In response to the first post on the series on finding a financial advisor, Thicken My Wallet posed an interesting question – why would anyone want to search for potential financial advisors off the internet? – and further suggested that getting referrals from friends or colleagues might be a better option. There are a couple of reasons why I got most of the short-listed planners from the CFP website: First, I am interested in finding out how easy (or difficult) it is for an average person to find a competent planner and the sample set I ended up with would be a good cross-section of what’s available out there. Second, if I did hire a planner, it would be strictly on a fee-only basis. I believe that investment advice isn’t worth paying for but everyone I know deal with investment advisors, brokers or mutual fund representatives, not fee-only planners and pretty much get investment advice only.

Now, I was ready to talk to the short-listed candidates over the phone. I had a list of five planners: Ruth* from Scotia McLeod, Kevin* from Investors Group, Alan* from RBC Dominion, Todd* from Berkshire Securities and June* from an independent planning firm. Of these planners, the only disappointment was Kevin because the first question he asked me was the size of the account and the interview went downhill from there, centering mostly around the great services he offered (i.e. mutual funds from the “best” companies around. Apart from Investors Group funds, Kevin also sold funds from Fidelity, AGF etc.), rather than trying to figure out what I was looking for. He was reluctant to speak about fees but was quick to mention that I don’t pay anything directly and it took much prodding to get him to admit that he gets a sales commission but probably forgot the trailer fees. I mentioned to Kevin that I don’t believe in paying for active investing and would want to continue to hold my current ETFs, only to be interrupted by his question — “ETF? What’s that?” I probably should have thanked him for his time and hung up after the first question but I was fascinated by the train wreck the interview was turning out to be.

The rest of the advisors were straightforward with their answers and as far as I can tell were quite competent but only two (Ruth and June) offered fee-only planning. They were happy to mention exactly what their fees were – typically starting at 2% of portfolio for account sizes starting at $200K – and were impressive with their knowledge of the financial planning process. Almost everyone mentioned that they provide clients with an analysis of their insurance coverage and have a team to assist with wills and estate planning and tax planning. Next week, we’ll look at potential questions to ask prospective advisors.

* All names have been changed.

You can read Part 3 of this series here.

This article has 24 comments

  1. it would interesting if you could also tell us their educational backgrounds as well after you get to know them … every company has their own training program but i would like to see if there is a correlation between quality of school and quality of advice.

  2. Fascinating – I can’t believe he asked what an ETF was (I’m sure he knows what they are) – why wouldn’t he just hang up at that point?

  3. CC, you mention that most financial planning firms have a team to assist with wills, tax and estate planning.

    If a person wants in-depth tax planning advice, the best source for this advice is an accounting professional. Tax and estate planning can be relatively complicated areas where a lack of knowledge on the part of an advisor can lead to serious unintended consequences. Fortunately, many CFP’s also hold an accounting designation and are capable of providing these services.

    Full disclosure – I am a Chartered Accountant.

  4. Interesting findings (especially Kevin) but if you do what the average person does to find an investment advisor/financial planner etc. are you not statistically going to end up with average results?

    Your fee base advisors are most likely investment counsels and not IA or FP’s. Perhaps you should write a follow up on the types of advisors who hold CFP’s…

  5. Canadian Capitalist

    don: All the advisors have a Certified Financial Planner (CFP) designation. Now a CFP designation does not guarantee that an advisor is competent but the certification process is fairly rigorous. Everyone I spoke to had a college background.

    Mike: Maybe Kevin was feigning ignorance but at that point the conversation wasn’t going very well and he may have thought what the heck.

    Dillon: My understanding from the advisors I spoke to is that they will assist in creating tax efficient portfolios but the actual accounting & estate planning will be done by other professionals in their team. I don’t think any of them had an accounting certification (I’ll have to check this).

    Thicken: I disagree that this is how an average person looks for a financial planner. Everyone I know hired a planner after attending a free investment “seminar” and liking the presentation. I can’t think of many who short listed potential advisors and talked to each one on the phone first.

    I don’t quite understand your comment about fee-only advisors not being FPs. All the CFPs I talked to were financial planners and apart from wills and estates and taxes handle the other aspects of a full financial plan — insurance, retirement, cash flow and of course, investments.

  6. I will be writing my CFP exam in November. The pass rate is in the 50% area, it’s a tough exam from feedback I’ve had. Also, to get the CFP you need 2 years of experience in the area, my writing of the exam will coincide with this requirement. A CFP must also obtain continuing education credits each year, I’ve been taking tax courses and do taxes as a side business, anything too far out of my comfort zone I would refer to a CA. As CC stated, the “FP” in CFP is for financial planner.

  7. CC-sorry, my comment was with respect to people finding advisors from the internet. I read your passage as meaning the average person finds an advisor off the internet and not as attending seminars and whatnot.

  8. A ‘fee-only’ service should charge by the hour. You will pay a consultant from any other industry for his/her time and effort (and you will get a quote as to what that will be beforehand)- charging fees as a percentagae of the portfolio is unprofessional in my opinion, even though it is ‘accepted practice’ throughout the worldwide financial industry.

    I think if you can afford the time to research and interview potential FP’s, you should be able to handle your own finances if you rather spend the time doing some basic investment research. If you find yourself in the unlikely position of being both financially illiterate and independantly wealthy, with a large and complicated portfolio, services like tax and estate planning may be worthwhile. People still accumulating wealth should have ample time to further their financial education, it should be obvious that this is the sensible thing to do.

  9. Interesting subject. Even if the adviser does not work for a mutual fund company, can he or she can still recommend a mutual fund, depending on the clients goals, preferences and other conditions? I guess yes. Those fees just keep growing don’t they, 2% for the adviser and another 0.5-3 for mutual fund or ETF. I wish there a was adviser who looks after a group of people with similar goals and portfolio targets, so people can share fee. Would that make sense?

  10. The concept behind percentage based fee services for financial planners is the same as it is for real estate agents and class-action lawyers – that the planner is motivated to maximize your return in order to maximize their own fee. A percentage based fee aligns the planner’s remuneration with the client’s goal.

    In reality, however, percentage based compensation is used in many industries because clients are less likely to question this structure, making it more lucrative. A 2% fee on $200,000 is $4,000, and people may tend to accept this uncritically if they are told that 2% is the industry standard. If a financial planner instead sends the client an annual bill for 40 hours at $100 per hour, and increases their hourly rate by 6 or 7% every year (just as the percentage fee would increase each year as the asset base increases), clients would begin to question both the size of the rate increases and the amount of time actually spent.

    What tends to happen with percentage based compensation (for real estate agents, financial planners, or any other profession) is that the well-organized, straightforward, thoughtful “good” clients end up subsidizing the difficult, unorganized, complicated, pain in the butt “bad” clients, since the fee is based on a percentage of assets rather than on time spent.

  11. Canadian Capitalist

    NN: I cannot agree with you more that everyone needs to learn the basics of finances. It’s hardly rocket science and “I don’t have the time” etc. is just a cop out. Even if an investor hires an advisor, how would he ever be able to tell if the advisor is competent if he is clueless.

    Paul_Z: I don’t know if fees are as high as you make it out to be. AFAIK, 2.5% is the average for mutual funds and it includes advisor compensation.

    Dillon: For me, a fee-only planner is a no-brainer if the investor is willing to do some homework. Yes, the investor has to implement the portfolio and handle the book keeping but $1,500 on a $200K portfolio is 0.75%. Annual plan update meetings should cost much less.

  12. How will the FP increase returns for the client? By choosing equity mutual funds or ETF’s over bonds, cash and the like? By steering the client towards more risky assets such as hedge and commodity funds, or perhaps a larger allocation to emerging markets? If the fee structure is an incentive for the FP to maximise returns for the client, then it is by default also an incentive to increase risk – clearly not what the FP should be doing. (And clearly, it is not the FP that ‘enhance returns’, that is the asset manager’s arena, or the market’s, for ETF’s). Each clients risk tolerance is unique, and it is the FP’s duty to take that into account.The term ‘align with the clients goal’ is grossly misused in the financial industry. The only professional who can even begin to justify the use of percentage based fees is the asset manager – and instances where performance fees are abused abound, although not all investment houses are guilty.

    Dillon, I am afraid that using other examples of the inappropriate use of percentage based fees only strengthens the argument against them. You make a very good popint in your final paragraph – but overall I am not sure if you are for or against?

    Below is a table illustrating the effect of a 2% annual fee…..

    Return After Fee Decrease
    8.0% 5.8% 27.0%
    9.0% 6.8% 24.2%
    10.0% 7.8% 22.0%
    11.0% 8.8% 20.2%
    12.0% 9.8% 18.7%

    This should send shivers down anybody’s spine.

  13. I’ve also dealt with an advisor from Investors Group. She was my parents’ advisor, so when I first started and didn’t know anything at 18 I put my money in whatever she told me to. Now that I’ve graduated university and making real money, I started questioning the funds she put me in and asking about funds from other companies. Every time I asked about an index fund she would have a million reasons index funds are a bad idea. She eventually broke down and admitted that they’re a very good idea, but she doesn’t get paid a cent from anything I have invested in index funds.

    That’s most likely the reason he feigned ignorance, he realized he wasn’t going to make any money off of you.

  14. Personally i have an issue with trusting Financial Planners, Real Estate Agents and Dentists. They are expensive and nothing is guaranteed. Maybe it is just me, but it looks like in order to pick a good financial planner/adviser you almost have to be one.

  15. uhm, the table’s spacing suddenly vanished…

  16. I brought in around 1.5 million in assets under my management in my first year as an advisor and made a whopping $22k in fees. I don’t think I’m living high off the hog on the backs of my clients. Perhaps Paul_Z can tell me how I can make what he makes at his job without charging some sort of fees. Even at 2 mill. assets under management and a 1% trailer or fee only charge, I would be paid 70%(after expenses charged by firm I work through) of 20k in fees. Then I have my own expenses and tax. I don’t expect to get rich, just make the average wage everybody else gets. I’m getting really tired of all the advisor bashing. All I want to do is help my clients to the best of my abilities and make a living in the process.

  17. Sorry Venter, I did not mean to be mean or anything. It is not an easy job that’s for sure, it anything goes wrong you are the one always getting blamed. By the way I’m not employed in the financial industry, therefore probably have some limited knowledge about financial advisers compare to the most of the readers. Let me ask you a question, are those 22k in fees will be charged again the second year and the one after that if those assets stay with the company? It wasn’t clear the post.

  18. I’m making the assumption that all assets are in a FE load fund, if DSC or Low Load, trailers are 0.5% instead of 1% so cut the 22k in half. In bad markets m trailers will decrease as well, no matter how good the plan is, of course I benefit in up markets. Much of the 22k is generated from new business. LL or DSC is often used to rebate any fees clients are charged from DSC fees from previous advisors (I always rebate these fees).

  19. There seems to be some confusion about fee-only planning and fee-based investment management, implicitly in this discussion and in the population in general.

    A fee-only financial planner will prepared a comprehensive financial plan, covering such aspects as cash flow projections, debt management, tax planning and strategy, risk management, insurance needs, investment strategy and estate planning. The fee-only planner may or may not be licensed to sell investments. If he or she is not licensed, he or she cannot give advice about specific individual investments He or she can talk about asset allocation, costs, risk factors, but cannot tell you if you should buy or sell ABC stock or LMNOP mutual fund .If he or she is licensed, then specific investment advice can be part of the process.

    When the original poster talks about “Ruth” and “June” offering fee-only planning and then says they are charging an asset under management fee of 2%, the concept gets blurred. The fee here is for investment management, and not for fee-only comprehensive financial planning, although there may be an element of comprehensive planning offered for the fee. And it is an on-going fee, not a one-time fee. This a is fee-based advisory service, not fee-only planning.

    Disclosure: I am a financial advisor who is licensed, and who offers both fee-only financial planning and fee-based investment management services.

  20. Thanks for the explanation MoneyPower, it is pretty clear now.

  21. Canadian Capitalist

    MoneyPower: Thanks for your explanation. Reading the post again, I realize the wording is sloppy. Ruth and Jane were mainly fee-based planners but also did fee-only planning, which they mentioned were a very small part of their service. I’ll make this clear in the next post.

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