How Is Your Financial Advisor Compensated?
Did you know that there are over 90,000 financial planners and advisors in Canada of various forms?
It is estimated that fewer than 200 of them are flat fee-only, or fee-for-service advisors1.
The typical financial advisor/financial planner is paid in 2 primary ways.
- Commissions from investment fund companies or banks for selling their mutual funds
- These funds carry much higher management expenses (MERs) than a typical low-cost ETF, which will end up covering the cost of the commission to the fund manager.
- Commissions from insurance companies for selling their policies or investment products (e.g. segregated funds or annuities)
- Percentage of assets under management (AUM)
- Range from 1-2% of your entire portfolio per year, depending on the financial advisor
- Robo-Advisors typically charge around 0.5% of your total portfolio.
The problem is that the typical financial planner/advisor is incentivized to benefit themselves, instead of their clients, in 2 ways:
- Sell products with high commissions instead of the best products for the client
- Retain you as a client under management, so that they can take a % of your assets each year for the “privilege” of working with them, possibly at the detriment of what is best for the client
Why do you need to pay an advisor a management fee every year for expensive products that aren’t best suited to you?
Why should you pay for a plan or advice that caters to the advisor and not you?
Ask yourself, if you work with an advisor for 30+ years, how many of those years did they earn their fee?
The Advantages of Working With A Fee-Only Financial Planner
These are the main benefits achieved from breaking up with your current advisor and moving to a fee-for-service financial planner:
- A fiduciary relationship, not a suitability standard which is what you get with most financial advisors.
- A plan tailored for you, not the advisor.
- Reduce your investment expenses and achieve your goals faster.
- Pay only for the services that you need, whether it be simple advice or a full financial plan.
- Pay only for services when you need them instead of paying expensive management fees every day.
- Be the fee-only planner’s top priority while working together, instead of being secondary to a client with higher AUM/a larger account like with a typical advisor.
- Access to a wide array of products and options, instead of only those that pay the highest commissions to the advisor.
Arguably, the most important advantage of fee-for-service financial planning is cost.
Here is a simple example of potential savings over a 30-year period from working with a fee-only financial planner.
Our Commitment to You
Since cost reduction is such a critical aspect of wealth-building, Novel is committed to acting in your best interests. We believe in this principle so deeply, that if working together wouldn’t leave you in a positive cost-benefit position, we won’t work with you. We will, however, point you in the direction that you need to go, and if required refer you to other options. At the end of the day, our goal of fee-only financial planning is to build a long-standing relationship with you where we can help you reach your goals in a cost-effective manner.
In addition to the cost benefits illustrated above, there are a number of qualitative factors that you achieve as well.
Fee-for-service financial advisors can make a difference for you both qualitatively and quantitatively. If you would like to discover how the Fee-Only Financial Planning Advantage could work for you, contact us here.