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.
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.
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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.
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.
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.
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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.