When Jessica Moorhouse was in her mid-20s, she and her husband decided to invest some of their money. They went to their local bank for help.
The first adviser they met seemed to care about helping them. “He invested us in high-fee mutual funds but at least we felt like we were actually getting some value for those fees,” she recalls.
Later, another adviser who took over left Ms. Moorhouse unimpressed. “Whenever we’d talk about our retirement goals or other goals, he would always focus on products. He’d say: ‘Oh, you’re concerned about retirement? Well, have you considered this other mutual fund portfolio instead?’”
Over time, she realized that the second adviser “didn’t know that much more than I did,” and began doing her own research. Today, she’s a certified financial counsellor in Toronto, host of the More Money podcast and the author of Everything but Money.
Her early experience with bank advisers is not unique. Many Canadians who visit a financial institution looking for guidance instead get sold products that aren’t a good fit.
A recent Ontario Securities Commission report revealed the sales culture inside Canada’s big banks. One striking finding saw that one in four mutual fund dealers admitted to recommending products or services that were sometimes not in their clients’ best interests.
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The report highlighted pressures that dealers face to meet sales targets, which can affect their pay and influence the products they recommend. The result: Customers may think they’re getting advice, but they’re really getting a sales pitch.
Ryan Lee, a certified financial planner with Twain Financial in Vancouver, sees this often. New clients come to him with mutual funds from several banks, thinking they’re diversified.
“But when we look inside these, we find they’re basically invested in the same things,” he says. “This creates the illusion of being well-diversified when they are really not.”
Anita Bruinsma, a certified financial planner with Clarity Personal Finance in Toronto, hears similar stories. Many clients don’t fully understand what they already own.
“They see a list of mutual funds on their statements and they don’t know what it all means,” she says. Often, they’ve never been shown their asset allocation or how their investments fit with their goals.
So how can you tell the difference between good advice and a sales pitch? There are clear warning signs to watch for.
One obvious signal is how quickly a meeting turns into a sales call. Ms. Moorhouse suggests setting a timer. “If they are giving you advice and telling you to buy such and such product in 10, 20 or 30 minutes, that’s a red flag because there’s no way they can know anything about you that fast.”
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A first meeting should focus on learning about you, not selling. Good advisers may spend an hour or more – sometimes over several meetings – gathering details about your finances. They’ll ask for financial records, current investments and tax information.
They’ll also ask about your risk tolerance, time horizon – such as saving for a house or retirement – and long-term goals. “If they’re trying to sell you a product without understanding your full picture, that’s a big red flag,” Mr. Lee says.
Another warning sign, he says, is if the person sitting across from you can’t answer simple questions about the tax implications of an investment product. Professional advisers aren’t accountants, but they should be familiar enough with Canada’s tax laws to explain how investments will affect what you’ll owe the government, now and in the future, he says.
A salesperson might also avoid telling you the pros and cons of a recommended product. For example, Mr. Lee says that when he speaks to clients, he goes over the upside and downside of RRSPs. They’re great for lessening your current tax burden but you can’t take the money out if, say, you suddenly need cash to buy a car. If you expect you might need the money sooner rather than later, perhaps a TFSA is a better alternative, he’ll advise clients.
A final red flag is a lack of transparency. Ms. Bruinsma says sales-focused advisers often avoid discussing the management expense ratio, or MER, on a mutual fund.
These MERs can be 1.5 per cent or more of the fund’s value each year compared to lower cost exchange trade funds with fees often under 0.25 per cent. Over time, high MERs can cost investors tens of thousands of dollars, so advisers should be upfront about these fees.
What can you do to protect yourself against sales pitches?
First, do your own research before any meeting and come with a clear set of goals. If you know what you’re looking for, you’re less likely to be sold something you don’t need. Arrive with questions and see if the adviser can answer them. You should leave knowing exactly why an investment is recommended and how it fits your objectives.
If offered a high-fee mutual fund, Mr. Lee suggests a few follow-up questions. First, ask to see other investment options, including ETFs, that offer similar market exposure. Then compare their long-term performance and MERs. (If the adviser demurs, it’s a sign they’re more interested in hitting sales targets and earning hefty commissions than having your best interests in mind.)
Also, ask if there are fees for altering, withdrawing or transferring any investment, as these changes can erode returns and sometimes exceed the cost of MERs.
Another question to ask: “How are you compensated?” says Lisa Kramer, a professor of finance at the University of Toronto. “If a financial adviser is unwilling to be transparent about the relationship between their advice and their financial incentives, that is a warning flag.”
It may feel awkward to ask, she adds, but “this is our money, so we are entitled to know the answers.”
As Ms. Moorhouse discovered in her 20s, the quality of financial advice from a bank can vary greatly. It can be hard to tell the difference between sound advice and a sales pitch. If you’re unsure, walk away and consider other options.
One option is the do-it-yourself route with a robo-adviser. “They’ve got portfolios of low-cost index funds, so you don’t have to figure out how to construct a portfolio by yourself. It can be very easy to do,” Ms. Moorhouse says. (A good place to start is with The Globe and Mail’s robo-adviser guide.)
If you do need personalized help, consider a fee-only planner who charges for advice only rather than earning commissions on investments. While more expensive up front, these advisers can save you money in the long run by steering you away from unsuitable investments and high fees.
Ms. Moorhouse suggests approaching investment shopping the same way you would start searching for a new car: Shop around, do your homework and get expert, unbiased advice.
“If you want advice on which car you should buy, you’re not going to get it at a car dealership because they’re going to sell you their specific car. It’s the same thing at a bank.”