Drawing the line on an adviser relationship

Bruce Sellery says it’s important to have a strong relationship with an adviser, but you shouldn’t put it ahead of your own financial well being.

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Question

My parents are in their 80s and have an investment portfolio of about $1.4 million. They have been with the same adviser at a major bank for decades and say she is like family. They have segregated funds, mutual funds, annuities, GICs and some individual stocks, but I reviewed the MERs they pay and know they are high. (My parents had no idea that there were fees on mutual funds, they thought they only paid commissions.) I finally got my dad to understand that their portfolio may not be working for them and I think they are becoming open to the idea of moving at least some of their money. What are some of the next steps that I should suggest to my parents?

Answer

I am one of six kids. Add parents, spouses and kids into the mix and our annual “Sellerybration” event grows to 25 people, and sometimes more. I love my family, but I don’t need a financial adviser to make it complete. While I think it is great that your parents have a close connection with theirs, the relationship needs to be first and foremost about their investments, not family ties. You’ve flagged a number signs of dysfunction on that front and now it’s time to do something about it.

Move your parents to a fee-based structure

Your parents are coveted clients in the investment world. Their asset level puts them in the high net worth category—which means they can get great service and investments for under 1.75% or $24,500 per year at the low end. That includes any fees they would pay on ETFs and F-class mutual funds. They are currently paying much more than that—about $34,000 if the average MER on their portfolio is 2.4%.

Using a fee-only adviser is not just about lowering costs. The point is that a fee-only adviser has fewer conflicts of interest and has no incentive to sell inappropriate products like seg funds. You should be paying for good advice and service, not products.

These numbers are very basic estimates, but the point is that your parents should at the very least move to a fee-based relationship. Their current adviser may be able to operate in this fashion, or they may need to find someone else. But I can’t see how anyone could justify keeping them in high MER mutual funds given their asset level.

Get a second opinion from another adviser

You have flagged fees as an important issue for your parents. But I would still recommend that you find another adviser to provide them with a second opinion. I wrote a blog on how to find a financial adviser and I recommend they start by setting up a conversation with a fee-based adviser who can provide a fresh eye on their circumstances. He or she will be able to compare fees as well as look at the make-up of the portfolio itself—what is in it (Do they need segregated funds? Really? Why?), and how much of each do they have (Does the asset allocation make sense given their investment objectives?)

I’m focusing my comments on the fee issue, but I bet the conversation with another financial adviser will include topics like estate planning and investment objectives. It seems unlikely that your parents will spend this $1.4 million sum in their lifetime, so what legacy do they want to leave and what portfolio mix will deliver it?

Reconnect with the current adviser

I am going to give your parents’ adviser the benefit of the doubt and say that she just got lazy with them, and didn’t illustrate the benefits of moving to a fee-based structure. Once you have the second opinion in hand, I would meet with the current adviser and let her know that you are considering making a change. I would definitely give her the opportunity to demonstrate the value that she believes she can provide that would have your parents stay put.

It is crucial that you be at this meeting to support your parents in having what could be a tough conversation, and to ensure that the financial adviser doesn’t try to come between you and your parents.

Give “status quo” the advantage

In my opinion, your parents basically have two options: move to a fee-based arrangement either with their current adviser, or with a new one. I wouldn’t recommend a hybrid strategy to your parents by moving only a portion of their money to someone else. As with your family physician, you want one person who has the complete picture and can provide continuity. It is simpler to have one person who is accountable for providing them financial advice.

I would give the status quo the advantage here. Your parents have a long history with their current adviser and it will be a lot of work to make the transition to a new one. That being said, this relationship is critical to their financial health and you all have to feel confident that whomever they choose is going to do a great job.

If your parents do decide to move on here are some tips on how to break up with a financial adviser. It won’t be easy, and they risk harming the relationship with their current adviser. But if she really is like family, she’ll get over it soon enough.

ask@moneysense.ca

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