Why Advice-Only Planning?

When I told a co-worker at my previous place of employment that I was going to open a fee-for-service, advice-only financial planning practice, her immediate response was, “Why should anybody pay for that? A financial advisor will do that for free!”

Advice-Only Financial Planning: a small but growing niche

According to a study published by Advocis, there were about ninety-thousand financial advisors employed across Canada in 2012. Most of these advisors are licensed to sell life insurance, securities and/or mutual funds and are paid by commission. They may also be compensated based on a percentage of assets under management (AUM). Of the 90,000 advisors, only about 150 are fee-only planners.


While still very small, there is increasing interest and growth in the number of fee-for-service, advice-only financial planners. Why? Fundamentally, it is driven by a desire to offer a service free of conflicts, where the client’s best interest is the foundation for all recommendations. Even in the case of an advisor who is fully committed to his clients, if he is paid by commission, the structure of the business makes conflicts unavoidable. Certifying bodies like FP Canada acknowledge this reality by requiring candidates to pass exams in professional ethics. Practitioners are also guided to disclose potential conflicts of interest and to settle those conflicts in favour of the client.


Advice-only financial planners choose a different path. Instead of disclosing conflicts, we seek to eliminate them altogether. Since my source of income is from you, the client, then my goal is to provide the best service I can to you, regardless of whether a financial product is the appropriate solution.


To a Hammer, Everything Looks Like a Nail

There are plenty of good financial advisors out there who are paid by commission or other traditional means. Sticking with my previous example of mutual fund sales representatives, that would typically involve a trailing commission paid to the advisor by the mutual fund company. The trailing commission is an ongoing charge, intended to compensate the advisor for the advice provided, for as long as the client holds the mutual fund.


The problem arises when a financial advisor, who makes her money from selling mutual funds, is asked whether it might be better to invest a lump sum of money in a mutual fund or to pay down a mortgage or other loan. When the advisor works at a financial institution that offers both mutual funds and mortgages, a genuine conflict arises. What is in the best interest of the advisor? Paying down the mortgage means the advisor does not get a mutual fund sale; it also means that the mortgage principal is reduced, and less interest will be earned by the company for whom the advisor works. If the advisor recommends a mutual fund, is the client getting that recommendation because it is in his best interest, or is it in the best interest of the advisor because of the trailing commission income? If my income depends on my selling mutual funds, is it not unsurprising that I will recommend the purchase of a mutual fund?


Mutual Funds for Nothing and Advice for Free

Consider the following table:

Mutual Fund MER Average Yearly Growth Starting Balance Ending Balance Total Fees to Fund Company Total Fees to Advisor Firm
Global Neutral Balanced 2.13% 4.08% $50,000 $84,090 $19,588 $9,196


This is an example of a typical mutual fund. The MER, or Management Expense Ratio, refers to the costs of managing the fund. This is taken off the top of the fund’s growth. Before the MER the fund averaged 6.21% (2.13 + 4.08). Consider that each year, the mutual fund company received 2.13% of the value of the investment. After thirteen years, that fee totalled to almost $20,000. Of that figure, greater than $9,000 (a typical 1% of the 2.13% MER) would have been distributed to the advisor’s firm to compensate the advisor for selling the mutual fund in question to the investor.


The costs associated with owning a mutual fund are significant. The service you get from your advisor is most definitely not free. Having said that, the advisor may still be giving you good service that is worth paying for. Just don’t think that you are getting something for nothing. Better yet, contact Money Architect Financial Planning and know that you are paying for advice that is only in your best interest.


Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, accounting or legal decisions.



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