Fee-based financial planning isn't for everyone
Fee-based financial planning is the new darling of the wealth management industry. Rightfully so, it’s a bold new direction in an industry that has been traditionally dominated by commissioned salespeople. The concept is simple; a client hires a financial advisor and pays the advisor directly for their advice. Like any financial advisor the fee-based advisor may or may not recommend specific financial products and may or may not encourage his or her clients to invest in any number of industries. The key difference between the fee-based advisor and the traditional advisor is the method of compensation. Fee-based advisors charge a fee directly to their clients whereas traditional financial advisors receive a commission from mutual fund and insurance companies for placing their client’s money into their respective products.
Anyone in Canada can set up shop and claim to be a financial advisor
At first glance it appears obvious that the fee-based advisor would naturally be the more neutral party and provide the less biased advice. If there are no commissions at play then the fee-based advisor has no incentive to convince you to invest money in any particular fashion, nor buy an exuberant amount of life insurance if you truly do not need it. In fact, the fiduciary role that the advisor should be adopting is much more suited to the fee-based advisor than the commission-based advisor simply based on the nature of their compensation.
But does this mean that we should all be using fee-based advisors? At the risk of shooting myself in the foot (I provide my clients with fee-based advice) I would venture to say no, at least not yet. While I do believe the fee-based method can lead to a more objective relationship between the advisor and the client there are still several drawbacks to the fee-based approach:
Lack of implementation
For all of its benefits, pure fee-based advisors tend to be unlicensed. This means that once they plot out a financial plan you may be left on your own to implement the strategy. This is fine for tech-savvy do-it-yourself investors who don’t mind using discount online brokerages to make their stock trades but this is not so fine for a neurosurgeon or Bay St. lawyer who works 75 hours per week and doesn’t have the time to have supper with their children let alone spend hours in front of the computer making their own trades. If the advisor is not licensed then they can be limited in helping you implement the plan on an ongoing basis.
It seems like everyone in the financial industry (myself included) has some sort of alphabet soup following their name on their business card. There are literally dozens of different professional designations and qualifications that financial advisors can go by and to the layperson it can all be quite confusing. The public must understand that fee-based financial planning is NOT a regulated industry in the same manner as public accounting, the practice of law, or the selling of securities. Anyone in Canada can set up shop and claim to be a financial advisor.
The charging of a fee does not make a particular advisor any more or less qualified to provide financial advice. In fact, when dealing with a fee-based financial advisor it is important to ensure you are dealing with someone who is part of a legitimate professional organization; a lawyer, a licensed accountant, or someone holding a major financial designation. It is also advisable to ensure that the advisor carries liability insurance and can provide you with quality references, preferably long-term clients. Remember, the industry is not regulated so there is no central disciplinary committee that you can complain to if you have been provided faulty advice.
Fee-based financial advisory is not free — it costs you money. In many cases the advisor can plot out a plan that saves you a ton of money on trading, investment, and insurance costs but in the end someone needs to get paid. There is no guarantee that the fee-based advisor will save you money or provide better results than the commissioned advisor. If the fee-based advisor does their job correctly they should be able to help you cut costs (especially in Canada where investment management fees are among the highest in the developed world) but this in by no means guaranteed.
The bottom line is that while fee-based financial advisor is a step in the right direction it does not come without its faults. In the end, it is up to individual investors to seek out an advisor that is best suited to their own needs. In many cases the potential objectivity and unbiased advice provided by a fee-based financial planner can be worthwhile, but at other times the more traditional route is a better fit.
Article written by Fabio Campanella, CA, CFP, CIM
Originally appeared in Financial Post May 3, 2012