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4 ways to tell if your investment advisor is a good investment

In the ever-evolving landscape of financial markets, Canadians are increasingly on the lookout for top-notch investment advisors. According to the 2023 Ernst and Young Global Wealth Research Report, a significant 45 percent of Canadians investing through advisors are actively seeking new talent—a notable increase of 24 percent since 2021. The growing skepticism seems to be tied to how well advisors weathered the market storm during the pandemic.

As we step into the new year, many individuals are contemplating a review of their investment advisors or embarking on the quest for a new one. Here are four straightforward ways to determine whether your investment advisor is truly delivering value for the fees they charge.

1. Comparative Returns with Broader Markets:

A well-crafted investment portfolio should echo the successes of the broader market. In 2023, key asset classes like stocks and fixed income performed exceptionally well. The S&P 500 saw a 25 percent surge, the TSX Composite returned over eight percent, and Guaranteed Investment Certificates (GICs) yielded as high as five percent. If your portfolio fails to mirror these stellar performances, it's time to ask questions. Understanding the reasons behind lagging returns, such as risk tolerance misunderstandings, is crucial for long-term gains.

2. Fee Evaluation:

Excessive fees can be a substantial burden on an investment portfolio, especially if it consistently underperforms the market. The annual fees associated with mutual funds, often the avenue for professional management, can surpass three percent. A skilled advisor not only identifies high-value funds but also explores cost-effective options like exchange-traded funds (ETFs) to minimize fees. As portfolios grow, fee rates should decrease, with high net worth investors typically aiming for total fees below one percent of the invested amount.

3. Tax-Efficient Investment Strategy:

An essential aspect of an advisor's role is to optimize tax efficiency in your investments. Ensuring that your savings are strategically placed in tax-efficient vehicles such as RRSPs, TFSAs, and spousal RRSPs can lead to significant returns. Advisors need to navigate the fine line between maximizing returns and minimizing the tax implications, preventing pitfalls like high taxation on withdrawals and jeopardizing government benefits like Old Age Security (OAS).

4. Personalized Relationship and Regular Communication:

Investment management is a year-round commitment, and effective communication is key. If your advisor only contacts you during RRSP season, it might be a red flag. A good advisor maintains regular communication, updating you on market situations and ensuring your investments are well-positioned. They should also have a deep understanding of your financial situation, including debt levels, home equity, pension plans, and other major assets and liabilities.

In conclusion, if any of these signs resonate with your investment experience, it's time for a candid conversation with your advisor or a consideration of a change. Ensuring a symbiotic relationship with your investment advisor is fundamental to the success of your financial journey.