How much does financial advice cost and how do you know whether you’re getting value for money? There are no neat and tidy answers, but read on for some guidance. But before you do, have a read over a prior post: Why financial advice is worth paying for.
How to know if you’re getting value for your money
It’s not easy to fork over money to someone who isn’t giving you a tangible outcome. You can judge a hair stylist by the cut they give you and your mechanic by whether your car is working. A financial advisor or planner? Not so easy to judge. What’s the measure you should use? What outcomes should you expect?
Financial advice isn’t the only service that has this problem: psychologists, acupuncturists, tutors, massage therapists and music teachers are all professionals providing a benefit that can be hard to measure. We pay for their expertise and we trust that they will deliver a valuable service, but how do you put a price on the value you’re getting?
There is an important difference between financial advice and getting a massage: your money is so personal. Yes, even more personal than taking off your clothes for a stranger. When you hire a financial advisor, planner or coach, you are often in deep with them. You don’t get the work done in a one-hour conversation. It can take several sessions and work in between. They learn a lot about you: how much money you have, how often you pay off your credit card, your shopping habits, your fears and insecurities, and often even the dynamics of your family relationships. This is hugely personal stuff. Also, this is more than a one-hour, $150, no strings attached commitment. Entering into a relationship with the person helping you with your money is a commitment – a time, money and emotional commitment.
How will you know whether you’re getting value for the fees you pay? The truth is, you can’t always know. The challenge with financial advice is that most people who seek out advice are doing it because they don’t know very much about money – and how can you know if you’re getting a good product if you don’t know what a good product looks like? A financial advisor will provide reports showing the performance of your investments, but how do you know whether this performance is good or bad relative to how everyone else is doing? A financial plan can look great on paper, but how do you know whether it includes everything you need to consider or whether the advice is sound?
There are no absolute answers to these questions – it’s different for every person - but here are a few ideas for measuring the value of the financial advice you are getting.
How it makes you feel: Good financial advice leaves you feeling good. You should be feeling some of all of the following emotions: confidence, relief, hope, empowerment, and levity. You should not be feeling wary, ignorant, confused, inferior or overwhelmed. Feeling good is worth paying for.
Tangible changes: Another way to measure value is by reflecting on the tangible changes you made as a result of the advice you got. This might include maximizing your RESP grant from the government, dividing your savings between a TFSA and
an RRSP, opening new savings accounts to compartmentalize your savings, and getting your retirement money out of a savings account and into the stock market. The actions you take are often simple once they are identified and laid out for you and are tangible results of good advice, coaching and guidance.
Increase in your net worth: The point of financial planning is to do more with your money. Tracking how your net worth is increasing over time is a very tangible and important way to know how you are doing. Use a simple spreadsheet, the notes function on your phone, or a notebook to update the value of your savings and other assets every six months. Not only does this give you a measurable outcome of your financial advice, it also feels really good to see your savings grow.
How much should you pay for financial advice?
First and foremost, you should only pay for what you need. Not everyone needs a full financial plan. Not everyone needs a complex portfolio of investments along with tax advice and estate planning. So find the right type of advisor who will offer you just what you need. Most “average” Canadians have basic needs, mainly around saving and investing.
Now about the costs. There are different types of people who can help you, various ways to pay for advice, and a wide range of fees. The fees outline here are not based on a comprehensive study of the Canadian market but I have done a fairly thorough review of advisors, planners and coaches. (If you are interested, you can see a long list of people in Canada offering advice along with their fees here.)
Financial advisors: A financial advisor’s main purpose is to manage your investments. For this, they usually charge a percentage of your assets. Because of this fee structure, many advisors won’t take on clients with less than $100,000 to invest (and many require much more than that). To put a number to it, a 1% fee is $1,000 a year for every $100,000 you invest and goes up as your wealth goes up. Commission-based advisors will put your money into mutual funds, and those funds often carry a fee of 2% per year or more. On $100,000, you’d be paying $2,000 a year. You can do the mental math on larger amounts of money.
Financial planners: Financial planners will put together a comprehensive financial plan which includes a savings plan, cash flow analysis, debt strategies, tax planning, estate planning, insurance recommendations, and an investment plan. Planners often charge a flat fee for a financial plan. In Canada, this often ranges from $2,000 to $5,000.
Financial coaches: A financial coach is an alternative to a financial planner or financial advisor. Coaches usually charge a flat fee, either for a specific service, a package of meetings, or per hour. Coaches tend of hone in on exactly what you need, rather than giving you a comprehensive financial plan, and in fact, many coaches don’t do complex planning like tax, estate and corporate planning. With a coach, you can pay for what you need. What do coaches charge? Most of the time, it’s less than a full financial plan, and because you decide (together) what to tackle, the engagement tends to be efficient and therefore cheaper than a full financial plan. The hourly rate for financial coaches tends to be $150-$300.
Personalized financial advice comes at a cost, and for good reason. Financial decisions are highly personal and everyone’s situation is unique. Find a coach, planner or advisor that you can trust and make sure they are upfront about their fees. Your future is worth the investment.