Not an uncommon question. The answer can be quite complex.
Step 1 is to find good advice. This can be daunting. While seeking out referrals from trusted friends or colleagues is usually a good start, there is still some very important decisions to make about who might be the best possible adviser for you and what you need.
Everybody has a different level of understanding of financial matters. So how will you know if the advice that you are being offered is right for you?
If they talk above your level of understanding (despite you having acknowledged a limited one) or sound vague about detail (fees and costs especially) or attach some subtle sales tactic (investing in mutual funds, insurance products, etc.), walk away.
The priority should be to focus on your lifestyle needs and what that costs you (including taxes). It may be as simple as creating a budget and extrapolating from that. But, this should drive all of your future financial decisions. In other words, you need a financial plan. At High Rock, we call it a Wealth Forecast. This should include whatever increases (in your cost of living) that may occur in the future (often referred to as inflation). This is impossible to predict accurately, but is enormously important. So you need to be conservative.
The mandate that the Bank of Canada operates under is to keep “inflation” at or close to a range between 1-3%. So this is a reasonable place to start, but everybody consumes differently and it will depend on what you consume and where you consume it. Once you get an understanding of your personal level of inflation (of your cost of living), only then can you put together some kind of investing strategy that will keep you ahead of inflation and reduce the probability of running out of money.
If an adviser does not create this plan first, to fully understand your needs. Walk away.
There are independent financial planning firms that will offer a “fee for service” financial plan and leave you to find your own investment advice elsewhere. This you may find appropriate as it limits the potential for conflicts of interest (sales and commissions) and is therefore unbiased and objective. However, a good plan needs monitoring and updating as the dynamics of life change the outlook and this could add to your costs.
At High Rock we include this planning (Wealth Forecast) with our fees so that we can have continuity between your plan and your investment strategy and keep your costs to a minimum. One transparent fee, all inclusive.
Risk: I have written a series of blogs on risk mitigation, you can find them in the blog archives on this website. Most importantly, you will have to take some form of risk to avoid the biggest risk of all which is running out of money before you run out of life. That means that you need an investment strategy to stay ahead of inflation, but at the same time, one that limits the potential of losing money in doing so. That, in turn means managing your risk. Choosing experts in the management of risk is the most important part of getting good investment advice. Anyone can promise future portfolio performance. Few will remind you that there is a direct correlation between getting good returns and the risk required to get them. Why take more risk than is absolutely necessary? Past performance is not a guarantee of future returns. My regular readers are told this ad nauseum. For this reason alone, make certain that your adviser is a fiduciary.
A bank investment or financial advisor is not a fiduciary. They might recommend a suitable investment, but beyond the point of sale (as long as you are deemed suitable at the time) they have no further legal responsibility to you. A professional discretionary portfolio manager (like High Rock) has a legal responsibility to ensure that your investment portfolio continues to be suitable. We have a legal fiduciary responsibility to manage your risk. This is crucial. Few take heed of this and it can be a problem if you end up, unfortunately, with a bad advisor. It is why we manage risk first.
If you have to take risk and usually you do (to stay ahead of the inflation of your cost of living), make sure that you have the right help to manage it appropriately. Ask the questions: how do you manage my risk? and on what are you basing my expected returns? The higher returns they suggest to you, the greater the risk they are putting you into. And always remember, no matter what the last few years returns look like: past performance does not guarantee future returns.