Most people don’t consider using a fee only financial planner when they’re ready to start investing.  The first step is usually to meet with a financial advisor at your bank.  The advisor assigned to you guides you through a basic risk assessment profile and then, based on your assessment, suggests the appropriate investments.

Commission Based Advisor

What many investors don’t understand is these advisors are paid commission to sell their own brand of mutual funds.  They may choose to offer you investments which pay the highest commissions.

Related: How Index Funds Compare To Equity Mutual Funds

Here’s an example.  A 30-something couple meets with an advisor from TD.  Since they have a long time horizon to invest, they’re looking to maximize growth.

The TD e-Series Canadian Index fund looks like a great option for this couple, due to the low management expense ratio (MER) of 0.33% and solid performance.  However, the advisor may recommend the TD Canadian Equity fund, which has a MER of 2.18% and underperforms the e-Series fund.

This situation can be avoided by using a fee only financial planner because they have fewer conflicts of interest than a strictly commission based advisor or mutual fund salesperson.  Instead, the clients’ needs can be placed ahead of their own.

Fee Only Financial Planner

So why aren’t fee only financial planners more popular?  For one thing, most people prefer not to pay direct fees up front, even if the advice ends up being cheaper in the long run.  Many fee only planners won’t take on clients with small portfolios – which rules out most young investors.

Related: Why Your Financial Plan Sucks

It’s also hard for some people to understand the difference between a financial plan and a retirement plan.  A retirement plan for a 65-year old widow can be much more complicated than a financial plan for a 30-something couple.

You might choose to work with a fee only planner, who is mainly compensated for advice and management of investments, but who can also help you find the right insurance or annuity products.

Jim Yih from Retire Happy Blog is a fee only financial planner.  He says there’s a wide range of fees, depending on your needs as a client.  “On a pure hourly basis, I think you can find advice for as low as $75 an hour to as high as $350 an hour.  A good plan can range from $1500 to $2500,” says Yih.

Related: Paying Lower Fees Directly Can Be Tough On Investors

Most people aren’t cut out to manage their own finances, so they’ll need the help of an advisor.  The key is to find one that suits your needs.  While commission based advisors get a bad rap because of the conflict of interest, not all advisors are created equal.

Most financial planners, whether they’re fee only or work on commission, want you to be dependent on them so you keep coming back.

Yih does fee only financial planning on the side because he enjoys helping people.  He calls himself unconventional because he prefers to teach people to manage their own money, as opposed to becoming dependent on his services.

Final Thoughts

A fee only financial planner is a worthwhile investment, especially as you get older and your income, investments and tax situation becomes more complex.

While it can be difficult to shell out a few thousand dollars for a financial plan, it’s not that bad when you consider how much money investors spend on recurring commissions and trailer fees over their lifetime.

Related: Do You Need Financial Advice?

To put it in perspective, paying 2.5% MER on a $100,000 portfolio will cost you $2,500 a year.  If an unbiased fee only financial planner can steer you into the right investments, they can save you thousands of dollars a year.

I don’t currently use a financial advisor, but I will consider using a fee only financial planner when I get older to help create my retirement plan.

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25 Comments

  1. Ken Faulkenberry - AAAMP Blog on August 20, 2012 at 7:02 am

    Your emphasis on MER fees is so important. Most people don’t realize how destructive high fees are to long term returns. If long term equity returns average 6.5% (real), and an investor pays 2.5% in fees, his long term return drops to 4%.

    I would like to add there are many internet services (such as the Arbor Investment Planner 🙂 ) which provide ongoing services to educate and guide investors.

    • Echo on August 21, 2012 at 6:43 am

      @Ken – you’re right, high MER can be destructive to your portfolio over time. Canadian investors pay some of the highest MER’s in the world.

    • fiscally fit on September 28, 2012 at 10:04 am

      lol so hypothetically…. would you pay a 5% MER if it mitigated the risk of your equity based fund by 50% (relative to the TSX) and increased your average return by 100% relative to the TSX? I know this fund doesn’t exist but my point is… the MER is not your problem… the amount of value (excess return, reduced std. deviation) you are getting is the issue…

      • TruthTeller on June 19, 2013 at 1:52 pm

        What? The MER *is* the problem given that the fund you mention is hypothetical.

        Lets talk real numbers. If you could realize a gross return of 14% year over year then a 2.5% MER is not a big deal.
        However, these days when you are happy with your portfolio returning 6%, gross a MER at 2.5% is exactly the issue.

        Of course if you could reduce volatility and increase your return the MER is not the problem.

        If the Queen had nuts she’d be the King. Lots of if’s there, bro.

  2. Ray @ Excess Return on August 20, 2012 at 7:04 am

    I think it is important to remember that the advisors role is not always to find you the best investments, their role is much broader.

    1. I think their primary role is education. If you are just looking for someone to just tell you what to buy and sell then you are not getting the true benefits of your advisor and might as well buy a mutual fund a few index funds. Your advisor should always tell you WHY he recommends something, how it fits in your portfolio and what to expect from it in up and down markets.

    2. Hand holding. Investors might not realize this, but this is an important duty of the advisor. Everyone can do good in an booming stock market, but what happens when things start to go south? Most individual investors will start to panic and change their investment strategy at the worst possible time. Your advisor can keep things calm and go through your ISP with you to see if you truly need to make changes, they wil ensure that no rational decisions are made and keep you on track.

    3. Fee based-Although you may find fee based advisors these are often not licensed to sell or recommend any investments, this is often due to the costs associated with getting licensed (at least in Ontario). These advisors can often help you build a plan, an investment statement policy (ISP) maybe your asset allocation, however you will still need to purchase your own investments. Also, I don’t think they really care much about your investable assets, as long as you can pay their fees.

    4. Asset based Advisors- These advisors charge you a percentage of your asset under management (AUM). The % often decreases as your assets increase. These are often professional portfolio managers who run discretionary funds. Basically they set up a detailed ISP with you and you give them full authority to buy and sell on your behalf. These advisors often need a minimum portfolio size of 500K and might not be accessible to smaller investors.

    Conclusion: An advisor can/should provide you with much more than just buy/sell recommendation. If you can’t afford a fee based or assed based advisor, consider a commission based advisor. If you are truly confident in your investing skills and have a decent understanding of modern portfolio theory than by all means manage your own portfolio, however if you are just starting out an advisor maybe a good idea.

    • Echo on August 21, 2012 at 6:48 am

      @Ray – Absolutely, it’s not just about the best investments. One of my points is that investors shy away from the up-front cost to use a fee only financial planner, yet they pay much more over time. That’s because their “advisor” is really a mutual fund sales person who is not focused on lowering your costs and finding the best investments for you.

      And are there many commission based advisors giving complete financial advice, like you describe above? I doubt most people are getting that kind of advice, but maybe it’s because they don’t know how to ask or what to ask for.

  3. Joe on August 20, 2012 at 8:57 am

    The majority of commissioned advisors are small-time, morally hazardous sales people who offer no added-value. Some – and they’re the exception but they exist – are fantastic. They get your taxes done each year (and actually help with tax planning; most commissioned people don’t even know how to properly tax plan), they hold dinners and learning events for clients that aren’t just sales seminars, etc. Those advisors are extremely few and far between.

    • Echo on August 21, 2012 at 6:50 am

      @Joe – It’s an amazing feeling when you discover there are actually good investments outside of your banks’ own branded mutual funds.

  4. Money Beagle on August 21, 2012 at 6:33 am

    Fee only planners have their upsides, but some things to consider: You have to have a net worth above a certain level for it to make sense (i.e. be cheaper) than a traditional planner. Many aren’t there yet. Also, fee-based planners are going to minimize their costs and will have a limited portfolio of investments that they will steer you towards. Some are great but others may be lower performing. Also, make sure everything is included in your fee. If there are other services you need, some could be charged separately and you should make sure you understand the total costs that match your needs.

    • Echo on August 21, 2012 at 6:53 am

      @Money Beagle – you’re right, there’s your total wealth to consider, as many fee only planners won’t take you on as a client unless you have $100k+

      And good point about asking if there are extra charges associated with other services. If you want a complete financial plan, it’s going to cost more.

      A fee only financial planner is probably not right for 20 and 30-somethings who are just getting started.

  5. Jude Boudreaux on August 21, 2012 at 10:15 pm

    I think the assertion that fee-only planners are not right for 20-30 somethings is completely incorrect. What better chance to meet with somebody who is unbiased, who can help review things in a comprehensive manner, help you learn how to communicate about money, and set you up on a path for success for years to come? What better group could fee-only planners serve?

    • Echo on August 21, 2012 at 10:32 pm

      @Jude – I agree that it would be great for young people to have access to unbiased advice right from the start, but the reality is most young people aren’t in the position to pay up-front for a plan, and they’re at a stage in their lives when change is the only constant variable.

      How many fee only planners take on young clients with little to no assets?

      • Jude Boudreaux on August 22, 2012 at 10:22 am

        Fee-only planning does not equal asset management. There are planners that will do hourly or flat-fee arrangements to provide help to clients regardless of their asset level.

        • Roger Wohlner on September 1, 2012 at 9:11 pm

          Here in the U.S. there are many excellent fee-only planners like Jude who work on an hourly basis with younger clients and also middle income clients who might not have the assets normally required to meet the minimums of many fee-only advisors. Take it from someone who has undone the handiwork of several commissioned “advisors” over the years, a young couple looking to get started on the right financial foot is far better off paying Jude’s fees than dealing with some sales type who is only concerned about generating sales commissions. Yes there are good, ethical commission based financial advisors, I just don’t seem to run into many of them.

      • Kathy Waite on September 30, 2012 at 8:15 pm

        We are fee for advice, no commission, have no minimum account size, as a Mom and financial planner I believe getting organised early is important and we often help the 20 somethings. My son and business partner is 24 and relates to them. Some pay per hour, some we just do for the goodwill or because their friends and family are clients.

  6. W at Off-Road Finance on August 23, 2012 at 8:36 am

    I don’t currently pay any advisory or management fees – I figure I can do at least as good a job on my own. But if I did feel I needed advice (perhaps for insurance or annuity products) I’d definitely go fee-only.

  7. fiscally fit on September 28, 2012 at 10:08 am

    lol again, pick the the advisor by value added! not by how they get paid! compensation is only 1 variable on the grocery list of choosing someone to partner with…

    • TruthTeller on June 19, 2013 at 1:57 pm

      Well we know what fiscally does for a living. Sells mutual funds. Lol…..I love the guys this who make a career of obfuscating and inveigling the issue at hand. You work for the guy that pays you. SIMPLE.

  8. Michael Zhuang on October 1, 2012 at 4:26 pm

    I am a fee-only financial advisor. But I must say the term “fee-only” is counter-productive for marketing one’s services.

    First of all, very few people know what it actually means. People get the first impression that you “only” care about “fee” and nothing else.

    Trying to explain to them that “fee-only” almost ensure “fiduciary” standard of services does not help since most people don’t know what “fiduciary” means.

    Nowadays, I just tell people that I am a commission-free financial advisor. I don’t take any commissions in connection to advice I give them. It’s much easier for people to understand the benefit of that.

  9. Michael Zhuang on October 1, 2012 at 4:39 pm

    About @Money Beagle and @Echo’s comments about fee-only planner take clients with certain asset levels therefore people should go for fee-based advisors, I beg to disagree.

    Conflict of interest is conflict of interest, it’s gonna hurt you regardless the size of your portfolio.

    Personally, I only take clients who have at least $500k or can invest at least $5000 per month. For those who don’t, I create a one page financial plan for them pro bono. This would set them in the right direction. I limit myself to about 5 pro bono works per month.

    For middle class folks, I suggest you go with a hourly fee only financial planner. There is a painful upfront cost, but the savings down the road really pay for itself.

  10. Rachelle on November 11, 2012 at 12:02 am

    A few years ago I spent weeks trying to track down a fee-only financial planner. My net worth was less than $50K, and I couldn’t get anywhere at all. A few posters have suggested it’s possible to simply pay an hourly fee but that hasn’t been my experience at all.

    Before and after my attempt to get unbiased financial advice, I got so much bad advice from bank-based advisors accountants, and insurance people that it would take a book to relay it all. The biggest problem was that I seriously overcontributed to my RRSP for many years and ended up owing the government over $10K. I was trying to be financially responsible and ironically ended up losing a lot of money.

    • Joan on February 25, 2013 at 12:15 pm

      This company has some pretty straight forward fee only services. Says no account minimum either.

      http://www.susanmallin.com

      • Rachelle on February 25, 2013 at 3:43 pm

        Thank you Joan, that looks very promising. Incredibly, I am STILL untangling my RRSP disaster . . .

  11. Brian Poncelet, CFP on December 23, 2012 at 2:32 pm

    Insurance products such as Life insurance, Disability, annuities are sold by insurance agents who get paid by insurance companies, which is a commission. The same is true for insurance products bought over the internet.

    So to get advice through Fee only for insurance in the end means one has to pay up front and then from an insurance agent unless of course the Fee only person is the insurance agent as well!

    To avoid commission you can buy coverage through CAA or some associations and the like, which means one will pay up to 50% more because they get a “group rate”.

    Brian

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