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Will The Fee Only Financial Planner Model Ever Catch On?

There is little doubt in my mind that hiring a Fee Only Financial Planner is in the best interest of the consumer.  Financial Planning is an occupation and every Financial Planner needs to get paid.  This is true for good planners, bad planners, honest planners and dishonest planners.  If they do not get paid they can not earn a living. The Financial Planners loyalties are going to lie with the person or company who pays them, because without a paycheque they have no job.

If they get paid a salary they are working for the company that pays that salary, the advice they give is going to involve the products and services of the company they work for.  If the planner gets paid on commission they are going to do their best to sell the products of the companies who pay them that commission.  After all if they do not sell you something they do not get paid anything.  If the Financial Planner is getting paid by you, then their loyalty is with you and providing you the advice they feel is in your best interest.  It is pretty clear that having a Financial Planner who is only working for you is better for you then having a Financial Planner who is being paid by a company to sell you something.

Despite this, very few people actually use a Fee Only Financial Planner and I do not see that changing anytime in the near future.  There has been so much advertising out there for so long misinforming investors that financial advice is “free” that it is very difficult for people to pay for it.  Mutual Fund fees are hidden from investors, and commercials advertise free financial reviews or free second opinions.  What these companies are really offering is a free sales pitch.  You bring in your investment statements and they tell you how much better off you would be, owning the investments they have to sell.  It is like getting a free automotive review from a car dealership when you are buying a used car.  They are going to recommend a car on their lot and they are going to tell you all of the positive features about the car.  But do you expect them to tell you if there is a mechanical issue or other negative aspect of the car?

To get unbiased advice you need to get it from someone who has no interest in selling you something and that is what Fee Only Financial Planners provide.  It would be like taking a used car to a mechanic before you buy it.  Because you are paying the mechanic and they do not benefit either way if you buy that particular car or not, they are going to give you an unbiased opinion on if that car is in good running condition.

The investment industry likes things the way they are now, many companies and many financial advisors/planners are making a lot of money with the current system so why would they want it to change.  I can tell you from experience that it is a much more difficult task to be a Fee Only Financial Planner and that on average Fee Only Planners do not make nearly as much income as their commission based counterparts.  The only way things will change is if either consumers demand a change, by moving there assets away from these companies, or if the government steps in and changes the laws that are currently in place.  The UK and Australia have both announced plans to make commission based investment sales illegal to protect consumers, but Canada does not seem to be moving in that direction any time soon.

Comments

  1. larry macdonald

    Not that I’m trying to defend commission-only advisors, but in trying to understand why their model persists, I wonder if it has something to do with the fact that in order to get the sale, they’ll showing clients how to save on their taxes, plan their estate, etc?

    • Ryan Rohloff

      Every Planner is different, but from my experience most commission based advisors do not do estate planning, and the only tax planning they do is to tell you to put money in a RRSP so you get a tax deduction (and they get a commission) Also many do not have the education or experience to cover these topics with any depth.
      It is far more likely to have a Fee-Only Financial Planner spend time on aspects of your financial life other then investment recomendations, because they, for the most part, don’t sell investment products.

  2. youngandthrifty

    I agree with you.

    I have been burned by FP’s because I didn’t know that they would get commissions from selling mutual funds.

    How is it unbiased information when they get commission for selling you something?

    How can you trust them, really?

    It’s like.. going to a doctor who will get you to have knee surgery when you don’t really need it just because he gets a cut.

    (okay maybe that’s not a good analogy, but you get the point)

  3. Ryan Rohloff

    @youngandthrifty
    How are you handling your financial planning and investment management now? Are you doing it on your own or did you find a fee-only advisor?

  4. Alex

    Can’t agree more Ryan. I think it comes from reacting to incentives and for commissioned advisers (planners, brokers, whoever) it’s all about the maximizing those commissions (through trades, by packing more assets, whatever brings most money). Just look at Canada’s average mutual fund fees – they simply don’t make sense. If only advisers were compensated on amount of time they spent on client’s portfolios or financial needs or even better, if they had bonuses aligned to customer satisfaction, like a lot of retailers do we would’ve had a lot more happy retirees.

  5. Alex Hung

    The myth regarding the -fee only finance planners now seems to be busted with this blog. I really appreciate the detailed explanation on how it is best to take suggestions from a non-commissioned financial expert, rather than choose someone who is more interested in his or his company’s benefits. Thanks for such a great suggestion on our financial advisors.

  6. Paul N

    Another thing I found interesting is when you go it alone and you think you find a good fund you want to invest in you cant. I fund two funds in the TD family using simple internet searches that looked really interesting to me. I called waterhouse and was promptly told I could not invest in those “series” funds, they are only for brokerage houses. If I wanted those funds I would have to ivest through a third party who would tack on their commision fees (higher MER).

    So I do the research, find the fund, call it in to make the purchase. So why do I have to pay someonr to do that for me? It’s a total rip-off. I told them these funds should then not seen by just anyone on the web, maybe password protected. It just seems every time I dig deeper into the world of investing it just gets dirtier. Another question I have is when do commissions from MER’s stop being paid to these do called “financial salesperson’s”, whoops I mean advisors? Do they get a commission as long as an individual holds the funds an advisor put’s them in?

    Where can I sign up for that deal?

  7. Rick Coyle

    Great points. The other side of the coin is, how big is the demand for fee only service? Some people prefer the idea of not paying up front and having their fees buried within their products. Their is sometimes a relutance to pay for fee services when they perceive they can get the advice for “free” or at least with no upfront cost from captive planners or commissioned based planners. And some of these planners are actually very good.

  8. David Goldstein

    The problem does not lie within the fee structure. It lies within the advice that is being received. Many of the comments noted above allude to the fact an investment proffesional was providing advice solely for the advisors benefit and not for the clients’. Finding a trusted Wealth Management Team would solve this problem. In some cases, a client may prefer commissioned based advisors because with the right advice, it is more cost efficient for the client. Our team offers both fee structures with a larger proportion geared towards our discretionary services with a flat annual fee.

    There are tons of articles written about how to find the right investment advisor, however, the propensity to take the advice is null or rare at best. An individual is inclined to choose an investment advisor solely based on referral or previous connection. My advice is shop around and compare referrals, skill, education, resources, services, customer service.

    The Sharp Wealth Management Team services affluent individuals within the GTA. Please follow this like to learn more about the team: http://www.sharp-wealthmanagement.com. My name is David Goldstein, business development consultant and I am more than happy to answer any questions that you may have.

  9. Kathy

    I think that people trust the big banks and insurance companies less than they used to but don’t know there are other options. The ones who come and find me are usually very proactive types or very worried about their future.
    I am fee only no commissions work for my clients not the shareholders of my employer
    Kathy at Eureka Investor Guidance

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