Questions to Ask Before Investing

As the number of investment options in Canada continues to grow, Canadian are looking for help in making their investment decisions.  But how does one choose an investment advisor?

Before investing be sure that you can answer the following questions.  Be honest.   You or your investment advisor will require this information to make appropriate investment recommendations for you.

Questions to Ask Yourself:

• What are my objectives?
• How much risk am I comfortable with?
• What are my up-coming financial needs, and goals, when will I need money for them?
• How much do I have to invest?  Have I determined how much I can invest on a monthly, yearly basis?
• Will I be adding to my portfolio each year?
• What are my current investments?  How much are they worth?
• What is my family situation? How much money do I require each month to maintain my standard of living?
• When do I plan on retiring?

Questions to ask Potential Advisors:

• What are your professional qualifications, credentials and experience?  What services can you provide me?
• Are you a member of, or affiliated with, a professional association?  Which association, for how long?
• How many clients do you work for?  What is the average size of your client's account?
• How long have you been in the industry?
• Can you provide me with an overview or background of your firm?
• Describe your typical client.  Can you provide me with references from long term clients who have similar financial situations and objectives?
• What is the full range of products you offer?
• What is your investment style?
• Can you provide me with a rough financial play or asset allocation mix?
• Does the investment you recommend match my investment goals?  Why is this investment suitable for me?
• What is the cost of your services?
• How are you compensated?  Fee only, fee plus commission, commission based on products sold only?
• Who will work with you on my account?  Do you have support staff who will actively participate on my account?  When can I meet the support staff and what are their credentials?
• How often will I receive statements?  What will the statements look like?
• How many times a year will we meet?
• How will you keep me updated and informed?

Questions to ask about any Investment:

• What written material is available for me to review?  Prospectus, Annual Report, quarterly financial statements, Annual Information Form
• What are some of the portfolio holdings?
• What are the risks associated with this investment?  Am I comfortable with the level of risk?
• Is there a charge if I must sell the investment before it matures?  What will be the tax consequences if I must sell early?
• How liquid is this investment?  How easy would it be to sell if I needed my money right away?
• How does this investment compare to other investments in the same category?

If you Select an Investment Advisor:

• Provide accurate information about your financial situation, and keep your investment advisor informed
• Make sure you are comfortable with the advisor
• Stay committed to your plan
• Always keep the lines of communication open with your investment advisor
• Ask questions about your investments
• Be honest with your self and your investment advisor about your financial situation
• Keep good records; of all information you receive, copies of forms, and conversation you have with your investment advisor.  Write down the answers you receive and your decision

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What To Expect From Your Financial Advisor

Often when we visit our financial advisor we are either asked too many or too few questions. Sometimes we are not sure what questions to expect nor what questions we should or should not answer. After the interview we wonder shouldn't he/she have asked me about "blank" or, did they really require that information. The following is not an exhaustive list but rather information that will assist you in determining if your advisor is taking into consideration all relevant information and providing you with the service that you expect or deserve.

Data Gathering
Currently, there are no policies set out that indicate what information a financial advisor requires. There are however, questions that an advisor should ask a client. While there is no legal requirement to answer these or any questions, it is in an investor's best interest that his/her advisor be provided with sufficient and accurate information to be in a position to make appropriate investment recommendations. The following is the list of questions that your Advisor should ask:

What are your investment objectives?
This question forms the basis for all investment planning. Your advisor must be made aware of your objectives in order to make the best recommendations for you. Are you interested in safety of capital, income, or long term growth of capital?

What is your age?
There are two reasons that this question is asked. The most important reason being your age ties in with your short, medium and long-term goals. An individual who has recently graduated from University and is just starting to save will likely have different objectives and risk tolerance than an individual who has recently retired.

There is also the legal age of majority that your advisor must be aware of. In Manitoba, one must be 18 in order to enter into a contractual agreement.

What is your Annual Income and Net Worth?
This information is used to determine you financial condition and make product suggestions best suited to your financial ability.

What is your occupation?
Many people work in industries whereby they are paid on a commission basis or they are seasonally employed. These individuals do not necessarily receive a regular paycheque The gaps in their income that they experience may necessitate short-term liquidity of investments. Knowing this enables your advisor to make appropriate investment recommendations.

What is your tolerance for risk?
Investments that are speculative generally carry a higher risk factor, and while high-risk investments tend to reap higher rewards on the upside there is also a possibility that on the downside an investor could lose some or all of his/her investment. An advisor needs to ask questions to determine whether a client's risk tolerance is low, medium or high. Making this determination requires not only reference to age and financial considerations but also how investment risk may affect the client emotionally. If you are likely to spend significant energy and sleepless nights worrying about higher risk investments they are probably not for you, regardless of your financial ability.

What investment knowledge or experience do you have?
Knowing what knowledge or experience you have allows an Advisor to better understand your tolerance and familiarity with different products and allows them the opportunity to educate and keep you informed of all types of investment vehicles being offered. The more information an advisor shares with you the better informed you will be and the better able to protect your hard-earned savings.

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Additional Information

In order to provide you with the best possible recommendations with respect to your overall financial picture, it would not be unreasonable for your advisor to make inquiries in to the following investment related issues. Keep in mind that your advisor may not be able to provide advice or service in any of these areas. They more than likely have a list of individuals who are experts in a particular area and would be prepared to provide you with their name and number.

Do you have insurance?

Do you have a current will?

Have you looked into estate planning?

Have you set aside adequate savings?

What are your personal circumstances (what is your marital status, do you have any dependents etc.)?

Do you have any income tax issues?

Service Issues

In addition to data collection it is important to understand what is to be done with the information that is collected. In other words, in what ways will the data be used and what service will be provided. At this point, it would be valuable to note that the type of service, to some extent, may vary depending on the size of one's portfolio. For example, one with a portfolio of $20,000 may expect to meet with their advisor once a year while an individual with a portfolio of $1 million might have weekly consultations. The suggestions outlined below are expectations that an individual with an average size portfolio might have.

A written plan should be provided which balances your needs with objectives and makes recommendations.

The plan should be implemented and reviewed annually.

An explanation as to how the advisor operates the business should be given. (e.g. how often statements, prospectuses, annual reports and information circulars will be sent out, how the advisor is compensated, to whom your inquiries should be directed, support staff or the advisor.)

Be advised that before you decide on a financial advisor, you should take time to interview two or three potential candidates. To assist you in making a decision please refer to the article entitled "Questions to Ask Before Investing" which can serve as a guide when interviewing potential advisors. Remember that you are potentially investing your life savings with this individual. The better informed you are, the more likely that you will make decisions that are in your best interest.

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