Paying for financial advice

"Price is what you pay. Value is what you get."

 

Warren Buffet

Understand how you are paying for your investment advice


There are few services in life that have made charging fees as murky as the investment advisor world. Fortunately, this is changing but you still need to pay attention to how you are paying for financial advice. There are several ways for an advisor to get paid: by charging you directly, by receiving sales commissions from financial services companies, or in some cases, through a salary.  When you are charged directly, it's obvious how much you are paying. When the advisor is receiving sales commissions though, it's less clear since you don't actually "write a cheque" to the advisor. Rather, you pay these commissions indirectly through the fees you are charged on the mutual funds the advisor has recommended to you. Fortunately, rules introduced a few years ago require your advisor to show you, at least once a year, how much you paid the advisor either directly or through mutual fund fees. Whatever the methodology, you need to know how much you are paying.

Ask yourself whether you are getting good value for that money

If you are paying for advice, you should be getting advice. If you are not getting regular calls or emails from your fee-based advisor, or if you are finding the advice to be watered-down, not personalized and/or generally lazy, it's time to look elsewhere.  

Determine what kind of advice you need and where to get it

 

You might be looking for advice on things like:

  • How much you need to save for retirement

  • How to invest the money in your RESP 

  • Whether you should pay down your mortgage or invest in an RRSP

  • How to choose between an RRSP and a TFSA

What kind of advice you get depends on what kind of advisor you are working with. A financial advisor usually focusses on your investment portfolio, although some offer additional advice as part of their service. A financial planner takes a broader perspective, looking at all angles of your financial life and usually doesn't manage your investment portfolio. Some people get advice from the person who works at their bank branch. The quality and amount of advice you receive in this channel will vary greatly, depending on who you are dealing with, but generally is quite narrow in scope. A more recent addition to the advice world is the financial coach, a role that fills the gap in advice channels, and generally can cover a lot of ground. 

What kind of advisor is best?

It depends. First and foremost, the quality of the relationship is mostly about the person you are working with, regardless of the title on their business card.

Some things to consider:

  • Financial advisors often charge a percent of your assets and as a result only work with people with a lot of money to invest.

  • Financial advisors might receive commissions, which could introduce a conflict of interest when recommending a mutual fund to you.

  • Financial planners are more often fee-only, charging by the hour or by project. This means they should be indifferent to how much money you have. 

  • Many financial planners don't sell products so don't receive commissions, reducing the risk of bias in their advice.

  • Financial coaches don't sell products and charge a flat or hourly fees, reducing bias.

  • You might find a financial coach is a good place to start, as they can help you figure out what you need.