How independent is your advisor?


I have a good friend who has been in the financial services sector for about 30 years who has on his business card “Unbiased and Independent Financial Advice.” Isn’t that what all financial advisors offer to their clients? It makes sense that they would all offer independent and unbiased advice, so why is that not all do?

This is a very important question when choosing or keeping a financial advisor. You want someone who can make objective choices from among the entire array of investments available in Canada without influence from his or her company.

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Captive advisor

I started my advisory career at a large Canadian financial congloberate 20-plus years ago. I thought I was independent. I could come and go as I pleased and had an array of mutual funds I could offer clients.

Over a few years, I learned I was independent for income tax reasons only. If I wanted to sell less due to a new baby or studying for some course, I discovered that this was not allowed. I had to sell more every year. “Wait! I thought I was independent and self-employed.”

They offer something called “The Plan.” The Plan was simply a method to find ways to sell you more products, and had nothing to do with helping clients reach their goals.

What about from a product standpoint? Could I choose whatever I wanted? No, I had to choose from the company’s lineup of funds. So if Fidelity, for example, offers 120 funds, I could only offer clients the six that head office OK’d for us to sell. They do offer some outside mutual funds, but always in a limited fashion, because they would prefer you sold the company’s proprietary funds, but want to give the illusion of a full product offering.

Another problem is that fund rebranding. For example the Fidelity Dividend fund may be rebranded with the company name added to “Fidelity Dividend Fund,” which means that a client moving to another firm would have to cash out even if they want to buy the Fidelity Dividend Fund again. If you are with an independent advisor, you buy the real” Fidelity Dividend Fund and if you leave that firm (or your advisor leaves and you wish to follow him or her), you simply transfer over “in kind” and everything moves forward as before.

The big banks

This is where you go when you’re young, often to open an RRSP or TFSA (usually out of convenience, because you already have chequing and/or saving accounts there, or the teller mentioned it to you). Are they independent? No, they are not. Your bank representative is paid by the bank, so that is where his or her loyalty will lie, not with you, the client. You often end up with all bank proprietary funds (or worse GICs) or products, because why would a BMO employee offer you a TD or other mutual fund? They don’t. Their own brand is more profitable. So it’s hardly a place for independent advice or product offerings.

This doesn’t mean the big banks don’t employ many very qualified financial advisors who are very good at what they do. It just means they are somewhat “handcuffed” by the system they work under.

Bank brokerages

This is basically the same situation as for the banks, except the clients have more money (assets to invest). You probably will get more in-depth planning advice, maybe a nice colourful plan with graphs and charts, but still from a bank employee, albeit a higher-paid one with perhaps more qualifications. These advisors usually have a minimum of $30 million in AUM and make very good money. They often are running large support teams to wrangle every nickel out of your pockets, helping you with insurance, estate planning, and investments. 

If your assets are smaller, you may end up being assigned to an associate advisor, not the more experienced one you may have thought you would be working with.

You may get some investments from other firms (other than the brokerage the advisor works for) or not, depending on the broker’s methodology for how he likes doing business or the firm’s incentive packages.

The independent and unbiased financial advisor

These me and women are found all over Canada working for hundreds of firms across the country, some big, some small to mid-sized. They can offer all the bank funds, insurance company investments, and most every fund from the larger and smaller mutual fund sponsors.

These advisors are not employees of the firms whose investments they may offer. They usually work for a mutual fund dealership that acts like a middleman to keep advisors at arm’s length from the investment companies they work with.

So how does this work? If I offer a client $100,000 on, say, Fidelity Dividend Fund, which I offer on a 0% front-end basis, Fidelity pays my dealer (Portfolio Strategies Corporation) a small percentage each month. Portfolio Strategies keeps a percentage for its expenses (dealing with B.C. Securities Commission), processing my trades, keeping my client files in-house and online, and helping me fix problems as they arise).

Portfolio Strategies don’t care which products I offer clients. They only want me to offer what is best for a particular client in their situation, in order to help them reach their fiscal goals, whatever they may be. If a client wants safe, boring funds, that is what I must offer as solutions, not potentially high risk/reward options.

If you say, for example, “I really want the Fidelity Dividend Fund,” and they say, “We don’t offer that fund but have a similar one,” they are not independent and unbiased. I know that particular sales line, because I was taught to use that while I worked for such a company many years ago.

We operate much like a mortgage broker versus one who works with just RBC or CIBC, for example. You are curtailed greatly when dealing with one company’s solutions versus 15-20, each of whom wants your business.

The question then is, Why isn’t everyone dealing with an Independent Financial Advisor? There are a multitude of reasons for this; some make sense other not so much. Some like the RBC brand, which has been ranked recently as the brand Canadians trust the most. The odd thing is most of the small and mid-sized mutual fund dealerships don’t even offer any in-house mutual funds, so while you may invest with Bruce Loeppky, who works with Portfolio Strategies, your money is actually held with RBC, Fidelity, or Mackenzie Investments, for example. Thus, investing directly with a bank doesn’t buy you any security – only some false peace of mind.

Courtesy Fundata Canada Inc. © 2016. Bruce Loeppky is a financial advisor based in Surrey, B.C. This article is not intended as personalized advice.

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