| Fee only Financial Planners still make up a very small | | | | invest in my RRSP? One answer clearly is in your |
| parentage of overall planners, but are growing in | | | | advisors best interest while it might not be so clear |
| popularity for good reason. Before the benefits of | | | | which is actually better for you. Similar conflicts arise |
| dealing with a fee only financial planner are discussed, | | | | with questions like: Should I borrow to invest? Should |
| here is a brief summary of the three main | | | | withdraw from my savings or take a loan to by a |
| compensation models for financial advisors. | | | | car? Should I take the commuted value of my |
| Commission Based Advisors: These advisors get | | | | pension and invest it, or leave the funds in the |
| compensated based on the products they sell, by the | | | | pension? |
| companies whose products they sell. | | | | 3. This fee only financial planner may cost you less. |
| Fee Based/Asset Based Advisors: These advisors | | | | Each situation is different and the fees charged by |
| charge the client directly for their services and most | | | | fee only and fee based advisors can very |
| often do not accept any payments from the | | | | significantly, so this will certainly not always be true. If |
| companies whose products they sell. Their fee is | | | | you have $50,000 to invest the commission based |
| based on a percentage of your assets under | | | | advisor is most likely to sell you an actively managed |
| management. | | | | mutual fund. These types of funds typically have a |
| Fee Only Advisors: These advisors charge the client | | | | management expense ratio (MER) of about 2.5% |
| directly for their services based on an hourly rate or | | | | which is the amount you will pay on an annual basis, |
| flat fee. They do not accept any payments from | | | | in this case $1250 per year. The fee based advisor |
| other companies and often will not directly manage | | | | will typically charge about 1.5% annually or $750 per |
| their client's investments. | | | | year, plus if the funds get invested into a mutual |
| I believe the fee only model is the best for the | | | | fund or ETF which is common then you will still pay a |
| client's interests and here are four reasons why. | | | | reduced MER of 0.25% - 1.5% depending on if an |
| 1. The fee only financial planner has no financial | | | | actively managed fund, index fund or ETF is used so |
| benefit to recommend one investment type over | | | | in total anywhere between $875-$1500 per year. The |
| another. | | | | fee only advisor will charge you an hourly rate for |
| One of the major issues that arise with commission | | | | their time, an average amount is about $150 per hour. |
| based advisors is that their own income depends on | | | | You could pay for up to four hours of the planners |
| what they sell you. Investments which charge higher | | | | time to review your situation and make |
| fees to you often pay a higher commission to the | | | | recommendation to you and the $600 bill would be |
| advisor. This is a significant conflict of interest since | | | | less then the fee based advisor charged. With the |
| the lower fee options are in your best interest but | | | | fee only planner you can take the recommendations |
| the higher commission product is in the advisors best | | | | and use a discount brokerage/direct investing |
| interest. Both the fee only and fee based models | | | | account and process the transactions yourself, |
| eliminate this conflict. | | | | mutual funds and ETFs will still charge a MER but it |
| 2. The fee only financial planner has no financial | | | | should only be between 0.25% and 1.15% for a total |
| benefit to the advice they give. | | | | cost of between $725-$1175. On average when |
| There are a number of situations where the advice | | | | looking at the numbers you will pay less with a fee |
| given by a commission or fee based advisor can | | | | only advisor. |
| have a financial benefit for them. Whether it is due | | | | 4. The fee only planner will give you more for the |
| to more commissions or higher fees based on more | | | | money you pay. |
| assets under management, these advisors benefit | | | | Since you are paying the fee only advisor by the |
| financially by encouraging you to put funds into your | | | | hour for advice you can expect to get more for |
| investment accounts. Not that encouraging savings is | | | | your money. You will normally get a written financial |
| a bad thing, but what happens when you go to your | | | | plan from the advisor not just a product |
| advisor and ask: Should pay down my mortgage or | | | | recommendation. |