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How to know when it’s time to divorce your adviser

Cynthia Kett of Stewart & Kett says it’s time to divorce your advisor when you no longer trust him or her or your needs change. (Pawel Dwulit/The Globe and Mail)

With new disclosure rules on investment fees now firmly in place, Canadians have started receiving statements that reveal some of the amounts that go to their financial adviser in dollar figures as well as percentages. Not included in the new framework are other costs of investing, such as the management expense ratio (MER) on mutual funds.

When people see in black and white just how much their adviser is making off them under the Canadian Securities Administrators’ Client Relationship Model Phase 2 (CRM2), their eyes might pop out. If they’d already been contemplating finding a new advisor but had just never bothered, the CRM2 might be just the thing to get the ball rolling.

“With the new disclosures of CRM2, some clients are going to be surprised at how much they are paying their current advisor compared to the value they are receiving,” says Talbot Stevens, a London, Ont.-based financial educator, industry consultant and author of The Smart Debt Coach, among other books. “If they only see their adviser once a year during RRSP season and are paying thousands of dollars a year, they might be tempted to see if other grasses are greener.”

For those who take the temptation and divorce their adviser, “It’s important to focus on doing what is best for you – remembering that it is your money and the stakes are very high,” he adds.

“Recognize that continuing with a below-average adviser means that you’re missing out on potentially decades of benefits from a great advisor – benefits that you probably aren’t even aware of.”

Deciding if and when it’s time to ditch your financial adviser is, for many, a conundrum. On one hand, many people who want to move on may not, simply because the process seems too onerous, much like switching banks. If they have developed a personal relationship with their advisor over many years or decades, investors may deem a split too awkward, especially if they run into their financial planner at social events (or if they happen to be relatives).

And yet those who feel persistently dissatisfied with the service they’re getting may ultimately find it impossible not to sever ties. The rise of lower-cost robo-advisers may make investors even more motivated to initiate a breakup.

Leaving an adviser may be more commonplace than people realize, though: More than 60 per cent of high- and ultra-high-net-worth respondents to a 2015 Spectrem Group survey in the United States had switched advisers over their lifetimes. The percentage was 51 per cent for the less-wealthy mass affluent consumers.

Clients generally leave their adviser when they’re confident they can do better elsewhere or on their own, Mr. Talbot says, or when they lose trust that their advisor has their interests first.

“More commonly, there is a gap between what the client is expecting and what they receive,” he says, adding not all advisers provide the same level of service. Some advisers’ approach to retirement planning is just to try to maximize before-tax account values at retirement, generally using RRSPs. Others will do a detailed retirement income projection to meet a client’s lifestyle objectives as well as an income analysis after the effects of taxes and clawbacks. The first approach is simpler and requires much less expertise and time, Mr. Talbot says.

“At the highest levels, great advisers address all issues, are great behavioural coaches, and provide life planning across generations,” he adds.

The technical aspect of leaving an adviser may also put people off. According to Cynthia J. Kett, principal at Toronto advice-only financial advisory firm Stewart & Kett Financial Advisors Inc., investment holdings may be transferred in cash or in kind (in securities). If the holdings are in non-registered (taxable) investment accounts and if they have to be sold prior to the transfer, the sales would trigger taxable capital gains or losses on the dispositions. If the transfers are done in kind, or if there are transfers from one registered account to another (for example, RRSP, TFSA, or RRIF to their equivalent at a new institution), there would be no tax consequences. Plus, the current financial institution usually charges an administration fee for the transfers. The cost varies but could be $150 or more per registered account.

“In addition, if deferred charge mutual funds are sold, whether held in a non-registered or a registered account, the costs may be significant,” Ms. Kett explains. “Investors may need to hold some funds up to seven years before they can avoid triggering deferred sales charges that may be associated with them.”

While people sometimes leave advisors because of low performance or high fees, more often it’s because of lack of service or attention.

“I would say that it’s time to move on when clients no longer trust their advisor or when their needs change,” says Ms. Kett. “An adviser who was suitable in the past may not be the best choice for the client’s current circumstances.”

When people build their wealth to a level where they qualify for a smaller investment management shop, that may be the time to make a move, says certified financial planner Shannon Lee Simmons of Toronto’s New School of Finance, a fee-only financial planning firm. There are red flags that indicate it’s time for a split, aside from the sense that you could find better service somewhere else, she notes.

“It’s time to move on if the relationship with the adviser has gone south and you feel uncomfortable talking to them. For example, you defer your annual meetings or avoid calls or feel intimidated by them,” Ms. Simmons says. “If you’re searching for a new money manager, you should interview two or three first and look for referrals.”

The question of whether to end a relationship boils down to an adviser’s value, confirms Anthony Boright, president of fintech company InvestorCOM. He says that assessing the service or care you get from a financial adviser is no different than if you were dealing with a lawyer, doctor or landscaper. The moment people feel they’re not receiving high value, they should think about leaving – not necessarily right away, but by starting to look for options.

“While something may seem expensive or cheap to me, it all comes down to what value I associate with the service being provided for the price I’m paying,” Mr. Boright says.

“The reason many people rely on an outside adviser to manage their assets is because they have made a decision that they are not in the best position to look after this aspect of their lives. Having made that initial decision, many people will be unwilling to make a change even in the face of evidence that suggests that maybe they should.”