What Are Some Questions To Ask Your Financial Advisor? � Part 1

While Canadians are notoriously polite and inclined to defer to experts, that deference can come at a cost to your financial future. In this article, I will provide you with some key questions you should ask your financial advisor, and a basic overview of the sorts of answers you should be looking for. Nothing should be taken as gospel, and answers don't need to be verbatim. However, they should demonstrate a comprehension of the situation, a purposeful rationale, and, if possible, be supported by empirical evidence.

Keep in mind, the questions you should ask will depend on the registration of the advisor. In part 1, I will start with reasonable general questions to ask. In next month’s issue, I’ll suggest some specific questions based on whether the registrant is licensed to recommend mutual funds, a wider range of securities (including Exchange-Traded Funds (ETFs) and Offering Memorandum (OM) products) or as a portfolio manager who can use discretion in a fiduciary capacity. While the thrust is the same in all cases, there are some practical limitations regarding the advice given due to the limitations of the products available.

In all cases, I will follow up on the specific questions with some thoughts on the sorts of things you should expect in the answer. Let's begin with generic questions that can be applied to any advisor.

Question 1: Why are you recommending this product, and how does it fit in my overall portfolio?

Possible answer: the word you're going to look for is suitable or suitability. In other words, the product being recommended must be right for you. Virtually any product is suitable for at least some people, some of the time. Many, however, are suitable only in unique circumstances, or for a subset of the wider population. People who will be working for another 15 or 20 years do not need a product that generates income, for example. If your capacity or tolerance for risk is less than other people your age, then having an above-average exposure to interest-bearing products might make sense, but that would be from a know-your-client (KYC) suitability perspective rather than one based on needs and circumstances.

Question 2: How much does this product cost?

Possible answer: If you're using individual stocks and bonds, there is no cost at all other than the possible transaction costs you might incur to buy in the first place. All other investment products have a cost, known as a Management Expense Ratio (MER). What you're looking for is a quick, intuitive sense of what the product costs, both in absolute terms and relative to the alternatives. The world of investing may be the only field on the planet where low-cost products are consistently superior to high-cost products. The MER for ETFs often ranges between 5bps and 90bps (0.05% and 0.9%). The MER for F-class mutual funds typically ranges from 35 bps to 150 bps (0.35% to 1.5%). The MER for F-class offering memorandum (OM) products typically ranges from 90 bps to 190 bps (0.9% to 1.9%).

Question 3: What sort of return should I reasonably expect over the long term?

Possible answer: what you're looking for is reasonableness, an appreciation of financial planning principles, and intellectual honesty. Anyone who “answers” the question by talking about historical returns is engaging in a sleight of hand that you should be wary of. No matter what any investment or asset class did in the past, that is not necessarily what you could expect in the future. For example, stocks are trading at generationally high multiples in 2025, whereas bonds just ended a more than 40-year-long bull run when interest rates hit rock bottom in early 2022. Investors in both asset classes should expect long-term returns that are below their historical experiences. Specifically, the people at FP Canada release assumptions guidelines every spring, and they demand that reputable planners project income returns at between 3% and 4% and equity returns at between 6% and 7%¹.

Question 4: How much do you charge, and what services should I expect to get in return?

Possible answer: You're looking for an acknowledgement of a business model as well as a percentage. For example, if you're working with a bank employee, he or she may say that they do not charge you for their services. While technically correct, the answer is nonetheless misleading. In that instance, the advisor receives a salary that is paid by his or her employer.

If you're working with a mutual fund registrant, that person will either use “A-class” funds that pay a trailing commission or “F-class” funds that do not. If using “F-class” funds, the advisor will be charging an asset-based fee, either as a flat percentage, or on a sliding scale. The same is generally true for people using individual securities, except that there is no such thing as an “A-class” option for securities. In this instance, the advisors will buy and sell on your behalf and charge an asset-based fee as above.

Regarding services, this varies widely, and the primary concern you should have is that the services rendered meet whatever needs you have, and that the advisor does what they say and follow through in providing those services.

Question 5: Taking into account the weighted average of all products in my overall portfolio, please combine the answers to Questions 2, 3 and 4 to provide an expected long-term rate of return for my total portfolio.

Possible answer: You're looking for candour and the ability to admit that return expectations should be modest. While the case can be made that certain asset classes might expect to get returns of 7%, 8%, or even 9%, those constructed using traditional stocks and bonds should be projected at no more than 5.5% before costs are considered.

The FP Canada guidelines mentioned earlier insist that the return expectations for traditional asset classes (stocks and bonds) be reduced by both product cost and advisor costs to make long-term projections. For example, if your portfolio offers a traditional balance of stocks and bonds with a projected return of 5.5% before fees, and the products used to get access to those asset classes cost on average 0.5%, and the fee charged for the services rendered in managing the portfolio is 1.0%, then the expected return for that portfolio should be around 4%. This is perhaps the most awkward piece of information that any reputable advisor would have to deliver to a client. In the current environment, after taking all costs and fees into account, a balanced portfolio is not likely to return much more than Guaranteed Investment Certificates (GICs). This challenge poses an existential threat to the investment industry in the 2020s. Virtually no one in the industry is willing to admit as much. If you're speaking to multiple advisors in doing your due diligence before hiring one of them, I sincerely believe that, from the perspective of honesty and awareness of reasonable assumptions, the one who tells you to expect the lowest return is likely also the one with the most integrity. Setting low expectations is a proxy for having a high degree of decency.

Question 6: Tell me a bit about your practice. How many products would you typically use for a portfolio of my size? How many households do you manage money for? What is your average account size? Do you have any areas of specialization?

Possible answer: It should be obvious that you're just trying to see how you fit in in the grand scheme of things. Most people find comfort in knowing that the advisor has many other clients in a similar situation, whether with similar income, objectives, lifestyle, education, account size, values, or anything else. Although it's not definitive, most people would prefer not to be among the 5% largest or 10% smallest clients in any advisor’s book of business. As well, you can likely expect a higher degree of personal attention if the advisor has 80 families in his practice as compared to 380 families. This can be addressed by an advisor having a large and competent team and needs to be considered on a case-by-case basis, depending on how rudimentary or complex your needs are.

Question 7: How do you assess suitability in terms of both risk tolerance and risk capacity? Specifically, what do you do to manage risk, client expectations and client behaviour?

Possible answer: Risk tolerance is about psychology; risk capacity is about the ability to withstand a drawdown. Both are relevant in a portfolio, which should be designed to address the more conservative of the two. There are several tools that different advisors use, but most do a relatively poor job of assessing risk in a robust and repeatable manner. The good news is that many people have a reasonably accurate, intuitive sense of how much risk they can tolerate.

By now, we've reached the point where there is widespread acceptance that alternative assets that offer pension-style management have a place in retail portfolios. These are often assets that are weakly correlated or not at all correlated to stocks and bonds that can be added to a portfolio to reduce volatility. The sorts of products that qualify as alternatives include: structured notes, infrastructure products, real estate, private equity and private debt. Any advisor who is serious about managing risk should have at least a moderate (10% to 20%) exposure to alternative assets. Virtually every pension plan and endowment in the country has more than 20% of its total assets invested in such offerings.

Question 8: What can you tell me about behavioural finance?

Possible answer: You're just looking for familiarity with the research in general, and an openness to acknowledging personal applicability, in particular. Over the past generation, massive strides have been taken in the field. We now know that a lot of the success or failure of any given investor can be explained by their behaviour, rather than by their ability to understand the nuances of how capital markets function.

Many additional questions could be asked. I've tried to touch on the most important ones and the ones that would likely go the furthest in ensuring there is a fruitful two-way relationship between clients and their advisors. The majority of advisors are decent, well-intended people. As with any intellectually-based field of human interaction, there's a wide range of skill sets, specializations and familiarity with ongoing developments across the spectrum. No one is perfect, but it's important for advisors and investors alike to be honest with themselves regarding their limitations. As is often the case, the best outcomes are usually the result of honest, ongoing dialogue based on reasonable expectations in the application of established evidence.

In an upcoming issue, I will present questions that are unique to mutual fund registrants, securities registrants and portfolio managers.

Reading an article about the questions you could ask is of little value if you ultimately choose not to ask them. As such, you might want to keep this article as a reference or maybe bring 3 or 4 questions to your next meeting as crib notes. If you do that, be sure to write down what your advisor says as a form of mutual accountability and ongoing communication. Don't be afraid to ask! It's your money, and no one cares more about it than you.