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What Is Fee-Only Financial Planning?
The world of financial advice is divided into 3 main categories. A traditional financial advisor is what most people are familiar with. This is the most common arrangement where a financial advisor works for an institution and sells a product. Financial advice is provided “free of charge” and is part of the sales process for these products. The second category of advisers is called a paid financial adviser. This type of advisor does the same thing as a traditional advisor, but charges a flat percentage fee based on assets under management, not by product. The costs may be lower, but they can still add up over time because the fees are based on the percentage of assets you have. Advice is still part of the service and is “free”. The last option is a fee-only or fee-for-service financial planner. This type of planner only provides advice and does not sell a product. The consulting fee is a flat dollar amount based on how much time is spent or how complicated the project is.
What are the advantages and disadvantages of each type?
Traditional advisers tend to be the most expensive. Fees are based on the dollar amount of products you purchase. For example, if you invest $100,000 in mutual funds and pay 2% in fees, you’re paying $2,000 a year if you own those funds. The 2% figure is the average MER (Management Expense Ratio) based on a mix of equities and fixed income (equities and bonds). There may be additional fees such as sales costs, account fees, trading fees, trailer or referral fees, administration fees or early change or withdrawal penalties. To know the true cost, you would have to add up the costs for your situation.
A fee-based financial advisor may have reduced fees because they charge a flat percentage instead of the MER plus additional costs. The reduced fees are somewhere in the range of 1% to 1.5% for the entire account. The catch is that this option is available to people with more assets because the fees charged have to be high enough to be profitable. The minimum asset limit usually starts at $500,000 in investable assets (trading account assets). If you invest $1 million, this fee can be as high as $10,000 to $15,000 per year.
A financial planner charges a flat dollar fee per plan or project. This means you would get a plan done once or regularly every 3 or 5 years and pay somewhere between $1,000 and $5,000 per plan.
Note: don’t get too fixated on the names or titles of the person you’re dealing with – i.e. financial planner versus financial advisor. These names or titles are used interchangeably in Canada and do not identify a given service or accreditation. There are also other names like financial advisor, investment advisor, portfolio manager and so on. The key to knowing what you’re dealing with is to ask “what are the dollar charges?” and have it explained. Based on what you hear, you will know what type of fee structure is being presented.
Conflict of interests
A traditional counselor must serve many masters. There is a client who pays the bills and needs to be taken care of. There is an institution and a boss who want to make as much money as possible from client fees. Finally, there is a regulatory / compliance team to ensure that you, as an advisor, are serving the client and not breaking any company, industry or criminal laws. If your company has products that are below average, you as a consultant are now conflicted. You can sell a client a mediocre product and make your boss happy, or you can tell the client to go to a competitor and get a better deal that will keep the customer happy. Unless you’re a very experienced advisor with a large book of business or you don’t need the job, it’s very hard to please everyone.
A fee-based financial advisor has a similar dilemma if the service to the client means that assets should be transferred elsewhere. There is also advice on paying off debt, buying real estate, using money to buy a business, starting an art collection, taking money overseas, buying physical metals etc. which are not products sold by the institution and therefore would not generate any fees.
A fee-only scheduler does not have these conflicts because there is only one principal – the client. There are no products and no assets – only the legal order and ethical body of the association to which the consultant belongs.
A traditional advisor has an advantage in this area. If you are in a situation that requires a will, accountant, estate manager, mortgage broker, or insurance products, a traditional financial advisor works for an institution that can provide these services. The administrative aspect is also taken care of for you: opening accounts, trading, portfolio rebalancing, automatic deposits and withdrawals or filling out forms.
A fee-based financial planner may provide these additional services, but it will depend on the size of the business. Smaller “boutique” firms may specialize in portfolio or investment management, and if you have a more complex situation, you may need to hire a network of professionals.
The same situation applies to a fee-only or fee-for-service financial planner. Fee-for-service planners tend to be individuals or small companies that don’t have the resources to provide a network of professionals.
Minimum asset level
If you sell products or manage assets, the fees paid for the entire process including financial planning are a percentage of the amount of money used to purchase the products or assets. If the amount of money invested is $100,000 at 2% fees, you would pay $2,000 a year. Products are probably from a preset list. A know your client (KYC) survey is completed and products are selected, not a comprehensive plan. Minimum asset values for a financial plan typically start at $500,000 in product or asset purchases, but some firms may provide a plan with a smaller amount of assets. In the age of robo-scheduling, a plan can be created using software for less than $1,000, but it may not cover all scenarios because software is not as complete as talking to a human being.
With a fee-only financial planner, there is no minimum asset requirement because revenue is not tied to product sales. The revenue generated is tied to time spent and work done, and whether it’s a $1,000 deal or $100 million in product purchases, the amount of work involved in creating a plan and allocating assets will be the same.
What type of advisor is right for you? It will depend on what you have, what you need, how much of the work you do yourself, and how knowledgeable and comfortable you are with finances.
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