In part one of this three-part series, we looked at the math behind why some Financial Advisors have a minimum account requirement of $250,000 (or more), and also three reasons why (most) Advisors might not be the experts you believe them to be.
If you missed that post in the series, you can find it here » https://themoneycoach.com/fa1
Today, in part two, I want to look at the various levels of Financial Advisors in Canada, because just like lipstick and mascara (LOL), not all are created equally!
OK, in no particular order:
Bank Financial Advisors
These Advisors are employed by the bank and will receive a salary plus a small commission to push you toward bank products. For example, if you have a cash balance in your account of several thousand dollars or more, a teller (who will also receive a small commission), might mention it to you and ask if you would like to see a Financial Advisor at the Branch.
If you agree, you will most likely see someone that has limited training or knowledge on portfolio management strategies and will advise you to purchase a basket of high-fee mutual funds offered by the bank.
Bottom line: Never a good option.
Mutual Fund Representatives
These Advisors are contractors who work for a specific mutual fund company (i.e. Fidelity, Dynamic, AGF, etc.). They work their own hours, most often from a home office and are usually more than willing to meet you at a place of your convenience.
My first experience with investing was a lovely woman named Donna who worked for Dynamic Mutual Funds. Despite the fact I only had a few thousand dollars to invest, she was always willing to meet me at home or a cafe by my office for lunch. I did not realize it at the time (I was 18!), but she was paid to sell only Dynamic Funds. I remember the only time she became upset with me was when I wanted to purchase a mutual fund from Fidelity that had been recommended by a friend.
As you might guess, the fees were high; between 2% and 3%* for equity funds. In fact, Donna was so successful that her husband quit being a fisherman to become her partner and also sell funds for Dynamic. So yes, not always a lot of training in mutual fund reps.
Bottom line: Never a good option.
In general, there are two types of Financial Planners: commission-based and fee-based. In the first scenario, the planner will provide you with a comprehensive financial plan that could include investment recommendations, tax planning, estate planning and insurance advice. The Advisor does not charge a fee for the meeting or the plan but does receive commissions or referral fees for the products recommended to you.
Can you see a pattern here?
I would never choose to see a commission based planner because I could not be sure s/he was recommended products that were right for me, or even better for the downpayment on their new country house.
Bottom line: Avoid working with any commission based Advisor or Planner
Which brings me to fee-only planners, which I think are great! With fee-only planners, you receive a comprehensive financial plan, one that should see you through years, for a one-time up-front fee. Depending on your situation and the planner’s rates, this could be between $500 and several thousand dollars.
Why do I love upfront fees?
In Day #12, we looked at an example where the cost of hidden fees was, over the long term (i.e. 20 – 30 years) devastating to the portfolio. And so yes, of course, I would rather pay a one-time fee of $2,500 (that is also most often tax deductible!), that hundreds of thousands of hidden fees and opportunity costs over 20+ years.
Bottom line: Always (in my opinion) a good idea.
Caveat: Commission-based planners love to bash fee-only planners. They will find examples of unethical fee-only planners that have figured out a way to charge both an up-front fee and commissions on recommended products, usually insurance and referral fees for professional recommendations. And so they write posts like, “Beware of Fee-Only Planners!”
But this is dumb. It is like saying, don’t go outside because you might get hit by a car. The trick is to look both ways before you cross the street. In my opinion (and experience) there are far more ethical fee-only planners than unethical (and not sure I can say that about commission-based planners).
If you are looking for a directory of pre-screened (trust me, it’s tough to get on this list) fee-only planners in Canada, check out the MoneySense directory: http://www.moneysenseapproved.com/find-an-advisor/
(and no, of course, I do not receive any referral fees on that list)
Portfolio Managers/Wealth Managers
This group of Advisors will charge between .75% and 1.5% to manage your assets. Which is to say, if you have $500,000 (which as we discussed yesterday, you will need to get into this club), you will pay roughly 1% or $5,000 each year for investment management and (possibly) financial planning.
I have worked as an Assistant and Associate Financial Advisor for a few top wealth managers, all of whom were highly educated in portfolio management and financial planning, and I can tell you, even at this level, there are some atrocious and unethical Advisors.
But? Also some of the best, most ethical, professional and competent Advisors you could imagine. Bar none.
(yes, I was in Victoria for the first 28 years of my life)
Bottom line: A great option if you have amassed a certain (high) level of investible assets, but you have to do your homework! You have to ask questions (we will cover this in a future lesson), and you
absolutely can not enter the client/Advisor relationship with blind trust. It is buyer beware when choosing a professional wealth manager.
This lesson is long enough, and so I will just say, if you need insurance, visit an insurance person. If you need investment advice, don’t. It is that simple. Insurance salespeople are often licensed to sell hybrid insurance/investment products, but (as you can probably guess!) the fees are ridiculously high on these overpriced and often unnecessary products (i.e. segregated funds**).
Bottom line: No.
So what’s a girl to do? If you do not have $250,000 or more (and you don’t want to pay high fees) your options are far and few between in finding an Advisor.
It is not as difficult as you might think. Trust me.
And that wraps up today’s lesson! I hope you feel you know a little bit more about the Financial Advisor landscape in Canada than before you read this lesson.
I will be back tomorrow for the third, and final, installment in our three-part series on Financial Advisors.
*pricing pressure from competition (specifically from firms like Wealthsimple, have brought the highest MER at Dynamic down to 2.0%)
**there are rare cases when it makes sense to purchase segregated funds (i.e. seg funds offer creditor protection in the event of bankruptcy or other creditor claims, and so, in certain circumstances, can be useful for business owners or Directors)
Ps. If you are looking for more information, I cover mutual funds, ETFs, segregated funds and Financial Advisors in-depth in Module Three of Zero to Portfolio, An Investing MasterClass.
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