By Scott Ronalds

Preet Banerjee is an industry insider who runs a blog titled 'Where Does All My Money Go?' (his blog was ranked Canada’s #1 investing blog by the Globe and Mail last month).

Preet recently developed a resource for investors called the Know Your Advisor Tool (KYA). In his words, ‘the tool is designed for investors to help them figure out who the good financial advisors are out there.’

An integral part of the KYA is a questionnaire that probes issues such as an advisor’s candour, competency, and services offered. In order to make the tool as useful as possible, Preet is looking for input from investors, financial advisors and other interested parties. We sent him the following feedback on the tool:

You are to be congratulated for taking on this project. Picking an investment professional to work with is one of the most important aspects of investing for individuals - arguably the most important thing for investors who are totally reliant on their advisor.

I know a lot of thought has gone in to the KYA questionnaire, but we have a few thoughts that you might consider.

First, a general comment. This questionnaire is for someone who is looking for soup-to-nuts financial planning and advice. This is in contrast to someone who is strictly looking for ‘investment advice’. It’s an important distinction because the point system embedded in the questionnaire rewards the breadth of offering and expertise more than it does the depth. That makes sense in the context of a client who needs the full service, but may lead to an inappropriate result for a client looking for investment advice. In other words, an advisor focused on investments, and the product and market knowledge related to that, is likely to have more to offer to that type of client.

In addition, there are a couple of areas where you might consider adding to the questionnaire.

Philosophy

When it comes to investing, there are thousands of ways to skin a cat and each advisor has a different approach. It’s important, first of all, to determine whether the advisor has a well-grounded, consistent philosophy. While this sounds obvious, it’s often the case that an advisor doesn’t, and is subject to the changing trends, and dare I say fads, in the industry. Without a stable foundation, it’s unlikely the advisor will keep the client on a steady, long-term path.

With regard to investment philosophy, it’s important that the client understand how the advisor is going to do it. Are they a value investor? Or is it Growth? Do they use funds and/or ETFs? How did they work with their clients in the fall of 2008?

The advisor’s approach to asset mix is important to understand. Are the active in shifting their clients’ asset mix? How big are the shifts? Do they get their clients right out of the market at certain times?

Reporting

A key part of an advisor’s service is the on-going reporting - regular statements and quarterly updates. In hiring an advisor, it’s essential that the reporting package be part of the assessment. Will the client know (1) what they own (i.e. overall asset mix by asset class and geography); (2) what they are paying (including commissions, MERs and administrative fees); and (3) what their returns are?

We recognize that advisors don’t have control over the reporting protocol of their firms, but it’s nonetheless a required piece of the service offering. Not knowing any or all of those three things doesn’t allow the client to monitor the advisor’s work. Why would a client hire an advisor that isn’t going to give them the tools to assess their performance? To us, inadequate reporting is a deal breaker and should be given a heavy weighing in the questionnaire.

If you have any comments on the tool, you can post them below, or on Preet’s blog (hyperlinked above).