Am I putting too much power into my financial adviser's hands?
February 22, 2010 7:13 PM   Subscribe

Am I putting too much power into my financial adviser's hands?

Most of my family's investments are in RRSPs (retirement plans) invested in mutual funds (value: $ 400,000). It is being managed by our financial adviser, who works at a large wealth management firm (we are in Canada). He gets paid through commissions.

At a recent meeting with him, we signed an authorization giving him more freedom to move our money without our explicit consent. According to him, the money management process gets very tedious without such an authorization. At the time this seemed reasonable, but we are now second guessing whether we are making ourselves too vulnerable. We don't know a whole lot about finances, or what's normal in a situation like this.

When we gently approached the topic, our advisor acted a bit hurt. He seems trustworthy; we just want to be cautious.

How can we be sure we're keeping our assets safe, while maintaining a positive relationship with our adviser?
posted by kirsti to Work & Money (18 answers total) 4 users marked this as a favorite
I'd rescind the authorisation. Most large firms won't give higher commissions for churning, but some do, and the fact that he moves your money around so often that it is difficult to get your authorisation? Something is weird here.
posted by jeather at 7:19 PM on February 22, 2010 [1 favorite]

When we gently approached the topic, our advisor acted a bit hurt.

That is a big red flag for me.
posted by grouse at 7:22 PM on February 22, 2010 [2 favorites]

Tedious for him or for you?

Unless you are finding yourself constantly pestered for authorization for individual money moves and would like that to end, I would rescind this.
posted by Tell Me No Lies at 7:31 PM on February 22, 2010

Rescind it. Using his "feelings" to sway your financial decision-making is not at all a good sign.
posted by thomas j wise at 7:38 PM on February 22, 2010

In the summer of 2008 my mom went shopping for Financial Advisors. One of the ones that was recommended to her actually told her to put all her money in "C-Shares" of financial institutions... Like Bear Sterns, Lehman brothers, etc. Yeah. She ended up keeping all her money in cash and the market crash didn't impact her at all.

Also Mutual funds are a ripoff. And it's a double rip off if you're paying your Financial "Adviser" and the fund manager. Mutual funds as a whole under-perform index funds because of the fees, while only a few % eat into the margins in good years and bad.

Look at your yield over the past, say, 10 years and see if it's outperformed the market consistently.
posted by delmoi at 7:48 PM on February 22, 2010

Are you sure the fees are commission-based? A setup like this makes much more sense if the fees are set at a flat rate based on assets (say, 0.50% of assets per annum). This type of fee arrangement discourages churn and better aligns the advisor's interests with yours.
posted by mullacc at 7:55 PM on February 22, 2010

Sorry, I now realize that you had two questions.

1) The question "Am I putting too much power into my financial adviser's hands?" ---

The answer: Yes.

2) The question "How can we be sure we're keeping our assets safe, while maintaining a positive relationship with our adviser?"

The answer: The goal of keeping your assets safe may be incompatible with keeping a positive relationship with your adviser. It is advisable to select an adviser whose compensation is independent of transactions. Fee only financial adviser at Wikipedia is a good starting point.

And seconding the replies before this.
posted by SantosLHalper at 7:59 PM on February 22, 2010 [1 favorite]

It is exceedingly difficult to find a real "fee based" financial advisor who does not get kickbacks. Just food for thought.

I am a fan of stupid passive portfolios, but kimyo is pointing to real issues that make it very difficult to justify any investment other than cash.
posted by rr at 9:28 PM on February 22, 2010

I would rescind that authorization. You really can't (shouldn't) worry about his hurt feelings. It's your money. I just recently was told by a work associate of mine how doing this same thing didn't work out so good. I for one would like to hear about your decision.
posted by snowjoe at 10:50 PM on February 22, 2010

I am an assistant to a financial advisor at a firm in Canada. The advisor I work for has been in the business for more than 20 years. But I myself have only been in it for 1 year, and I've only worked for this advisor, and we are at a small branch. So my exposure to the styles of different advisors is relatively limited.

Every now and then he'll comment that he should get his discretionary license, so that like your advisor he can use his own discretion in trading for clients (with their authorization). But he's been saying that for long time now, without really doing anything about it. I think it's because it would help, but for the most part it wouldn't really make a big difference to his business. But that is for his particular investment style. I'm sure there are advisors with investment styles where it would make a huge difference.

There is a particular corporate bond that we held in about 400 accounts. Another company bought out that company and made an offer to redeem that bond early. Advisor thought it would be a good idea to take that offer for various reasons. So now he has to call and explain that to 400 people. The amount of time you get between when the offer is announced and the deadline to take that offer can vary quite a lot. For this particular bond, because we worked like crazy and there was a decent amount of time given, there most clients got contacted in time. But that's not always the case. If they only give a few days, there's no way to contact everybody. This is why he wants that license. Situations like this don't come up all that often though. So like I said, it would help. But it's not crucial to the business. After all even if he did use the discretionary license to make that trade, he would still be calling all the clients to explain it to them. Only this time it would be after the fact.

When we gently approached the topic, our advisor acted a bit hurt.
2nding grouse that this was a red flag for me. Your advisor should expect people to be at least a bit apprehensive about giving someone else that much control over their money. So the fact that he acted hurt, makes me a bit suspicious. Not big alarm bells, but I would be questioning it.

I guess the question is, have YOU noticed that you've been missing out on things because your advisor for whatever reason cannot get your authorization in time. Maybe try and ask your advisor for examples of when and how he would use his discretion. I can't imagine any of the advisors at my office getting hurt by a question like this. And this will give you an idea of just how much discretion he's planning on using.

Let's say one day you get your statement in the mail and you see he's made trades in your account that you don't like, and you question him about it after. "Acting a bit hurt" would not (or at least, should not) sway your decision about whether or not to revoke his power. It should depend on the logic of his answers, and whether or not he kept your interest in mind when he made those decisions. So don't let hurt feelings sway your decision now either.
posted by cheemee at 11:00 PM on February 22, 2010

Mod note: Bunch of comments removed. This is not the place for a general argument about Buffet, Munger, and whether the economy is doomed. Please answer the actual question directly or stay out of the thread.
posted by cortex (staff) at 7:02 AM on February 23, 2010

If you are at all uncomfortable with this, you should withdraw the authorization. The advisor will understand, don't worry about his feelings. Everyone has different tolerances for risk, and you should not feel pressured into anything when it comes to how your money is managed.

(Disclosure: I work in the industry, in Canada, as a financial advisor.)
posted by smitt at 7:20 AM on February 23, 2010

Virtually every disastrous story of people getting swindled or having their accounts churned and their returns slashed (at best) or their principal destroyed begins with signing over complete control of their accounts to a third party with minimal oversight. This certainly doesn't mean that your adviser will lead you down that road, but I can see no particular value in setting that up. There is a lot of evidence that actively traded portfolios underperform the broader market and that extremely low cost index funds are the best, lowest risk and highest yield approaches to investing. Setting aside the question of if active trading is a good idea or not, the fact that your adviser displayed an emotional reaction to your concerns is a big red flag. Given that each transaction is an excuse to charge you money (transactions lead to fees, which generate income for him at your direct expense), it is entirely reasonable to insist that you approve them individually. I would not back down from this position under any circumstances, especially if your adviser is petulant about it.

Further, I strongly suspect that if you constructed a model portfolio of Vanguard index funds with a similar investment mix to that used by your adviser (large cap, small cap, foreign, bond, etc) you will find that the low cost, broad index Vanguard funds (or any other low fee fund) would have substantially outperformed your adviser's results.
posted by Lame_username at 7:25 AM on February 23, 2010

The "hurt" comment worries me as well. If you "don't know a whole lot about finances", I would expect your advisor to be working hard to inform you of what he is doing, and being very clear about why he might find the trading authorization necessary or helpful, as well as being very clear on when he would or would not plan to use it.
Something like what cheemee explains above seems quite reasonable to me.

From what you've told us, this raises several red flags for me. If you are uncomfortable with this, you should withdraw the authorization.

On the fee-only advisor recommendation, in Canada it seems fee-only advisors are much thinner on the ground than in the U.S.
posted by dttocs at 8:17 AM on February 23, 2010

There are lots of reasons to have trading authorisation, but rarely when you are in the 6 figure range of someone's entire retirement savings. You should consider speaking to the financial planner at your bank (or at Scotiabank, which I believe is the bank that will meet with non-clients) and ask them about what their suggestions/recommendations are. You don't want to sign with them, not immediately, just get information on what they have available and what they recommend.

I have some specific knowledge about financial planners and legalities within Canada, though I am not a certified financial planner, lawyer, or any type of accountant, and if you want to discuss specifics feel free to MeMail me.
posted by jeather at 9:16 AM on February 23, 2010

Ask.mefi sees an awful relationship questions to which the answer is inherently "You are a confused buffoon, DTMFA." "Am I putting too much power into my financial adviser's hands?" seems like another such question. If you even have to ask, the answer is yes. All the obvious emotional manipulation is just icing on the cake.
posted by jeffburdges at 9:26 AM on February 23, 2010

How well do you want to sleep at night? As other in this thread have pointed out - this is not a good idea. This is how most victims of fraud perpetrated by some financial advisors are set up to begin with.

My personal view of financial advisors is that they always look after number One and don't for a minute think that you as a client will ever be number One.
posted by DonM at 1:50 PM on February 25, 2010

I think having a financial advisor who takes commissions is a bad idea, and giving him ANY power to make decisions without you is a terrible idea. I also think having a flat-fee financial advisor is a bad idea, though slightly less bad. The whole field is pretty bogus.

Really, if you read a few well-regarded books on investing (I'd start with The Boglehead's Guide to Investing; a Boglehead is someone who is a fan of John Bogle, founder of Vanguard, which is one of the very few mutual funds set up to make more money for its clients than itself) and then choose funds based on reputation and low costs (you'd be amazed at what an enormous difference a percentage point or two makes in long-term results), you can do far better on your own.

I've spent a lot of time learning about investing, and in my opinion, people pay advisors so that someone else has the anxiety of making decisions. Only advisors have no such anxiety, because it's not their money. If the advisors were any good, they would have made so much money for themselves that they wouldn't bother with your account.
posted by Lizzle at 5:27 PM on March 3, 2010

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