Dale Jackson

Personal Finance Columnist, Payback Time

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Nearly half of Canadians who invest through advisors are shopping for new talent.

According to the 2023 Ernst and Young Global Wealth Research Report, 45 per cent of surveyed people said they were looking for better portfolio managers – a 24 per cent increase since 2021.

The waning confidence in professional management is likely linked to how well advisors navigated the market turmoil caused by the pandemic. As the lockdowns took hold in 2020, investment firms reported an influx of new clients. A survey commissioned by Manulife Investment Management at the time showed 63 per cent of respondents were looking for an advisor, compared with half in the year before COVID.

If your new year’s resolution is to review your investment advisor, or if you are in the market for one, here are four ways to tell if they are earning their fees.        

1. HOW DO YOUR RETURNS COMPARE WITH THE BROADER MARKET

2023 was a good year for the two main asset classes that make up a balanced investment portfolio: stocks and fixed income.

The U.S. stock benchmark S&P 500 advanced by 25 per cent, the Canadian stock benchmark TSX Composite returned over eight per cent, and guaranteed investment certificates (GICs) paid yields as high as five per cent.

Your portfolio should reflect those stellar performances if it is properly diversified among asset classes, major sectors and geographic regions. 

Inversely, properly diversified portfolios would likely have shown losses in 2022 when stock markets fell and yields were much lower. It’s long-term gains you are looking for.

If your returns are consistently out of whack with broader markets, ask questions. Lagging portfolio performance might be attributed to specific misunderstandings relating to your risk tolerance or return goals.

2. HOW MUCH OF A BITE ARE FEES TAKING?

A portfolio that consistently underperforms the broad markets could be weighed down by excessive fees.

Professional management costs money. The only way for most Canadians to access professional management and diversification is through mutual funds, which charge an annual fee based on a percentage of the amount invested.

Depending on the fund, those fees can top three per cent, which can shrink a return of five per cent to two per cent.

Returns dwindle further when other fees such as loads and commissions are piled on. 

A good advisor knows the best funds for the buck, but should also find ways to minimize fees over time by shifting assets to lower cost exchange traded funds (ETFs) or investing directly in equity markets.

There are other ways advisors are compensated that could cost less, including flat fees. 

Fee rates should fall as the portfolio grows and the dollar amount increases. High net worth investors generally strive for total fees under one per cent of the amount invested.

3. IS THERE A STRATEGY FOR KEEPING MORE TAX DOLLARS INVESTED?

Part of an advisor’s job is to ensure your savings are invested in a tax-efficient manner. Keeping more of your tax dollars to compound in your portfolio is a risk free way to boost returns.

If too much money grows in a registered retirement savings plan (RRSP), for example, investments could reach a point where withdrawals will be fully taxed at a high marginal rate. Eventually, minimum withdrawals will be mandatory, putting government benefits like old age security (OAS) in jeopardy. 

Before it gets to that point, an advisor should strategically channel savings into tax-efficient vehicles such as RRSPs, tax free savings accounts (TFSAs), income splitting tools like spousal RRSPs and even non registered investment accounts. 

4. DOES YOUR ADVISOR EVEN KNOW YOU?

Do you only hear from your advisor when RRSP season rolls along? Portfolio management is a year-long event and regular communication is essential.

Your advisor should be in touch with you by phone or email, or at the very least a regular newsletter explaining any market-moving situation and assuring you your investments are well positioned for what comes next.

In addition, a good advisor should know your retirement goals, tolerance for risk and personal circumstances that impact your finances.

They should also know your big financial picture: debt levels, home equity, workplace pension plans and other major assets and liabilities.

If any of these points ring true, it’s time for a chat – or a change.