Both geopolitical conflicts and the pandemic have resulted in a somewhat confusing economic fallout. The volatility and higher interest rates in 2022 caused both fixed income and equities to decline. Because of this tricky environment, the Russell Investments’s study this year found that Canadian advisors helped add 3.9% in value to their clients.
The assets under management of Canadian financial advisors continues to grow year-on-year. One reason for this is because the modern financial advisor is taking up increasingly complex and holistic services. It’s not just portfolio rebalancing, but it’s behavioral coaching, customizing family wealth planning, tax planning, and even helping with insurance decisions. This trend has also come about in a pushback towards the popularity of using low-cost index funds as a sole financial vehicle.
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It’s no surprise that financial advisory services grew in Canada during a period of high inflation and rapidly rising interest rates - suddenly our savings are being eroded, our repayments rising, and investing becomes more pressurized. Do we stick with the same strategy, do we hedge inflation, or do we aggressively pursue outgrowing inflation?
This confusion makes clients more vulnerable than usual, as they seek to make sense of the unique economy. Whether financial advisors are truly independent suddenly becomes all the more important to understand, because this would be their best opportunity to take advantage of clients.
Kyle Prevost from Million Dollar Journey explains that whether a financial advisor is independent will depend heavily on whether they just take a fee for their services, or if they’re selling other products too. This is a bit like whether a Youtube tech reviewer is making videos for ad revenue or whether they’re receiving the products for free in exchange for reviews - you cannot fully trust the latter.
Even a financial advisor with the best intentions could have their judgment clouded, as Prevost points out. And, whilst financial advisors are further removed from emotions than we are, they’re still profit-seeking humans. For this reason, it’s always best to seek out advisors that charge you an annual fee.
In particular, a percentage fee of assets under management creates an aligned incentive - their fee revenue increases as your portfolio’s value increases. Only in some cases could this be a bad incentive, such as someone with minimal-risk nearing retirement looking to cash out their wealth, not grow it.
What Financial Advisors Can Offer
On the topic of financial advisors, many people just consider the investing aspect - helping compile a portfolio based on a client’s goals and risk tolerances. However, this is arguably the easy part in many cases, as many could make do with a simple 80-20 or 60-40 portfolio from Vanguard.
Where advisors really shine is within the intricacies of tax considerations, such as tax loss harvesting, where capital gains tax is minimized by realizing losses in tactical ways. Or, by making the interest on a mortgage as tax-deductible, which is known as the Smith Maneuver.
Insurance - A Necessary Evil
If you have wealth to be managed, you also have wealth that needs protecting. Beyond traditional assets like homes and cars, insurance becomes paramount. A skilled financial advisor conducts a comprehensive risk assessment, considering not just your assets but the specific risks and liabilities they face. In tandem, explore innovative approaches to insurance with companies like Insurdinary, who offer a proprietary online life insurance quoter. Here, you can input details about your debts, assets, bills, dependents, and more, gaining insights into the optimal life insurance coverage. It's a synergistic blend of expert advice and accessible tools for your comprehensive financial well-being.
When Does Insurance Become Unnecessary?
It can be easy to be of the view that the more insurance you have, the safer your position is, so why the need for an advisor? Just insure everything… But, some insurance policies overlap with others, and some can be made redundant as a result.
Not only this, but in some cases it’s preferable to avoid insurance where it’s not needed, thus saving you money in premiums. For example, if you own a home and several rental properties, some aspects of your homeowner’s insurance may overlap with landlord insurance, like liability coverage.
Another example is in the case of buying life insurance, something that is very common (and usually very wise) to purchase when your children are young and dependent. However, over time, our situation changes. Children grow up to be financial independent, where they may have their own advisors protecting their own wealth. According to Alliance Income, there are 5 big mistakes that parents are making when it comes to life insurance.
On top of this, the mortgage may now be paid off, and the benefit of this life insurance is rapidly decreasing each year. This isn’t to say life insurance is a bad idea, but a financial advisor will continually assess the need for all such outgoings, helping us stay on track with our goals.
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View ArticleFinal Word
In challenging times, the demand for financial advisors surges, evident in the increasing reliance on advisors in Canada and the quantifiable value they deliver to clients. While trust in advisors remains a nuanced subject, the true measure lies in the products they offer. Are they solely managing assets for a fee, or do they provide a comprehensive suite of solutions?
In navigating the intricate web of tax, insurance, portfolio, and estate planning, the complexity of our financial landscape intensifies with more assets, dependents, goals, and businesses. At Insurdinary, we recognize the evolving needs of individuals in safeguarding their financial futures. Beyond the expertise of financial information, our platform offers a range of insurance products tailored to your unique situation.
