We are going to spend the next three blog posts on Financial Advisors—because yes, they are that important to the conversation.
First, I’d like to stress that just as you or I expect to be compensated fairly for our products or services, financial advisors as well, deserve and need to get paid.
Second, I will be the first to agree that there are many, many excellent, qualified and devoted financial professionals in Canada.
Third, anyone who has spent a decent length of time working in the industry would probably agree with the statement that upwards of 70% – 80% of financial advisors in Canada are not the experts you might believe them to be.
Most financial advisors are in fact sales persons for a bank or a broker; their responsibility is to their employer and not to you.
The current structure of compensation for financial professionals—specifically as to commissions and trailer fees, creates a landscape ripe for high, hidden and complicated fees.
The requirements to become an investment representative are so low ($375 course; pass mark 60%; no academic prerequisites) that there are a fair number of people representing themselves as experts, when in fact, they may not have more than one or two courses on the subject.
How do investors pay wealth managers?
The generally accepted fee for wealth management is 1% of assets under management. Meaning, if you have $1,000,000 with a wealth manager, you can expect to pay (give or take) $10,000 in fees to have those funds managed professionally. This 1% charge will often include input on any estate planning, collaboration with your accountant, insurance advice, etc.
Essentially, you are being a supported by a true financial professional.
Let’s keep moving forward to look at how a wealth manager is paid:
Hypothetically, let’s assume that our financial professional—let’s call her Christine—would like to earn $250,000 before taxes. She works 60 hours a week, passed all her courses, spends weekends reading Portfolio Management journals, and she provides her clients with superior investment management and exceptional client service. Christine deserves to get paid.
Now, Christine will have to split the 1% wealth management fee with her firm— most often half of the fee will go to the employer firm (i.e. Merrill Lynch, TD Wealth Management, Wood Gundy, etc.) to cover the cost of an office, assistant, marketing, and related expenses.
Summary of Christine’s situation:
- To earn $250,000/year, Christine needs to manage $50,000,000 (50MM x .005)
- Christine works 200 days per year
- After office meetings, portfolio management, and research, on average, Christine can see no more than three clients per day
- Clients expect to see Christine approximately three times a year (some semi-annually and others Quarterly).
If we look at the math, and we take into the account the maximum number of clients that Christine can see, without sacrificing her ability to service them, it is 200 clients.
- 200 days a year, with ability to see three clients per day is 600 meetings per year (200 x 3)
- clients need to be seen three times per year, so the maximum number of clients Christine can have at any one time is 200. (600 / 3)
What does this tell us?
It tells us that with the necessity to have $50,000,000 under management, and the maximum number of clients 200, that the average account balance needs to be $250,000.
And this is why if you have less than $250,000 it is often hard to get access to high-quality wealth managers.
So where do you go?
According to the statistic of there being 1.138 trillion dollars in mutual funds in Canada*, you go to a bank or a broker where you will see a sales person who will sell you bank or brokerage products, most often mutual funds with an average MER of 2.0% – 2.5%.
And if that is not clear, yes: You are paying twice as much for half the service.
I am not sure if it is right or wrong, fair or unfair, but I do know it is the current state of affairs in the Canadian investment industry.
So what can you do if you have under $250,000 in investable assets?
You can learn to invest by yourself. There has never been a better time to learn to invest on your own. Why? Because technology has left no industry untouched, including the investment industry. There is absolutely no reason, none, zero, that you should be paying over 1% for management fees. And that means no more mutual funds.
It means self-managed ETFs (Questrade) or looking at some of the great auto-investors in Canada (Wealthsimple).
I will talk more about Questrade and Wealthsimple in an upcoming blog post but over the next few days, you can expect more posts in this 3-part series on Financial Advisors.
*as of January 2017
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