A Novel Beginning
You’re probably thinking, “Great. Another financial services firm”.
You are probably not alone.
If that were the case I would completely understand. There are literally thousands of organizations out there that address some component of the financial services market.
The problem is that most of them don’t care about you.
The average fund manager cares about their performance relative to their benchmark and the amount of their assets under management (AUM).
The average financial advisor cares about their commissions and their management fees charged on assets under management.
The typical bank wants to direct you to products that they sell, not the best available products, or products that are best suited for you.
The fee-only financial planning approach works in stark contrast to these conflicts of interest.
How The Fee-Only Financial Planning Journey Began
The unfortunate realities of the typical advisor model played out for me recently. My Mother invited me to join her at a meeting with her financial advisor, as she wanted to make sure she was on the right track. She recently retired from a career as a teacher and was transitioning from the accumulation phase of her life into the drawdown phase. The plan that was set out for her to follow was a logical one. The options presented were very reasonable from an approach and strategy standpoint.
When it came time for execution, this is where the reasonability went off the proverbial cliff. This came to light as I asked 3 critical questions:
- What is the fee structure of this financial plan/arrangement?
- What product options do we have within the financial plan framework?
- Is there a more cost-effective way to implement this financial plan?
With respect to the fee structure, the advisor was going to be investing in a balanced fund charging 2% of AUM. In addition, the advisor would be taking a 1% of AUM management fee on top of the costs of the funds. In total, this plan would cost 3% of AUM each and every year. Something to keep in mind is that we could substitute AUM with life savings in any sentence in this article. What this ultimately means is that the investments would have to return 3% just to break-even! As you know, interest rates are very low in the current environment and earning 3% is not a given. How do you think you would do in the 100-metre dash if you started from 130 meters away? Why would you want to put your life savings in the same situation?
When it came to product options, we did have some to choose from. Segregated funds, mutual funds and annuities were all provided as options. Each of these options has their own merit and can provide value to certain individuals depending on their situation. However, I asked if there was a way to move to a lower cost ETF based approach. The advisor’s response was, “I am not licensed to sell ETFs”. So, now you only get to choose from products that they have agreed to sell?
These investment products undoubtedly have a commission being paid to the advisor from the fund company, because for every client an advisor can direct to them, it means that the fund company will now get paid each and every year that you invest with them. For 1% of my life savings, I would expect that an advisor could bring all appropriate options to the table for me.
Lastly, I asked if they would be open to moving to a flat fee-based model as opposed to the percentage of AUM model that they were currently utilizing. They declined to entertain the idea. That’s their prerogative as a business person, but it was worth a shot.
At the end of the day, this is a classic example of an expensive advisor using expensive products because it suits them best, not their client. Luckily, it’s your prerogative to explore other options!
Harsh Reality of Working With a Typical Financial Advisor
My mother and I inevitably left their office following the meeting. We had some discussion and she quickly realized how much money had been paid to this advisor over the years. Literally 3% of her hard earned money was given away every year.
It was this day that drove me to launch Novel Financial. I wanted to be able to provide quality financial planning advice to all Canadians at a cost that was commensurate with the service being provided. Thanks to this meeting, it turned out that on this day Novel had inadvertently also found its first fee-only financial planning client.
Your best interests are our best interests. That’s Novel.
Learn more about the Fee-Only Financial Planning Advantage.