Roughly one-third (33%) of Canadian investors choose a wealth manager based on a referral from a family member or friend, according to a recent Investor Education Fund (IEF) study. Another 38% of Canadians say they rely on their financial institution to assign them an advisor.
But whether you acquire an advisor through your financial institution or through a referral, how much do you actually know about him or her? According to the IEF study, not enough. Nearly two-thirds of those surveyed said “they knew very little about their advisor when they first entered into the relationship.” That can be dangerous. If you have hired someone to look after your investments, you need to know that person is going to act in your best interests. In other words, you need to know if your advisor is going to act as a fiduciary.
What is a fiduciary?
A fiduciary is a person who holds a legal or ethical relationship of trust with another person. Typically, a fiduciary takes care of money or investments for other people.
When an investment manager acts in your best interests—taking care of your money and your investments, and putting your interests ahead of their own—that is called fiduciary duty. According to the IEF study, an advisor is said to have a “fiduciary duty to a client when the advisor has a legal duty to put the client’s best interest ahead of their own. It also means doing what is best for the client even if it means less money for the advisor.” According to the study, only seven out of 10 investors believe that their advisor has a legal duty to put their best interests ahead of the advisor’s own.
Think about this. You go to the doctor when you’re sick and expect that doctor will do their best to get you well. In other words, that doctor should have your best interests at heart. It should be the same with your investment manager.
Why should you care about fiduciary duty?
It is extremely important that your wealth manager has fiduciary duty because, if he or she doesn’t it can have a negative impact on your long-term financial goals. You may lose out on the best investments for you; you may also lose out because the investment products that are purchased for your portfolio won’t necessarily benefit you but will likely benefit (read compensate) your advisor.
Many in the financial industry feel that fiduciary duty should be mandatory for investment managers and Wealth Management Canada falls into this camp. Unfortunately, in Canada, fiduciary duty is not mandatory. Sadly, not every investment advisor will act in the best interests of their clients. That means, you need to do your research before you decide to hire them.
- Ensure that they have the right credentials. The study found that many Canadian investors could not say which securities licence, registration, or professional certifications their advisors held.
- Ensure they’re recommending investments/products that will benefit you, not them.
- Ensure your manager is investing their wealth the same way they are investing yours. as substantially all of its financial capital invested in the same portfolio as you do.
- Ensure you understand the fee structure and your manager discloses the fees that they’re charging.
At Wealth Management Canada we know the importance of transparency and fiduciary duty. The investment companies we have identified understand and implement fiduciary duty in their practices. They all put their clients’ interests first—before their own, before their firm.
Fiduciary duty is an important aspect to consider when choosing an investment manager. After all, you want someone to take care of your money, not take your money.