industry.

Here is the issue: If an investment advisor is paid 1 per cent a year to hold stocks, 0.5 per cent a year to hold bonds and 0.25 per cent a year to hold cash, how likely is an investment adviser to suggest selling stocks and holding cash?

Let’s come back to the question of the day. Should I be in the stock market, or bonds or cash? Now let’s think about how a good percentage of advisors get paid.

Would you be biased in your job if your salary was going to be four times higher to make suggestion A as opposed to suggestion B?

Tips for Communicating with your Financial Advisor

Now let’s imagine it is June, 2008. The Toronto Stock Exchange is over 14,000 points. You suggest to your advisor that you are worried about the markets given all of the global turmoil. You think you want to get much more conservative. You ask for advice.

Your investment adviser says “I think that most of the bad news has already come out. I am confident that markets will be strong in the second half of the year.” Is that their honest opinion or are they afraid to take a serious pay cut? How angry would you be when your portfolio drops 30 per cent over the next few months, if the advice was biased by how the advisor is paid?

This article is not a knock against professional financial advisors. In fact, stocks do outperform bonds and cash in the long run and are often the best place for your money. However, this is a plea to fix the fee structure of mutual funds. This is also a plea to the public to be willing to pay differently.

I believe the best solution is for clients to pay a fee that is based on the amount of money being managed. This fee shouldn’t change based on how a portfolio is managed. Your fee should be the same if your portfolio was all in cash at the moment, as it would be if the funds were all in stocks.

If this was the case, you would probably end up paying more for investments in cash/money market and bond funds than you do today and pay less for stocks. If the fee was the same for all assets, advisors would have no financial bias towards stocks or bonds or cash. They would not be financially penalized by recommending that you have a high cash position today.

This doesn’t ensure that you get correct advice, but it helps to ensure that you get the best advice someone can offer you today. A good financial advisor can be extremely valuable in this environment. Now is the time to get the unbiased advice that you are paying for.

Is My Financial Advisor Trustworthy?

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Is your financial planner or advisor on your side? Is your financial advisor- client relationship based on honesty?

To put this to the test, ask your financial planner the very basic financial challenge question, “How should I spend an extra dollar (or realistically, $10,000)?”How they answer will tell you if they are the right advisor for you.

I think only an honest financial planner can answer this question properly. Here is why: If your adviser is focused on investments, the answer will most likely relate to further investments in an RRSP, RESP, TFSA or regular investment account. This may in fact be an appropriate answer, but did they ask the right questions before coming up with this recommendation? Do they know about your non-investment priorities and obligations?

Like most situations, the best answer requires some education. Most important are the questions an adviser asks before coming up with recommendations.

Does your investment adviser understand your debt situation? If you have debt with an interest rate of 6 per cent or more, then you should very likely be paying down that debt first. If your interest rate is more like 3 per cent or 4 per cent, then could you likely earn more than this return by investing elsewhere? Is your debt tax-deductible or could it be restructured this way? What is your philosophy toward carrying debt? These are all questions your adviser should consider.

Tips for Communicating with your Financial Advisor

Moreover, your advisor should inquire about personal life situations. How long has it been since you had a real vacation? If there is no urgent need for the money, would you like to take a trip?Is there a house project that is overdue or a hole in your insurance coverage that is in need of those funds? Could one of your kids or parents or a charity really benefit from this money – and is that something that you are inclined to support?

As you can see, the right answer for you is really dependent on an understanding of your overall financial situation and also your personal goals. To find out if your advisor is on your side, try asking this question and see the advice they come up with for you.  If you are not happy with the answer, start looking for a financial planner who will actually understand your needs.

If you liked this article, make sure you read about ten tips for having a better relationship with your financial advisor here!

Ten Tips for a Better Relationship with your Financial Advisor


You have done the research, understood the fee structures and finally hired a financial advisor. What now? For most of us, a good relationship with our financial advisor is a top priority.

To have the best relationship possible with your financial advisor, here are ten simple tips for you:

1) Be up front about what you expect of your advisor. If your expectations are unreasonable, it is the advisor’s responsibility to make sure that things are adjusted.

2) It is your right to respectfully disagree with your advisor and not take their advice, but if you find that this disagreement is very common, then there is a poor fit.

3) Judge your advisor based on their actions and not those of your previous advisors or “the industry.” It can weaken your relationship with your advisor and hurt communication if they always feel beaten up for someone else’s behaviour.

4) You have a right to know how you are doing. If you are not being given that information or are unsure, don’t be afraid to ask.

5) Measure your adviser fairly. This means basing it on trust over time, seeing them do what they say they will do, and comparing their performance against a reasonable benchmark. For investments, remember that the TSX is an aggressive equity index overweighted in metals, energy and financial services; even among stocks, it is not the appropriate benchmark for the conservative investor.

Tips for Communicating with your Financial Advisor

6) You should call or e-mail your advisor on occasion. This keeps the line of communication open, and keeps your advisor aware that you are interested in your finances.

7 ) Respect your advisor’s time. While you can ask questions and ask for reviews, a reasonable advisor can’t devote too much time to any one client without it negatively affecting other clients.

8) While it is always your money, and you have the right to fire an advisor who isn’t doing a good job – try not to hold your business up as a threat. It simply adds stress to the relationship that isn’t helpful to you as a client.

9) If your advisor is doing a good job, say thank you. If you are really happy and feel comfortable doing so, send referrals.

10) Be honest with your advisor about whether you are happy or unhappy with their service, and provide specifics about why you feel that way. This gives you the best opportunity to improve the relationship and results.

Like any relationship, the one you have with your advisor is a two-way street. Some of the most successful people out there get to that point because they have good advisors, and because they themselves are good clients.  You  can learn more about a good client-advisor relationship from this comprehensive Wharton Business School research report on The Financial Advisor-Client Relationship.