What is payment-only financial planning?

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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 where a financial advisor works for an institution and sells products. Financial advice is given “free” and is part of the process of selling these products. The second category of advisor is called a fee-based financial advisor. This type of advisor does the same thing as the traditional advisor, but charges a fixed percentage fee based on assets under management 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. Advice is still part of the service and is “free”. The last option is a paid or fee-for-service financial planner. This type of planner only gives advice and does not sell product. The consulting 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. Fees are based on the dollar amount of the products you purchase. For example, if he invests $100,000 in mutual funds and pays a 2% fee, he is paying $2,000 per year for as long as he owns these funds. The 2% figure is an average MER (management expense ratio) based on a mix of equities and fixed income (stocks and bonds). There may be other fees such as sales charges, account fees, trading fees, advance or referral fees, administrative fees, or penalties for switching or redeeming early. To find the true cost, you would have to add up the costs for your situation.

The fee-based financial adviser may have reduced fees since they are charging a fixed percentage instead of a MER plus other costs. The reduced fees are somewhere in the 1% to 1.5% range for a full account. The problem is that this option is available to people with larger amounts of assets, since the fees charged need to be significant enough for it to be profitable. The minimum asset threshold typically starts at $500,000 in investable assets (assets in a trading account). If you have $1 million invested, this fee can be as high as $10,000 to $15,000 per year.

The one-time fee financial planner charges for a plan or project using a flat dollar rate. This means you would have a plan done once or periodically every 3 to 5 years, and you would pay between $1,000 and $5,000 per plan.

Note: Don’t look too closely at the names or titles of the person you’re dealing with, ie financial planner vs. 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’re dealing with is to ask “what are the dollar rates?” and explain this to you. Judging by what you hear, you’ll know what kind of fee structure is being put forth.

Conflict of interests

The traditional counselor has to serve many teachers. There is the client who is paying the bills and you have to take care of him. There is the institution and the boss who wants to make as much money as possible from client fees. Lastly, there is the regulatory/compliance team that makes sure that you, the advisor, are serving the client and are not violating any company, industry or criminal laws. If your company has sub-par products, you, the consultant, 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’re a very experienced advisor with a substantial business book or you don’t need the job, it’s very hard to make everyone happy.

The fee-based financial adviser has a similar dilemma if serving the client means assets must be taken elsewhere. There is also advice to pay off debt, 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 Fee.

The single rate scheduler does not have these conflicts because there is only one master: the client. There are no products or assets, just the legal system and the ethics body of the association to which the adviser belongs.

services matrix

In this area, the traditional adviser has the advantage. If you are in a situation that requires a will, an accountant, a trustee, a mortgage broker, or insurance products, the traditional financial adviser works for an institution that can provide these services. The administrative aspect of this is also handled for you: Account opening, trading, portfolio rebalancing, automatic deposits and withdrawals or form filling.

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 need to recruit a network of professionals if you find yourself in a more complex situation.

The same situation applies to a one-time fee or fee-for-service financial planner. The people who do fee-for-service planning tend to be individuals or small businesses without the resources to provide a network of professionals.

Minimum level of assets

If you’re selling products or managing assets, the fees they pay for the entire process, including financial planning, are a percentage of the amount of money used to purchase products or assets. If the amount of money being invested is $100,000 at a rate of 2%, you would be paying $2,000 per year. The products would probably come from a pre-arranged list. A “know your customer” (KYC) survey will be completed and products will be selected rather than making a comprehensive plan. Minimum assets for a financial plan typically start at $500,000 in product or asset purchases, but some companies may be able to provide a plan with a smaller amount of assets. In the age of robotic planning, a plan can be created using software for less than $1,000, but it may not cover all scenarios as the software is not complete compared to talking to a human.

In the case of the fee-only financial planner, there is no need for asset minimums because income is not tied to product sales. Revenue generated is tied to time spent and work done, and whether there is a $1,000 transaction or a $100 million product purchase, the amount of work to create a plan and allocate 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 work you are doing yourself, and how knowledgeable and comfortable you are with finances.

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