How to choose a financial advisor

Since my last post, I’ve had a few people ask me how they should go about choosing a financial advisor - after all, there are so many firms and planners out there it’s hard to know who to trust with your hard-earned money.

Let me start by telling you how we chose ours - in short, we were in a hurry... A few years back, my then-fiancé and I were getting married and buying a house within the same few months - we had totally different money styles and financial goals and, of course, we were fighting about it - a lot! I felt like we needed to call in professional help to mediate our money merger - I asked a friend for the name of his advisor (who he liked) and we ended up using him. It turned out to be good move - we ended up with a financial plan that merged our goals and we made it down the aisle without killing each other.

Now, I would not recommend this kind of last minute approach to choosing a financial advisor - it’s one of the most important financial decisions you can make and ideally you should interview a few candidates before deciding.

So, with that mind, and to answer some of your questions about how to make the choice, here are a few steps to help make it easier for you to choose (and links to some other resources that might help too): 1. Start by asking around - canvas family and friends for potential advisors based on their recommendations. Narrow down the list to a few names and then interview each one.

2. Ask each candidate detailed questions about how they work, what their experience is and - importantly - how they get paid and how much. This is critical - how your advisor is compensated gives you insight into what motivation he or she might have for recommending investment products to you. For example, some advisors work on a commission model while others are strictly fee-for-service. Each has its pros and cons - these fee models are outlined quite well by MoneySense blogger Jody White in this post. Keep in mind, an advisor should be ready and willing to tell you exactly how he or she gets paid - if not, run away (or simply Google Bernie Madoff to find extreme examples of what can happen when transparency is lacking in the investment world…)

3. Be clear on what you want your advisor to do for you. For example, do you want a full financial plan or just investment advice around your registered retirement savings plan? What types of investment are you interested in? Do you need insurance? Tax planning? Discuss this up front when you are interviewing an advisor to make sure they can help with everything you need.

4. Ask about qualifications and experience. Do they have the right designations? Can they buy and sell investments? I also think you should ask if he or she has any experience working with people at your age and stage of life -- while the guy you’re talking to might have helped your rich Uncle Phil, can he help you if you’re a 30-something single woman looking to buy a starter home? You should also expect an advisor to have at least two years of experience under their belt.

5. Do a background check using this tool from the Investment Industry Regulatory Organization of Canada - it’s an online advisor search database that lists qualifications, background and disciplinary actions on file for IIROC-registered financial advisers.

These are just a few questions you should ask - there are lots more of course. The Investor Education Fund has a good list and other resources to help you learn about what you can expect from advisors. I also like this article from Morningstar about how to be a smart shopper when it comes to financial advice.