MoneySense Approved is Canada's only directory of financial advisors who surpass the standards of MoneySense, Canada's leading personal finance media brand. Start your search here.

The best financial advisor model for your needs

No one approach is better than the rest
BY PREET BANERJEE


If there’s one thing I hope you’ve gleaned from this series thus far as we start off this final entry, it’s this: The industry of financial advice is not uniform.

Bluntly answering the question of whether or not there is value in financial advice is futile, because there are so many variables to consider. Fundamentally, it comes down to understanding how and what you are paying—and what you are getting in exchange for that. Keep in mind, too, that while you can choose to pay commissions or fees, no one approach is better than the rest.

Below, I’ve put together an overview of the various advisor compensation models available to investors—explaining how they work, what they generally cost, what’s negotiable, and ultimately what you should expect in return. Combined with the funds you have available to invest and your own general understanding and comfort with investing strategies, all of this information should give you a better sense of where value lies for you.

Fee-for-service financial advisors:

This type of model, where you only pay by the hour or as a flat fee, generally doesn’t cover investment execution. Many advisors also note that investors start out enthusiastic about this type of model, but may have a hard time booking reviews or implementing plans. If investors attention to their finances falls by the wayside, their bottom lines could suffer.

SEARCH FOR ADVISORS NOW

Commissions or percentage of assets fees:

With either of these compensation models, advisors tend to earn more and more as your assets grow—even though all the heavy work was done earlier in the relationship. So as your portfolio gets bigger, your advisor should provide a tiering down of costs to reflect that.

In the percentage of assets model, standard fee schedules will tier down automatically as assets invested grow. For example, the first $250,000 might be charged 1.5%, while the next $750,000 might be charged 1.25%, with anything over $1 million being charged 1%. It’s further possible that there are different rates for different types of assets. For example, for up to $250,000 an advisor might set the fee for individual equities (direct stock holdings) at 1.5%, but charge 1% for F-class mutual funds (which are stripped of trailer commissions and sales charges) and 0.5% for individual fixed income holdings (direct bond holdings).

Note that it’s possible to negotiate from the standard schedules. If you’re near the advisor’s minimum, they may take a hard line on their set rates, but if your portfolio is substantial, there’s always room to negotiate.

In the commission model, it’s easy to reduce costs for individual stock and bond transactions to take advantage of scale, but somewhat harder to reduce costs for funds. Some fund companies offer a ‘high net-worth’ class of all their funds that come with lower costs, but if your portfolio holds funds from a company that doesn’t offer reduced cost options your hands are a bit more tied.

What about beginners?

Bear in mind that if you’re just starting out, commission-based advisors are effectively your only option. A notable exception might be a money coach who focuses on your overall financial behaviour and is generally compensated under a fee-for-service model for a short, intensive personal financial boot camp-style program. But with some programs ranging from $1,000 to $2,500, this type of model is a tough sell for lower-income households—and those with the means to pay may still balk at forking over a cheque as it’s a newer model still gaining awareness and attraction. While advisors using a percentage of assets model offer room for some negotiation and a high level of transparency, they’re not available to smaller investors. Many dealers won’t let their advisors take on these types of accounts unless there is at least $100,000 invested (in some cases it’s $250,000 as a minimum).

As you’ve seen by the examples provided above, you can receive just investment advice, just financial planning (without investment advice)—or both. Whatever you decide upon, just remember that the best advisors will also provide behavioural guidance on both investment and financial planning advice. For instance, preventing you from selling at the bottom of a market in your long-term portfolio has value. Getting you to save for the first time, or to save more money, has value. Gently nudging you to actually get your wills and powers of attorney in place and to implement an insurance portfolio has value as well.

I’ve met many investors who understand simple and complex investment strategies, but understanding strategies and executing them are different things. If you’re in the minority who can honestly manage your own portfolio, great. You may want to consider a fee-for-service advisor for your financial planning. But if you’re in the majority of people who need some help keeping an even keel with your investments, now you have a framework for understanding what you can get from an advisor—and what it might be worth to you.


Originally published at MoneySense.ca, where you’ll discover more helpful information about financial advisors and planning.