What is payment-only financial planning?

The world of financial advice is divided into 3 main categories. The traditional financial advisor is what most people are familiar with. This is the most common arrangement in which a financial advisor works for an institution and sells products. Financial advice is provided “free” and is part of the sales process for these products. The second category of advisor is called a fee-based financial advisor. This type of advisor does the same as the traditional advisor, but charges a fixed percentage fee based on assets managed rather than per product. The cost may be less, but it can still add up over time because the fees are based on a percentage of the assets you have. Counseling is still part of the service and is “free”. The last option is a fee-for-service financial planner. This type of planner only gives advice and does not sell products. The counseling fee is a fixed dollar amount based on how much time is spent or how complicated the project is.

What are the advantages and disadvantages of each type?

cost

The traditional advisor is usually the most expensive. Rates are based on the dollar amount of the products you purchase. For example, if you invest $ 100,000 in mutual funds and pay 2% fees, you are paying $ 2,000 per year as long as you own these funds. The 2% figure is an average MER (Management Expense Ratio) based on a mix of stocks and fixed income (stocks and bonds). There may be other fees such as sales charges, account fees, commercial fees, trailer or referral fees, administrative fees, or early exchange or redemption penalties. To find the true cost, you would have to add up the costs for your situation.

The fee-based financial advisor may have reduced fees as you are charging a fixed percentage rather than a MER plus other costs. Reduced fees range from 1% to 1.5% for a full account. The problem is that this option is available to people with higher amounts of assets, as the fees charged must be substantial enough to be profitable. The minimum asset threshold generally starts at $ 500,000 in investable assets (assets in a trading account). If you’ve invested $ 1 million, this fee can be as high as $ 10,000 to $ 15,000 per year.

The paid financial planner only charges for a plan or project using a fixed dollar rate. This means that you would have a plan done once or periodically every 3-5 years, and you would pay between $ 1,000 and $ 5,000 per plan.

Note: Do not pay too much attention to the names or titles of the person you are dealing with, ie financial planner versus financial advisor. These names or titles are used interchangeably in Canada and do not specify a particular service or accreditation. There are also additional names like financial consultant, investment advisor, portfolio manager, etc. The key to knowing what you are dealing with is to ask “What are the dollar fees?” and have this explained to you. Judging by what you hear, you will know what type of fee structure is being introduced.

Conflict of interests

The traditional advisor has to serve many teachers. There is the customer who is paying the bills and must be taken care of. There is the institution and the boss who wants to earn as much money as possible from customer fees. Lastly, there is the regulator / compliance team that makes sure that you, the advisor, are serving the client and not breaking any company, industry or criminal laws. If your company has products that are below average, you, the advisor, are now in conflict. You can sell the customer a mediocre product and make your boss happy, or tell the customer to go to a competitor and get a better deal that will make the customer happy. Unless you are a very experienced advisor with a substantial portfolio of business or you don’t need the job, it is very difficult to make everyone happy.

The fee-based financial advisor has a similar dilemma if serving the client means that assets must be moved elsewhere. There is also the advice to pay debts, buy real estate, use money to buy a business, start an art collection, take money abroad, buy physical metals, etc., which are not products sold by the institution and therefore , they would not generate any. Rate.

The single payment scheduler does not have these conflicts because there is only one teacher: the customer. There are no products or assets, only the legal system and the ethical body of the association to which the advisor belongs.

Services matrix

In this area, the traditional advisor has the upper hand. If you are in a situation that requires a will, an accountant, an estate trustee, a mortgage broker, or insurance products, the traditional financial advisor works for an institution that can provide these services. The administrative aspect of this is handled for you as well: account opening, trading, portfolio rebalancing, automated deposits and withdrawals, or filling out forms.

A fee-based financial planner can 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 you may still need to hire a network of professionals if you have a more complex situation.

The same situation applies to a fee-for-service or fee-for-service financial planner. Fee-for-service planners tend to be individuals or small businesses without the resources to provide a network of professionals.

Minimum level of assets

If you sell products or manage assets, the fees they pay for the entire process, including financial planning, are a percentage of the amount of money that is used to buy products or assets. If the amount of money invested is $ 100,000 at a 2% rate, you would be paying $ 2000 per year. Products are likely to come from a predetermined list. A “know your customer” (KYC) survey will be completed and products selected instead of having a comprehensive plan. Minimum assets for a financial plan generally start at $ 500,000 in product or asset purchases, but some companies may provide a plan with a smaller amount of assets. In the age of automated planning, a plan with software can be created for less than $ 1,000, but it may not cover all scenarios as the software is not complete compared to talking to a human being.

For the paying-only financial planner, there is no need for minimal assets because income is not tied to product sales. The income generated is tied to the time invested and the work done, and whether there is a $ 1000 exchange or a $ 100 million exchange on the purchase of a product, the amount of work to create a plan and allocate the 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 are doing yourself, and how much knowledge and comfort you have about finances.