How Much Does A Financial Advisor Cost?

April 11, 2019 | Danny MacKay, SeekAdvisor, Find an Advisor

How Much Does A Financial Advisor Cost?

Until recently most Canadians have been oblivious to the cost of financial advice.  Some have even been left with the impression that ‘financial advice’ is free – especially when this advice is provided by the nice fellow at the local bank branch. 

You can be forgiven if this sounds like you…

Up until January of 2017, Financial Advisors weren’t required to tell you how much you were paying for either their advice or the management fees on your investments.  It would seem logical that in the absence of an invoice there wouldn’t be a fee, right?  Not by a long shot - fees have historically been hidden from consumers - and for good reason, the value of advice received frequently does not match the cost of advice.  In fact through our mutual fund holdings, Canadians pay some of the highest investment management fees ("Advisory Fees") in the world.

Anyone with an investment account (RRSP, TFSA, etc) with one of the 80,000+ licensed Mutual Fund Advisors is likely just waking up to the fact that they are paying hundreds, if not thousands of dollars in fees every year.  Sometimes to a nameless, faceless institution or an advisor they barely know or talk to.

So...how much should you be paying for financial advice?  

In this post we'll explore the cost of financial advice and what might be considered a reasonable fee.

Fee-Based Advice – Two Types

In recent years, among Professional Financial Advisors, there has been growing trend towards complete fee transparency.  No more hidden fees - just one clearly defined and mutually understood fee, prominently displayed on client statements. In some cases fees are displayed on the Advisors websites.  This fee transparency means fees are charged as a percentage of assets being managed or on a fee for service basis. This is an important distinction to understand.

Fee For Service Advice – These are fees paid on an hourly or project basis.  Some Fee For Service Planners, such as SeekAdvisor's Natasha Knox offer their service on a retainer basis as well.  Fee for service Advisors traditionally only offer financial and retirement planning services - or "a plan".  They are not legally allowed to provide investment advice. Anyone providing investment advice must be registered with a regulator such as IIROC, (the Investment Industry Regulatory Organization of Canada), the Mutual Fund Dealers Association, or a Provincial Securities Commission.

Fee Only and Fee Based Advice – More common than the Fee For Service Advisor,  Fee Only and Fee Based Advisors charge a percentage fee based on the dollar amount of assets that they manage for you.  For example – if you have $100,000 invested and the fee is 1% per year – you will pay your Advisor $1000.00 per year (plus applicable taxes).  This amount will be billed either monthly or quarterly and will be deducted directly from your investment account.  These Advisors can offer a full range of financial, investment and insurance planning advice.

...there is no such thing as a standard set fee charged by Advisors...

Advisor Rules of Engagement

Firstly, it’s important to understand that there is no such thing as a standard set fee charged by Advisors.  For the most part Advisors are generally given the freedom by their Dealers to charge whichever fee they feel is appropriate.  However, as a matter of policy, Advisors are always constrained by a maximum and minimum fee which they are permitted to charge.  For example, an Advisor might not be able to charge less than 0.75% and no more than 1.5% - any amount charged outside of the prescribed range will require an exception by management.  The more money a client has with an Advisor, the lower the fee.  Many Dealers will also have 'account minimums' where accounts under a specific dollar value will not be eligible for their fee based program.

A typical internal fee schedule at a firm might look something like the chart below where fee parameters are provided for Advisors –

Assets Under Management Minimum Guidance  Maximum

<$249,999

0.95%

1.50%

2%

$250,000 - $499,999

0.95%

1.50%

2%

$500,000 - $999,999

0.90%

1.25%

2%

$1 Million - $2.5 Million

0.75%

1.00%

1.5%

>$2.5 Million - $5 Million

0.5%

0.75%

1%

> $5 Million

Negotiable

Negotiable

.75%

The Value of Advice

Financial Advice – broadly speaking comes in two parts: Investment Advice and Financial Planning.  Let’s begin by looking at Investment Advice.

Many Advisors consider the investment advice they provide to be their primary offering and the basis on which they charge their fees.  But investment advice is quickly becoming commoditized – it is very difficult for an Advisor to provide ‘superior’ investment performance to the extent that they can charge a premium for this service.  By superior I am referring to alternatives such as 'All In One ETFs' and the various Robo Advisors – where fee’s range from 0.22% to 0.50% annually.  However, a great Advisor can add value in many very important ways that these solutions cannot which may command a premium – some of these value adds might include:

·        Behavioural – Do they have a disciplined investment process?

·        Education – Will they spend time educating you about investing?

·        Strategic – Will they adjust your asset mix appropriately as you move through life and your circumstances change.

·        Time – How much time will they spend with you working on your investment strategy.

These are just a few of the ways a great Advisor can add value that a Robo Advisor or an ETF cannot and never will.  

In addition to Investment Management – most Advisors provide services that are focused on Financial Planning.  Whereas Investment Management concerns making your money grow – Financial Planning focuses on more personal matters - tax planning, budgeting, estate and retirement planning, wealth transfer strategies, etc.  A great Advisor will also be there to answer the little questions – or at least have an informed opinion on matters as they pop up -

Should you buy or lease a car? Variable or fixed mortgage? Should you prioritize your savings in a RRSP or a TFSA? 

Having someone who's input you value and trust, someone who is just a phone call away - this can be priceless.  Financial Planning is where a truly great Advisor can really shine - as life becomes increasingly complex and as the industry evolves this is becoming more and more evident.

...fees generally fall somewhere between 1% and 1.5% ...

So... What is a "Reasonable Fee"?

For a household with assets of between $100,000 and $1,000,0000 advisory fees generally fall somewhere between 1% and 1.5% - some charge more and very few charge less than 1%.  As a client’s assets under management increases, fees decline.  SeekAdvisor member Steve Lowrie's fees fall below 1% once total assets being managed exceed $500,000, representing tremendous value considering Steve's credentials and value proposition. 

Since fee-based compensation models began gaining popularity about 15 years ago, the amount of fees charged has unquestionably been on the decline.  For households under $500,000 in total assets under administration – the sweet spot for a fee hovers in the vicinity of 1.25% per year.  Once $1,000,000 in savings is achieved fees of over 1% are almost unheard of and may even be considered unreasonable – but this will depend on the Advisor (or Team as the case may be) brings to the table.

Many Advisors will only serve households that are able to bring in a minimum amount of money across all accounts.  These ‘household minimums’ can range anywhere from $100,000 to $1,000,000 and beyond.  In an effort to open the door to smaller households some Advisors will have a minimum fee – for example if the household minimum is $250,000 and they charge 1% at this level, they might have a $2500 minimum charge.  This means they may welcome the opportunity to work with less than $250,000, but they will still have to pay the minimum charge of $2,500.

Advisors at the big bank owned dealers like RBC Dominion Securities or Scotia McLeod will generally charge more than Advisors at Independent Dealers.  

You aren't getting anything extra when dealing with an Advisor at a bank - instead you very likely  pay higher fees which are necessary to support their higher overhead and the overall profitability of the corporation. Awesome!

As with any professional service, Advisor fees should be charged according to a schedule and be absolutely transparent - a five minute explanation that provides no clear answers should raise multiple red flags.  I expect in the not too distant future most professional advisors and portfolio managers will display their entire fee schedules on their websites.

When selecting an Advisor who's right for you and your family there is much more to consider than fees alone.  Always be sure to understand what services the Advisor is going to offer you in addition to investment management and that there is real value in those services as they relate to the fees you're paying.

Danny MacKay is the founder of SeekAdvisor, a former Bay Street Executive and Industry Insider turned Investor Advocate.  If you have any questions or comments about this article, please feel free to reach out - info@seekadvisor.ca