While personal, your relationship with your financial planner is also very transactional. It’s important to understand how the fees associated with them work to grow your investments.
It can be difficult to choose a planner with the right qualifications and investment style, as well as understand their fees, says financial educator Kelley Keehn.
The basic rule is that no service or advice is free. “No one works for you for free when it comes to your money,” says M.me Keehn, founder of Money Wise Workplaces.
Typically, wealth management professionals are compensated in three ways, says Ian Tam, director of investment research at Morningstar Canada.
Commission-based advice is the oldest and most common of all, Tam says. Typically, when a consumer goes to a retail bank branch, they’re offered this service.
This comes from the world of mutual funds where an investor pays a bundled fee and a portion of that fee goes to an investment manager or fund company. In this case, the client is often investing in a bank product or fund.
“As an investor, you don’t have the option to opt out of these bundled fees,” Tam says.
Fee-for-service advisors, who charge based on asset size, generally work best for people with more assets and money to invest.
Mr. Tam says fee-based financial planning aligns an advisor’s motivation with that of the client.
“They’re not going to be motivated to do what we call shuffling your accounts, or buying and selling similar mutual funds, so they can get a commission,” he says.
On average, fee-for-service planners charge a flat rate of 1% and provide broad advice such as tax planning, estate planning, or even day-to-day financial planning during times of economic uncertainty.
Although rare, fee-for-service, advice-only financial planners are another way to seek help with your money. This type of planner reviews a client’s finances and makes recommendations. It’s then up to the client to implement those recommendations.
These advisors only provide advice and do not sell investment products, Tam says.
This is truly a decoupling between consulting and sales, which we believe is something very positive.
Ian Tam, Director of Investment Research at Morningstar Canada
Fees are typically charged at a flat rate, Tam adds.
Mme Keehn suggests taking stock of your assets and income before contacting a financial planner.
“The advisor or planner who charges based on assets won’t help you much. […] if you don’t have the money to benefit from it,” she says. This is especially true for people in their 20s and 30s.
Mme Keehn suggests that people who don’t have a lot of money opt for a fee-only planner.
Different for young people
For young people, Mme Keehn suggests building a good relationship with their bank and banking advisor.
“You’re going to need your bank a lot over the next couple of decades when you’re in your 20s,” she says. “You’re not going to accumulate a lot of wealth during that time because you’re buying cars and houses and paying off student loans.”
She adds that seeing an hourly or fee-only financial planner once every two to three years could be complementary to banking investments, and could answer questions about life insurance or tax-free savings and retirement accounts.
“For young people, you have to understand that as a supplement, the hourly-paid financial planner can be a godsend,” says Mr.me Keehn.
But she warns that there are certain signals to watch out for.
“You absolutely want to ask everything in writing: what are you going to do for me and how much will it cost?”
If a client encounters resistance when asking about fees, that’s a big red flag, because no experienced, qualified advisor would have a problem relaying a fee breakdown, she adds.
Mr Tam believes it is important to know the fee structure before signing up for financial services or it could rob you of more wealth and delay you from achieving your financial goals.
“Fees are the only consistent, academically proven way to reduce your wealth over time,” he says. “It’s not interest rates or market volatility. It’s fees.”