Looking for a financial adviser? In addition to the usual attributes, it is crucial to know what to avoid. In investing, as in life, the principle of "winning by not losing" applies. While empirical markers and empathy are important, several serious red flags can impede financial progress.
Key Red Flags to Avoid
A decade ago, a groundbreaking academic paper revealed how advisers' faulty perspectives can lead to bad advice. The 2016 working paper, The Misguided Beliefs of Financial Advisors, analyzed 14 years of data from over 4,000 advisers and nearly 500,000 clients at Canadian financial institutions. It was later published in the Journal of Finance in 2020.
The paper identified three common transgressions among mutual fund registrants:
- Chasing past performance
- Running concentrated positions
- Ignoring product cost
If an adviser does any of these, leave immediately. Specific examples include:
- Recommending funds with high management expense ratios (MERs) when cheaper alternatives exist
- Suggesting two or three funds in one asset class as diversification
- Making large sector bets (e.g., cryptocurrency, cannabis, AI)
- Basing recommendations solely on one-, three-, five-, or ten-year returns
These are clear signs the adviser is not using evidence-based or best practices.
What to Look For in a Financial Adviser
Instead, seek an adviser with whom you can discuss your hopes and dreams. Solving specific problems and offering alternatives—such as CPP timing or pension commuted value—is critical. Good advisers provide clear explanations for their recommendations, helping you differentiate sound advice from poor.
Fit is also important. Consider whether you prefer a local adviser, someone from your community (defined by geography, religion, ethnicity, etc.), or someone outside it for confidentiality. Assess the complexity of your needs now and in the future.
Different types of advisers suit different situations. In small towns, a mutual fund registrant from an independent firm or bank branch may suffice. For more comprehensive advice, a securities-licensed adviser in a medium-sized city is a good option. Accredited investors might work with a portfolio manager who operates on a discretionary basis and has a fiduciary duty.
Ultimately, the best adviser helps you make sound financial decisions aligned with your goals.
