In Canada there are over 110,000 “Financial Advisors”. The generic title “Financial Advisor” covers an industry where people offering advice might choose any number of titles including Investment Advisor, Financial Planner, Wealth Advisor, Financial Security Advisor, Money Coach….the list goes on.
Advisor titles are unregulated – Advisors are only limited by their own imagination and what their dealers will allow (or in some cases require).
There are exceptions however;
Portfolio Managers, for example, must hold specific accreditation, registration and licenses; and a Fee For Service Financial Planner will only offer financial planning services and not investment advice.
Fee For Service Financial Planners – are a very distinct type of Advisor occupying a tiny fragment of the Financial Services Industry. In Canada there are fewer than 300 Fee For Service Financial Planners.
Before continuing, and to avoid confusion – it’s important to clarify the difference between three different types of Advisors. One of the defining factors for each is how they are paid by you, their client:
- Fee For Service Advisors – Paid directly by the client (by cheque for example).
- Fee Only Advisors – Paid as a percentage of the amount of assets they manage for each client. Fees are deducted from clients investment accounts on a monthly or quarterly basis.
- Fee Based Advisors – Paid primarily as a percentage of assets they manage for each client – but may also be compensated with trading commissions, mutual fund trailers, etc. Fees deducted directly from clients accounts on a monthly, quarterly or transactional basis.
What makes Fee For Service Planners different from other Advisors?
When someone hangs out a shingle as a Fee For Service Planner they will have a number of common characteristics which they don’t share with Advisors in the traditional advice channel:
- They aren’t registered with a regulator.
- They cannot offer investment advice.
- They only offer Financial Planning Advice.
- They are paid directly by their clients.
- The majority work alone as sole-practitioners.
Fee For Service Planners are never registered with a regulator such as the Mutual Fund Dealers Association (MFDA), the Investment Industry Regulatory Organization of Canada (IIROC), or a provincial securities commission such as the Ontario Securities Commission (OSC). Since they aren’t registered they cannot offer investment advice – or more to the point - recommend the purchase or sale of specific investments such as stocks, exchange traded funds, bonds, mutual funds, etc.
This is widely considered a positive attribute.
Mixing financial advice with investment advice can create conflicts of interest - especially when an advisor is only compensated through the sale of financial products.
A conflict of interest might look something like this:
You’ve just inherited $100,000.00 and you need some Advice on what to do with it.
You call up your financial advisor who is mutual funds licensed and handles your RRSP.
You tell him that you’re thinking about paying off your line of credit which is currently maxed out at $100,000.00 with a 7% annual interest rate.
Your advisor tells you about a mutual fund that has returned 12% over the last year and this performance is likely to continue - according to his analysis.
He convinces you that you should buy the mutual fund and use the ‘anticipated’ gains to pay down the debt.
What he doesn’t tell you is that this is a Deferred Sales Charge mutual fund; he and his firm will earn gross commissions of $7000.00 on the sale of the fund.
The Advisor is incentivized to give advice which is not in your best interests and makes relatively outrageous assumptions about future performance in order to close the deal.
If the same scenario were brought to a Fee For Service Planner there’s little chance of this sort of conflict of interest arising. Fee For Service Planners are not compensated through the sale of products so there wouldn’t be a huge (and hidden) incentive to sell a product – instead they would likely advise you to do what likely in your best interests and pay down your debt.
Let’s be clear – not all Financial Advisors would recommend the mutual fund instead of paying down debt. I’d like to think that most wouldn’t. However – there are many Advisors who would (and do) find the temptation irresistible. For the most part, registered Advisors (those who don’t have a fiduciary duty) are only required to provide advice which is suitable – not what is in your best interests.
Fee Only Planners are paid by their clients directly in the same way you would pay an accountant, lawyer or plumber.
All other Advisors are paid by their clients in a less direct way – payment is taken from the clients account as an ongoing fee, commissions or trailer fee paid on any mutual funds you might own.
When you engage a Fee For Service Planner you will know exactly how much you will be paying them down to the penny.
Typically Fee For Service Planners charge clients on an hourly basis, on a project basis, or on retainer.
The amount charged varies from planner to planner. Hourly fees typically range between $200 and $300 per hour. Comprehensive financial plans can start as low as $2500.00 and quickly become a multiple of this depending on client needs and the complexity of their situation.
Frequently when someone approaches an Advisor they aren’t exactly sure what services they’re looking for – and not all Fee For Service Planners cover all the bases. As discussed, they cannot provide Investment Advice nor will they sell you insurance products. Here are some of the services you can expect from a Fee For Service Financial Planner:
- Retirement Planning
- General Financial Planning
- Budgeting and Cash Flow Planning
- Estate Planning
- Tax Planning
- Debt Management
- Retirement Spending & Decumulation Planning
- Portfolio Reviews
- Severance and Pension Planning
- Disability Planning
- Business Succession Planning
- Divorce Planning
- Assistance with Do-It-Yourself Investors
If you need your money professionally managed, most Fee For Service Planners will refer you to a registered Advisor.
Occasionally a Fee For Service Planner will receive a referral fee from the investment manager who they refer you to. If this happens the Investment Manager is required by regulators to disclose to you:
(a) the amount of the referral fee, and;
(b) if there are any conflicts of interest.
This is an important point – one of the primary advantages of Fee For Service Planners is simply that they are unbiased in everything they do. In this regard it is preferable if they do not accept referral fees!
What to look for in A Fee For Service Financial Planner
Anyone in Canada can call themselves a Fee For Service Financial Planner – regardless of their education or experience. There are no laws or regulations that currently prohibit this – which is clearly a problem.
Although Fee For Service Planners aren’t permitted to provide you with investment advice – it’s important to protect yourself against fraud.
First – never allow an individual or Dealer who isn’t registered with a securities regulator to invest your money on your behalf. Before hiring someone to invest your savings ensure they are registered by going to the Canadian Securities Administrators website – this National Registration Database will also let you know if an advisor has ever been disciplined.
Second – never write a cheque for investment purposes or transfer funds to an “Advisor” in their name. Transfers and cheques should always be written in the name of a dealer, not an individual.
The risk of investment fraud and loss of savings increases dramatically when you invest you money with unregistered individuals and/or dealers.
Ensure an Advisor is qualified to provide financial planning advice and the type of advice that you need.
The most common designations held by professional financial planners are the CFP (Certified Financial Planner) and R.F.P (Registered Financial Planner) designations.
Others may have a CPA (Chartered Professional Accountant) or CA (Chartered Accountant).
Designations such as the CFA (Chartered Financial Analyst), or CIM (Chartered Investment Manager) are more closely associated with investment management – rather than financial planning.
You can verify someone has either the CFP or R.F.P designations by going to these websites:
Certified Financial Planner - https://www.fpcanada.ca/findaplanner
Registered Financial Planner - https://www.iafp.ca/findaplanner
It’s common for Fee For Service Financial Planners to have previous experience working in more traditional client/advisor roles at banks or other investment dealers. In many cases (at least among those I know) they’ve chosen to offer planning service exclusively because they feel this is where they can deliver the most value to their clients.
You’ll want to be certain that anyone you work with has several years of hands on experience working with a broad range of client scenarios.
The best way to check up on an Advisors professional background is to find their profile and work history on LinkedIn.
Financial Planning is clearly a broad topic – Advisors, of all types, will typically work as generalists or specialize in a specific aspect of financial planning.
If, for example, you have complex tax issues that need to be addressed you are likely to be best served by someone with experience as a CPA or a CA.
Looking for Estate Planning advice? You’ll want to ensure they have experience advising on tax, legal and insurance products.
A portfolio review? Ideally advice should be coming from someone with experience managing money and with a relevant designation such as a Chartered Financial Analyst (CFA) or a Chartered Investment Manager (CIM).
Pros & Cons of Fee For Service Financial Planners
- Free of Conflicts of Interest.
- A la carte services – you only pay for what you need.
- Transparent Fees – you know exactly what you are paying the advisor.
- Potential to reduce the long-term impact of fees.
- Focus on financial planning.
- Independent Advice
- Unregistered/Unregulated – Anyone can offer these services.
- Lack of Oversight – most work on their own as solo practitioners.
- Quality of advice varies.
- Cost savings might not exist for high net worth families.
- No investment management services
Where Fee For Service Planners Deliver Value
Traditional financial advice – advice which combines all aspects of financial planning with investment management services can be very costly.
The long term impact of these fees can be eye opening!
By using a Fee For Service Planner there is an opportunity to manage these costs, and potentially save thousands, if not tens of thousands of dollars over a lifetime.
How is this possible?
The math is quite simple:
Total Fees Year 1
Client A: $350,000.00 Portfolio
Advisor is Mutual Fund Licensed and a Certified Financial Planner.
Total Annual Fees – 2% of total assets (embedded in Mutual Fund Management Fees) = $7000.00
Client B: $350,000.00
Combination of Fee For Service Planner and Robo Advisor.
Total Fees: Comprehensive Financial Plan - $2500.00 + Robo Advisor Management Fees $2625.00 (0.75% (ETF MER + Robo Management Fee) = $5125.00
Savings in Year 1: $1,875.00
Total Fees Year 2 (Assuming Total Assets in both scenarios remain at $350,000.00)
Total Annual Fees – 2% of total assets (embedded in Mutual Fund Management Fees) = $7000.00
Investment Management Fees (Robo Advisor): $2625.00 + 8 hours of financial planning with Fee For Service Planner at $250.00 per hour - $2000.00 (optional). Total fees = $2625.00 - $4625.00.
Savings in Year 2: $2375.00 - $4375.00
One of the strongest arguments in favor of using a Fee For Service Financial Planner is the cost savings - only paying for financial planning when you need it. However, for many consumers Fee For Service Advice appear attractive. Paying upfront for these services (in the form of a cheque, etc.) may seem more costly than going the traditional route (never having to write a cheque, having money extracted directly from your investment account) – but this is more a matter of transparency rather than actual cost. Advice is never free.
In the above scenario we assume the traditional advisory fees are 2% annually. While this is not unusual – especially for Advisors who sell mutual funds – many Fee Only Advisors (Portfolio Managers) charge much less than this – sometimes as little as 0.75% to 1% annually. Typically, the more money you have (investible assets) the lower the fee. If you have a high net worth and prefer to work with a professional, fiduciary money manager (rather than using a low cost option) with a sophisticated investment process combined with financial planning services – there may be not benefit to hiring a Fee For Service Planner.
Who is Best Suited to using a Fee For Service Planner?
Contrary to what a lot of personal finance experts would suggest – Fee For Service Financial Planners aren’t suited to everyone.
The implementation of a plan is ultimately the client’s responsibility. The planner only provides guidance. The discipline and follow through with the plan is up to you, the client. Not everyone is prepared to follow a budget, reduce spending and force savings. Spending thousands of dollars on a plan doesn’t make sense unless you are committed to following the recommendations of the planner.
High net worth investors may see little in the way of cost savings by working with a Fee For Service Planner if they have a Fee Only Financial Advisor/Portfolio Manager charging a low investment management fee (1% or less) along with sophisticated (fiduciary) financial, tax and estate planning.
Those who are best suited to using a Fee For Service Planner are likely:
- People who have specific and well-defined planning needs.
- Do-It-Yourself Investors who might have ‘gaps’ in their finances.
- People who are paying too much for Advice through traditional channels (this is a lot of people!).
- People who’s Advisor is only providing investment management services, or selling products and not providing financial advice.
Who you choose to work with can be as much a matter of personal preference as anything else. While costs certainly matter, they are not the only consideration when hiring a financial advisor – you should always ensure they are well qualified, experienced and of course trustworthy.
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 - firstname.lastname@example.org