Fee-Only Financial Planning: How do Most Canadians Pay Their Financial Advisors?

Today’s Globe and Mail sheds light on the industry of fee-only financial planning. Most Canadians are completely unfamiliar with the concept of hourly-rate financial planners, but as the Globe and Mail notes, a small shift is beginning developing within the financial consumer’s mindset.

How do Most Canadians Currently Pay for Financial Advice?

Most Canadians pay for financial advice in one of two ways: 

1. A commission on the dollar amount of investments being managed. Most often this is reflected as a percentage of a particular financial transaction. For instance, if John and Jane Smith invest $100,000, they would pay a commission of anywhere from about $1500 to $2500 for the service. Some investment companies may charge as high as 5%, or $5000, but that is getting increasingly rare. 
2. A percentage fee charged annually on the amount of money invested. Most often, this charge is hidden within a wide range of investment and/or mutual funds fees and charges that is simply deducted from the investment returns of the customer. For instance, if John and Jane Smith invest that $100,000 in a balanced mutual fund at the bank, they would most often pay about $2,000 to $2,500 per year in mutual fund fees. Now, if the bank actually showed those charges to the customer, there would be an outrage… so they simply hide them in the prospectus and reports. How do they do this? Let us imagine that John and Jane earn 5% on their investments valued at $100,000, or $5000. In order to pay their fees of 2% per year, the bank or financial institution would simply show them a net return of $3,000 or 3% (Their $5,000 actual investment return, minus 2%, or $2,000 in fees).

There is, however, a third, and much more transparent way that Canadians can pay for financial advice: 

3.  Hiring a fee-only financial consultant or planner. This method generally involves the individual financial consultant billing the customer an hourly rate for the advice that they give. For instance, if the advisor charges $75 per hour, and the customer seeks an hour of advice, the bill would be $75. Plain and simple, with no hidden charges or secret fees buried inside the prospectus or report. Obviously, this method would not earn as much for the planner or financial institution, so it is less common and little advertised.

Why don’t more Canadians use fee-only financial planners / consultants? It is easy for the population to be manipulated by the financial industry into thinking that they are not “paying” their advisors or planners when they do not get an obvious bill for services rendered. Of course, the truth is that they are often paying more than necessary. Perhaps it is time for a change!

Cheers, and Happy Planning and Investing!

Matthew.