Imagine discovering, after years of disciplined saving, that your trusted adviser guided you into investments better suited to their wallet than your retirement. It’s a scenario that’s more common than we’d like to believe.
Many financial advisers do outstanding work – improving lives and building lasting financial security. Yet trust in the financial advice industry remains fragile for good reason.
Recent research published in the Journal of Economic Perspectives revealed a troubling statistic: Nearly 7 per cent of financial advisers in the United States have documented histories of misconduct. The authors argue that conflicts of interest are a serious driver of misconduct. The Canadian landscape is not immune.
Financial advice is what the researchers describe as a “credence good.” This means the quality of the advice is difficult for consumers to evaluate, even long after receiving it.
Historically, commission-based product sales have been the norm in the financial industry. Advisers traditionally earned their income from selling financial products rather than providing unbiased, holistic financial planning.
Although there’s been a gradual shift toward comprehensive, planning-centric advice, the transition remains in its early stages. Many advisers continue to rely heavily on commission-based sales, incentivizing product recommendations that might benefit their own financial interests more than those of their clients.
While some Canadians prefer managing their own financial transactions, not everyone feels confident or interested in going it alone. Especially as situations become more complex with respect to tax and estate planning. A good, professional financial adviser can play an important role, offering guidance, emotional reassurance and structured planning crucial to financial well-being.
My own research shows that planning-centric advice was robustly associated with better financial outcomes for consumers. Advisers who create comprehensive, personalized financial plans, regularly review those plans and prioritize transparency provide significant value beyond simple transactional or product-based relationships.
However, the quality of financial advice available in Canada varies significantly.
Research also points out that financial decision-making errors often follow a “U-shaped” pattern over a lifetime. Young Canadians, still acquiring financial knowledge, often make costly errors. Older individuals, potentially facing cognitive decline, also make mistakes.
Those in the middle typically fare better, but even they are not entirely immune. Thoughtful, planning-focused advice can smooth this curve, minimizing expensive errors at each stage in life.
Financial literacy matters, too. Individuals with lower financial literacy are more vulnerable to exploitation by advisers who prioritize sales over client outcomes. Ironically, those with higher financial literacy often derive even more value from professional advice because they’re better able to ask insightful questions, assess recommendations critically and implement advice effectively.
Canadians don’t need to become financial experts overnight to protect themselves, but there is some due diligence that should not be overlooked. Start with these practical steps:
1. Verify adviser registration
- Canadian Securities Administrators: AreTheyRegistered.ca
- CIRO (Canadian Investment Regulatory Organization): Check out the Know Your Adviser: Adviser Report to confirm licensing and disciplinary history. Not all financial professionals, especially those offering exclusively planning services without product recommendations, are required to register. Clarify your adviser’s role to understand their regulatory obligations.
2. Check for past misconduct
3. Ask clear, direct questions
- “How exactly are you compensated?”
- “Will you always put my interests ahead of your own or your firm’s?”
- “Are you subject to any type of sales incentives or quotas?”
- “Can you provide comprehensive financial planning services beyond investment selection?”
Pay attention to your adviser’s responses. Great advisers are open, transparent and comfortable discussing these points. Be cautious if your adviser appears evasive, vague about compensation structures or uncomfortable clearly outlining their duties and responsibilities.
Great advisers proactively explain their compensation, outline their duties clearly and regularly review detailed financial plans tailored specifically to their clients’ needs and goals.
Your relationship with your adviser is ultimately a partnership. The more informed and proactive you are, the greater the likelihood of financial success. Ask tough questions. Verify credentials. Regularly reassess your adviser’s performance and your overall strategy.
Great advice can change your life financially. But to truly benefit, Canadians need to be proactive, informed and engaged. Knowledge isn’t just power, it’s your best protection.
Preet Banerjee is a consultant to the wealth management industry with a focus on commercial applications of behavioural finance research.