How should a financial planner be paid?

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor. Seeking advice on your portfolio?
User avatar
AltaRed
Veteran Contributor
Veteran Contributor
Posts: 33398
Joined: 05 Mar 2005 20:04
Location: Ogopogo Land

Re: How should a financial planner be paid?

Post by AltaRed »

Dan, thanks for taking the time to provide input, at the risk of 'being abused' by armchair quarterbacks. Hard core, interested and successful DIY types are hardly the norm (except maybe at FWF). I know a few people exactly like the types you mention. Highly successful but choose to farm out their portfolio management. They should never be belittled. I don't do my own plumbing or pool servicing any more either.
Imagefiniki, the Canadian financial wiki The go-to place to bolster your financial freedom
User avatar
Peculiar_Investor
Administrator
Administrator
Posts: 13269
Joined: 01 Mar 2005 14:52
Location: Calgary
Contact:

Re: How should a financial planner be paid?

Post by Peculiar_Investor »

DanH wrote:I'm not here to advertise. I've always contributed to this forum (and predecessors) based on my views and industry experiences. My 'peace of mind' comment did not come from the salespeople or marketers. It came from a client at the end of a meeting last year. We certainly mention this when speaking to prospective clients today but only because it came from a client. And it's the only reason I repeat it anywhere.
Dan, your contributions here are very helpful and provide an excellent view and insight from the other side of the investing world. In the high fee world it has become very easy to paint all financial planners with the same brush. Your clear presentation of the actual facts (and costs) are definitely a breathe of fresh air. Thanks for your contributions.
Imagefiniki, the Canadian financial wiki New editors wanted and welcomed, please help collaborate and improve the wiki.

Normal people… believe that if it ain’t broke, don’t fix it. Engineers believe that if it ain’t broke, it doesn’t have enough features yet. – Scott Adams
tedster
Veteran Contributor
Veteran Contributor
Posts: 8515
Joined: 27 Feb 2005 10:11
Location: Montreal

Re: How should a financial planner be paid?

Post by tedster »

DanH wrote
It came from a client at the end of a meeting last year. We certainly mention this when speaking to prospective clients today but only because it came from a client. And it's the only reason I repeat it anywhere
Actually I think this is very important. Others beside myself have expressed this concern. What happens when I can no longer do it myself. I "manage" my son's portfolio plus the RESPs and have not done too badly. However, I keep telling him that if I go bonkers or die, then he will have to take some sort of action. Now he is a briiliant scientist but cannot stand this activity. It is of course up to him, and I will not nag, but I am ready to let it go even though it is a source of enjoyment for me.

I turned my RRIF over so that I would not have to worry. It is bad enough that when I travel, I keep an eye on his (and the RESP especially). I feel responsible for them. If I had to monitor my RRIF as well I would not enjoy my holiday at all. :)
gaspr
Contributor
Contributor
Posts: 287
Joined: 10 Feb 2015 11:39

Re: How should a financial planner be paid?

Post by gaspr »

So if I understand correctly, "peace of mind" is perhaps the biggest value added by a planner? If that is true, I wonder how many clients are OK with being charged large sums of money for this. My doctor and my lawyer probably have given me more "peace of mind" than my former planner/mutual fund salesman ever gave me, without charging extra for it. And they don't charge me, or refuse their services based on my net worth.

I agree that some excellent financial services are available for those high net worth individuals who are willing to search them out and are willing to pay a large fee. But the majority of savers out there are swimming in shark infested waters.
DanH
Veteran Contributor
Veteran Contributor
Posts: 2174
Joined: 21 Feb 2005 14:25
Contact:

Re: How should a financial planner be paid?

Post by DanH »

AltaRed wrote:Dan, thanks for taking the time to provide input, at the risk of 'being abused' by armchair quarterbacks. Hard core, interested and successful DIY types are hardly the norm (except maybe at FWF). I know a few people exactly like the types you mention. Highly successful but choose to farm out their portfolio management. They should never be belittled. I don't do my own plumbing or pool servicing any more either.
Thank you. It's the same evolution for me too. Though I do more small plumbing jobs around the house than I used to; there are some things I don't have time for (and can't do well). I end up paying more - but that's so I can spend my time more productively at work and with my family.
Peculiar_Investor wrote:Dan, your contributions here are very helpful and provide an excellent view and insight from the other side of the investing world. In the high fee world it has become very easy to paint all financial planners with the same brush. Your clear presentation of the actual facts (and costs) are definitely a breathe of fresh air. Thanks for your contributions.
Thanks PI - and you're welcome; even though I don't contribute here as frequently as I once did.
tedster wrote:DanH wrote
It came from a client at the end of a meeting last year. We certainly mention this when speaking to prospective clients today but only because it came from a client. And it's the only reason I repeat it anywhere
Actually I think this is very important. Others beside myself have expressed this concern. What happens when I can no longer do it myself.
Even though I hopefully have 30+ years before I need to worry about this it's a thought I had a couple of years ago. But then we got to the point where it made sense to move all of our household investments to our firm. It's not the same as fully delegating to a third part (since I am an investment decision-maker in the firm) but I'm happier not having to tend to my own account. And it takes care of my continuity concern in my absence.
tedster wrote:I "manage" my son's portfolio plus the RESPs and have not done too badly. However, I keep telling him that if I go bonkers or die, then he will have to take some sort of action. Now he is a briiliant scientist but cannot stand this activity. It is of course up to him, and I will not nag, but I am ready to let it go even though it is a source of enjoyment for me.
I don't know how you have the RESP invested but a simple way is to use a balanced fund combined with a money market or high interest account to deal with shorter-term needs.
User avatar
Bylo Selhi
Veteran Contributor
Veteran Contributor
Posts: 29494
Joined: 16 Feb 2005 10:36
Location: Waterloo, ON
Contact:

Re: How should a financial planner be paid?

Post by Bylo Selhi »

DanH wrote:
Peculiar_Investor wrote:Dan, your contributions here are very helpful and provide an excellent view and insight from the other side of the investing world... Thanks for your contributions.
Thanks PI - and you're welcome; even though I don't contribute here as frequently as I once did.
+1 to P_I's kudos along with our encouragement to post more often.
Sedulously eschew obfuscatory hyperverbosity and prolixity.
Flaccidsteele
Veteran Contributor
Veteran Contributor
Posts: 4523
Joined: 06 Mar 2014 12:52
Location: Retired Gen Xer somewhere on the planet earth

Re: How should a financial planner be paid?

Post by Flaccidsteele »

Peculiar_Investor wrote:Dan, your contributions here are very helpful and provide an excellent view and insight from the other side of the investing world...Your clear presentation of the actual facts (and costs) are definitely a breathe of fresh air. Thanks for your contributions.
AltaRed wrote:Dan, thanks for taking the time to provide input, at the risk of 'being abused' by armchair quarterbacks.
+1 completely agree with both AR and PI.

Thank you Dan for your contributions. Personally I also enjoy reading your posts. :thumbsup:
DanH wrote:This one person I mentioned is representative of clients at our firm. (This guy never became a client in the end; as far as I know still with the same advisors he had a few years ago.) But we have a firm full of clients like this. The ages vary but most are very smart, savvy, successful entrepreneurs.
I apologize since I wasn't clear. I wasn't referring to what was (or wasn't) representative for your client base or your firm's client base.

My assumption was that this "busy 30-something multi-millionaire entrepreneur" is not representative of individuals in society seeking financial advice.
DanH wrote:It's easy to discard my example as a skewed anecdote.
My apologies. Just for my own understanding, how was the example of a "busy 30-something multi-millionaire entrepreneur" not a skewed anecdote?
DanH wrote:Our clients are not average Canadian investors.
I appreciate the acknowledgement that your clients are not "average Canadian investors" so thanks for that.

I maintain that charging the "average Canadian investor" a fee based on % of AUM is a rip off. One of the largest in a person's lifetime.
DanH wrote:But nor are they trotted out to battle some objection. These are the people our firm sits down with every day and they don't fit into the two aforementioned categories.
My apologies. Just for my clarification, if the example of the "busy 30-something multi-millionaire entrepreneur" wasn't used to battle the objection against charging a fee based on % of AUM, what was the intent of using this individual as your example?
DanH wrote:I'm not here to advertise. I've always contributed to this forum (and predecessors) based on my views and industry experiences.
I apologize if it felt like I was accusing you of advertising. That was never my intent. I'm sorry if it came across as such.

Furthermore I'm hoping that all forum members are contributing based on their own views and experience. It makes for a richer and more educational experience for everyone.
DanH wrote:My 'peace of mind' comment did not come from the salespeople or marketers. It came from a client at the end of a meeting last year.
My intent was not to question your source (salespeople, marketers, or otherwise).

Again apologies if it came across as such. My intent was to show that one person's "peace of mind" is another person's "hand holding". They're the same idea; just different perspectives.
DanH wrote:We certainly mention this when speaking to prospective clients today but only because it came from a client. And it's the only reason I repeat it anywhere.
I also agree with entrepreneurs who repeat compliments from clients. Every single firm that I worked in the past did this. They had everybody in the company repeat positive client comments.

It just coincidentally makes for a far more effective promotion of a selling position. And also works well as testimonials and on ad copy. Coincidentally.

Again, thanks for the response and perspective. Please post more in the future. We all benefit.
tedster
Veteran Contributor
Veteran Contributor
Posts: 8515
Joined: 27 Feb 2005 10:11
Location: Montreal

Re: How should a financial planner be paid?

Post by tedster »

DanH wrote
I don't know how you have the RESP invested but a simple way is to use a balanced fund combined with a money market or high interest account to deal with shorter-term needs.
Thanks for this. I have made a note. Generally speaking I have the RESP in Cdn dividend paying stocks and US stocks that I consider extremely stable. I get ideas from the appropriate threads in FWF and from time to time from the people running the RRIF. So far my grand daughter is in her second year at university and has drawn it all from the RESP more than it was when it came to me in 2008. So I have been lucky. If it continues, it should support her through graduate school.
DanH
Veteran Contributor
Veteran Contributor
Posts: 2174
Joined: 21 Feb 2005 14:25
Contact:

Re: How should a financial planner be paid?

Post by DanH »

gaspr wrote:So if I understand correctly, "peace of mind" is perhaps the biggest value added by a planner? If that is true, I wonder how many clients are OK with being charged large sums of money for this.
First "peace of mind" was one client's feeling of relief of sorts in response to the services we provide. In other words, there's a lot behind that but POM was the client's feedback. As for whether that's worth the dollars paid, that will vary by individual. We show fees paid every quarter - reporting over a variety of time periods. But one staunch DIY investor I'm thinking of has contacted me a few times over the past ten years. He's super smart and is so fee-sensitive that he prefers to buy index constituents directly rather than pay ETF fees. So when he approached me to ask what it would cost to engage our services, he didn't begrudge us the fee (which is competitive) but he couldn't bring himself to do more than inquire and have a chat (which I was happy to do since he's a nice guy).

In other words, it's not everybody's cup of tea and many are not prepared to pay what we (or others) charge.
gaspr wrote:My doctor and my lawyer probably have given me more "peace of mind" than my former planner/mutual fund salesman ever gave me, without charging extra for it. And they don't charge me, or refuse their services based on my net worth.
I don't know what you consider "extra" but we have a fee schedule and clients know it before they invest and periodically after they invest. Even in between review meetings they can see all fees on their statements every month. It's certainly a different model since the government doesn't pay us and we don't charge hourly fees. But I don't consider it "extra". We provide services; people know up front what it will cost; and they either choose to engage us or not.
Flaccidsteele wrote:+1 completely agree with both AR and PI.

Thank you Dan for your contributions. Personally I also enjoy reading your posts. :thumbsup:
Thank you.
Flaccidsteele wrote: I apologize since I wasn't clear. I wasn't referring to what was (or wasn't) representative for your client base or your firm's client base.

My assumption was that this "busy 30-something multi-millionaire entrepreneur" is not representative of individuals in society seeking financial advice.
I agree then - certainly not representative of the general public or even the broad investing public.
Flaccidsteele wrote:My apologies. Just for my own understanding, how was the example of a "busy 30-something multi-millionaire entrepreneur" not a skewed anecdote?
I thought this was clarified above. It wasn't an isolated case or a one-off situation. Skewed vis-a-vis the general population? Yes. Skewed in our professional experience? No.
Flaccidsteele wrote:I appreciate the acknowledgement that your clients are not "average Canadian investors" so thanks for that.

My apologies. Just for my clarification, if the example of the "busy 30-something multi-millionaire entrepreneur" wasn't used to battle the objection against charging arguably outrageous fee based on % of AUM, what was the intent of using this example?
In this post...
OptsyEagle wrote:It is my opinion, that financial advisors exist for two specific customers. The first is the customer that finds all financial mumbo jumbo boring and difficult to understand and whose interests lie in other topics, and the 2nd area is where the customer does not feel confident investing, what they consider a very large amount of money. Sometimes those are the same customer.
Since that was pretty specific, I simply suggested that there is a third category (maybe more). I relayed the entrepreneur story because it's our typical client and because the notion of a wealthy, confident, smart and successful entrepreneur delegating investment management contrasts sharply with the notion of delegating investment decisions because of a lack of knowledge or confidence.

I didn't see anything in Optsy's post to object to.
Flaccidsteele wrote:I apologize if it felt like I was accusing you of advertising. That was never my intent. I'm sorry if it came across as such.
Your reference to peace of mind making good ad copy is what triggered that. Apology accepted.
Flaccidsteele wrote:Again apologies if it came across as such. My intent was to show that one person's "peace of mind" is another person's "hand holding". They're the same idea; just different perspectives.
The reason I mentioned it is that 'hand holding' is what a lot of advisors (try to) do. Whatever the client's feeling about the services received - peace of mind or otherwise - is the outcome or result of the advisor's activity. So when a real life client - who is paying a handsome fee - tells you that without prompting it's something you want to repeat. It sends us a message that we're doing the right things. And I read of similar client stories in the advisor publications I get each month.
Flaccidsteele wrote:Again, thanks for the response and perspective. Please post more in the future. We all benefit.
Bylo Selhi wrote:+1 to P_I's kudos along with our encouragement to post more often.
Thanks guys. Looks like I'm already posting more often ;)
Last edited by DanH on 15 Apr 2016 15:29, edited 1 time in total.
DanH
Veteran Contributor
Veteran Contributor
Posts: 2174
Joined: 21 Feb 2005 14:25
Contact:

Re: How should a financial planner be paid?

Post by DanH »

tedster wrote:So far my grand daughter is in her second year at university and has drawn it all from the RESP more than it was when it came to me in 2008. So I have been lucky. If it continues, it should support her through graduate school.
I think you should keep running that RESP! :thumbsup:
tedster
Veteran Contributor
Veteran Contributor
Posts: 8515
Joined: 27 Feb 2005 10:11
Location: Montreal

Re: How should a financial planner be paid?

Post by tedster »

DanH wrote
I think you should keep running that RESP! :thumbsup:
Thank you. I have been lucky. Of course, as they say, any boat will float upwards in a rising tide. :)
Flaccidsteele
Veteran Contributor
Veteran Contributor
Posts: 4523
Joined: 06 Mar 2014 12:52
Location: Retired Gen Xer somewhere on the planet earth

Re: How should a financial planner be paid?

Post by Flaccidsteele »

OptsyEagle wrote:It is my opinion, that financial advisors exist for two specific customers. The first is the customer that finds all financial mumbo jumbo boring and difficult to understand and whose interests lie in other topics, and the 2nd area is where the customer does not feel confident investing, what they consider a very large amount of money. Sometimes those are the same customer.
DanH wrote:Since that was pretty specific, I simply suggested that there is a third category (maybe more). I relayed the entrepreneur story because it's our typical client and because the notion of a wealthy, confident, smart and successful entrepreneur delegating investment management contrasts sharply with the notion of delegating investment decisions because of a lack of knowledge or confidence.
I understand now. We classified the "busy 30-something multi-millionaire entrepreneur" differently.

You suggested a third category. But I would have lumped this individual in being an amalgam of the characteristics that OptsyEagle mentioned including: finds all financial mumbo jumbo boring, whose interests lie in other topics and perhaps even does not feel confident investing (at least they do not feel confident based either on 1) knowledge level or 2) amount of time available to dedicate to it).
Flaccidsteele wrote:Again apologies if it came across as such. My intent was to show that one person's "peace of mind" is another person's "hand holding". They're the same idea; just different perspectives.
DanH wrote:The reason I mentioned it is that 'hand holding' is what a lot of advisors (try to) do. Whatever the client's feeling about the services received - peace of mind or otherwise - is the outcome or result of the advisor's activity.


I agree. Different perspectives. The outcome or result of the advisor's activity shapes the perspective. Sometimes called "peace of mind", and sometimes called something else.
DanH wrote:So when a real life client - who is paying a handsome fee - tells you that without prompting it's something you want to repeat. It sends us a message that we're doing the right things.

It makes sense that a client who is "paying a handsome fee" has a "peace of mind" perspective. My past employers had clients who paid huge amounts of money and only had praise for the company. That makes sense, otherwise they wouldn't be happy paying.

It would be odd if a client was dissatisfied and wanted to terminate the relationship, but still had the same "peace of mind" perspective. That would be unusual.
DanH wrote:And I read of similar client stories in the advisor publications I get each month.
I'm not sure there is similar desire from advisor publications to root out and publish the comments of dissatisfied clients who have gotten rid of their advisors or advisor firms. It's not that these clients don't exist either. There must be some reason that "peace of mind" testimonials are well represented.
DanH wrote:Thank you. It's the same evolution for me too. Though I do more small plumbing jobs around the house than I used to; there are some things I don't have time for (and can't do well). I end up paying more - but that's so I can spend my time more productively at work and with my family.
Fortunately (for me anyway; and perhaps for others?) many costs are not tied to a % of asset value in perpetuity (or for long as an asset is placed under the control a vendor).

Thanks again for your perspective. I appreciate it.

As an aside, and only speaking for myself,

1) I believe that charging % AUM hurts financially more than it helps for the average Canadian. And the average Canadian falls into the categories defined by OptsyEagle so they don't know any better.

2) I agree that charging an hourly rate for a financial advisor is unlikely to be popular for anyone outside of those who already understand investing.

3) Being a financial advisor is one of the best professions. Getting older is seen as getting better, the compensation compounds, the work-life balance is solid. I would be happy if my child chose to excel in this area.

4) I do not believe that financial advisors, now that they have had a long profitable taste of charging fees based on % of AUM would have any interest whatsoever, in moving to another (likely lessor) compensation scheme. There may (or may not) be more disclosure, but nothing will fundamentally change even after I'm long dead.

In short, it is what it is. Everyone needs to fend for themselves. Learn how to invest or pay through the nose.
DanH
Veteran Contributor
Veteran Contributor
Posts: 2174
Joined: 21 Feb 2005 14:25
Contact:

Re: How should a financial planner be paid?

Post by DanH »

Flaccidsteele wrote:1) I believe that charging % AUM hurts financially more than it helps for the average Canadian. And the average Canadian falls into the categories defined by OptsyEagle so they don't know any better.
Those average Canadians are the ones that most need help in my view. I've seen it first hand when I speak with investors across Canada; and when worked for a dealer that catered to average DIY investors. They held lots of funds - many of them expensive - tinkered with their portfolios too often and let macro economic headlines influence their decisions far too often. My observations are supported by my first hand research measuring returns experienced by mutual fund investors - and more formal academic research by the likes of Barber and O'dean.
Flaccidsteele wrote:2) I agree that charging an hourly rate for a financial advisor is unlikely to be popular for anyone outside of those who already understand investing.
It is popular enough. During the six years that I offered investment advice to individuals and charged an hourly fee it was more than popular enough for me to make a business out of. But I wanted to do other consulting work too so I was turning people away. There were some that were definitely drawn to the fee structure. This is in part because this option didn't exist back then for investment advice. And it's almost non-existent today. Lots of fee-for-service planners but it's extremely rare to find someone who is licensed to give investment advice and charges for that advice by the hour.

The last time I made that comment publicly (on Twitter) an advisor replied to me saying that she in fact fits this description. When I inquired with her more privately I found out that she is a licensed salesperson through a broker (and hence can give individualized advice) and offered said advice to people who paid an hourly fee. I didn't flesh out the whole business - i.e. does she also receive commissions on the investment recommendations; will the dealer execute and administer a whole portfolio of investments that pay no commissions; etc - but she claimed to be an exception.

The reason it's so rare (and I stopped the practice) is because the industry is not set up in a way to make this a feasible business model. It's a feasible model for planning work - though that's a challenge too - but not for investment management. I won't repeat why here...I've posted elsewhere on FWF at great length about the challenges of running an investment counsel firm on an hourly fee basis. The only way it might work is using a retainer model with a minimum annual fee. Otherwise, it's a non-starter.
Flaccidsteele wrote:3) Being a financial advisor is one of the best professions. Getting older is seen as getting better, the compensation compounds, the work-life balance is solid. I would be happy if my child chose to excel in this area.
Since I didn't make much money for many years I'm glad I chose a career that values experience. I plan to work for as long as I can - though fewer hours starting in 10-12 years. But I have no desire to ever walk away from this industry. And it's not because of the compounding income. This is often talked about without considering the front end of that life cycle.

Yes this business has some scalability. And yes there is a certain amount of operating leverage at play. But it takes a very significant amount of capital to build and manage this kind of business - and do it the right way. I don't recall if this is true but a money manager once told me that it took Capital Group - the massive U.S. fund company - something like 20 years before they were profitable. The operating leverage is great if you can get to a certain scale. But it takes a lot of capital, a lot of sacrifice and a lot of time, patience and persistence to get to that point because fixed costs are very significant.

But I am talking about building a business - not a practice. For an individual advisor to sign up with a firm; bring existing (or attract new) clients; and make a living that way (i.e. under a sponsoring firm) the economics are very different and the path to profitability is much shorter.
Flaccidsteele wrote:4) I do not believe that financial advisors, now that they have had a long profitable taste of charging fees based on % of AUM would have any interest whatsoever, in moving to another (likely lessor) compensation scheme. There may (or may not) be more disclosure, but nothing will fundamentally change even after I'm long dead.
If the government decided that it wanted financial advice providers to charge hourly fees, they would have to completely overhaul the rules and regulations and the entire industry framework. So you're right, that's not going to happen in my lifetime. For a bit on how the last big regulatory change disregarded the hourly fee model, have a read of my 2007 submission to regulators.
User avatar
kcowan
Veteran Contributor
Veteran Contributor
Posts: 16033
Joined: 18 Apr 2006 20:33
Location: Pacific latitude 20/49

Re: How should a financial planner be paid?

Post by kcowan »

I have a friend who just started in this business 4 years ago. He grew the business in Vancouver and has since branched out to Edmonton and Calgary. Even his wife has joined him. He figures 10 years total and he can retire. There is no question that it remains a lucrative segment.
For the fun of it...Keith
twa2w
Veteran Contributor
Veteran Contributor
Posts: 2054
Joined: 22 Feb 2005 13:08

Re: How should a financial planner be paid?

Post by twa2w »

kcowan wrote:I have a friend who just started in this business 4 years ago. He grew the business in Vancouver and has since branched out to Edmonton and Calgary. Even his wife has joined him. He figures 10 years total and he can retire. There is no question that it remains a lucrative segment.
True, it can be very lucrative but it chews up and spits out a lot of people in the process. Better than 90% of new advisors don't last 3 years. It is very much a sales job and it helps to have a big network with lots of well off people. Some people seem to have a natural fit for it and do very well - the ones that don't do well on the conduct and practice exam (ethics) is the saying in the industry. :D

The general expression is. ' you have to work like no one else will for the first 5 years so you can live the rest of your life like no one else can'. And there is some truth to that. Although the 80/20 rule still applies.
DanH
Veteran Contributor
Veteran Contributor
Posts: 2174
Joined: 21 Feb 2005 14:25
Contact:

Re: How should a financial planner be paid?

Post by DanH »

kcowan - if your friend is doing so well that from 0 to 10 years he can retire I'm going to say he's quite a salesperson - or he is working with a very sales oriented person. After 22 years in this business it seems as though there are two very broad types of advisory firms. Those that hit the ground running to bring in assets/clients and rarely if ever formally build out an infrastructure. And those that spend/invest a lot of time building out the operational/compliance infrastructure before taking dollar one from any client.

Those that fall into the first group might say that they have their dealer's infrastructure to lean on - which is why they give up a big % of gross revenue to the dealer. But you'd be surprised at the policies and procedures that would be needed (not by law) at the individual advisor level to run a truly professional practice.

twa2w is right of course. Many years ago I heard a stat that only about 1/4 of new 'advisors' survived the first leg of RBC DS' training program. It is very sales oriented. And you need those people in a firm. We have a few - and it won't surprise those who know me that I'm not one of them. But it's important to have a diverse skill set in a firm - in part to keep balance internally.
Last edited by DanH on 17 Apr 2016 17:16, edited 1 time in total.
Flaccidsteele
Veteran Contributor
Veteran Contributor
Posts: 4523
Joined: 06 Mar 2014 12:52
Location: Retired Gen Xer somewhere on the planet earth

Re: How should a financial planner be paid?

Post by Flaccidsteele »

DanH wrote:Those average Canadians are the ones that most need help in my view.
I agree.

I just don't agree that charging them a fee based on % AUM helps them.
DanH wrote:Lots of fee-for-service planners but it's extremely rare to find someone who is licensed to give investment advice and charges for that advice by the hour.
I agree.

I just don't agree that charging a fee based on % AUM is the solution.
DanH wrote:The reason it's so rare (and I stopped the practice) is because the industry is not set up in a way to make this a feasible business model.
I agree.
DanH wrote:But I have no desire to ever walk away from this industry.
I wouldn't either.
DanH wrote:And it's not because of the compounding income.
The compounding income is an incentive.
DanH wrote:Yes this business has some scalability. And yes there is a certain amount of operating leverage at play. But it takes a very significant amount of capital to build and manage this kind of business - and do it the right way. I don't recall if this is true but a money manager once told me that it took Capital Group - the massive U.S. fund company - something like 20 years before they were profitable. The operating leverage is great if you can get to a certain scale. But it takes a lot of capital, a lot of sacrifice and a lot of time, patience and persistence to get to that point because fixed costs are very significant.

But I am talking about building a business - not a practice. For an individual advisor to sign up with a firm; bring existing (or attract new) clients; and make a living that way (i.e. under a sponsoring firm) the economics are very different and the path to profitability is much shorter.
I understand.
DanH wrote:If the government decided that it wanted financial advice providers to charge hourly fees, they would have to completely overhaul the rules and regulations and the entire industry framework. So you're right, that's not going to happen in my lifetime. For a bit on how the last big regulatory change disregarded the hourly fee model, have a read of my 2007 submission to regulators.
I understand.

Fees based on % of AUM will be impossible to change.

That's why I mentioned that, it is what it is, learn how to invest or just bend over.

OT: re: salesperson. Anyone that has direct contact with the individual who controls the purse strings is a salesperson. How much the client keeps paying determines how good a salesperson.

OT2: I'm curious how the "busy 30-something multi-millionaire entrepreneur" charge customers?
DanH
Veteran Contributor
Veteran Contributor
Posts: 2174
Joined: 21 Feb 2005 14:25
Contact:

Re: How should a financial planner be paid?

Post by DanH »

Flaccidsteele wrote:I just don't agree that charging them a fee based on % AUM helps them.
You said that the AUM % fee hurts more than it helps. I've seen first hand how much harm people do on their own. Not all of course but those who need help. And I've studied (both first hand and by reading third party research) how much investors around the world (particularly in N.A.) cost themselves in % annualized returns from poor behavioural-driven decisions. So I have a good handle - generally speaking - on the harm DIYs inflict on their own portfolios in % terms. I'd peg it as 1% to 2% annually (a range because it's an estimate). That, in turn, could be considered the potential value of professional advice.

But Vanguard - the firm that is justifiably so highly regarded by FWF members - says the value of overall advice is much higher. Interestingly, their 'behavoural coaching' value added of 1.5% falls squarely insided of my above range. Their 2015 press release summarizes their findings.

Flaccidsteele wrote:The compounding income is an incentive [to stay in the industry as long as possible].
But that's not my reason for stating that I don't want to retire. I have no complaints but I don't have a compounding income. In fact, I had a sub-par income for a very long time. I made career choices that equated to less money so that I could do my work without compromising my values and beliefs. In the end, it has worked out well but it required a true long-term outlook.
Flaccidsteele wrote:That's why I mentioned that, it is what it is, learn how to invest or just bend over.
I understand that it's difficult to accept that a % AUM fee actually works for people - not just because they feel they have no other choice but because in many cases value is delivered in excess of the (implicit + explicit) cost of doing it yourself. I could re-wire my house or revamp my plumbing but unless I spend a lot of time learning the finer details of each trade, it will cost me much more time, stress and money to try to do it myself compared to hiring a pro to do it for me. Same applies here.
Flaccidsteele wrote:OT: re: salesperson. Anyone that has direct contact with the individual who controls the purse strings is a salesperson. How much the client keeps paying determines how good a salesperson.
I am occasionally sitting in a sales role - but maybe 1-2% of the time. If you want to call me a salesperson that's fine. I've been called worse ;) But my reference to 'salesperson' was simply that kcowan's example sounded like a practice/business that was likely driven by sales. Other more professional firms are driven by client needs. All businesses need sales and salespeople but the difference is that sales shouldn't drive everything. it should feed into a client-centric philosophy of running the business in my view. And that's the balance.
Flaccidsteele wrote:OT2: I'm curious how the "busy 30-something multi-millionaire entrepreneur" charge customers?
If memory serves he's in the IT industry in a way. And I believe he charges a daily consulting rate to the tune of $3k to $4k daily. And I believe that qualifies as more lucrative than our industry.
DanH
Veteran Contributor
Veteran Contributor
Posts: 2174
Joined: 21 Feb 2005 14:25
Contact:

Re: How should a financial planner be paid?

Post by DanH »

Flaccidsteele wrote:I just don't agree that charging a fee based on % AUM is the solution.
If you feel so strongly about this then you must love NestWealth's offering and their flat $ fees. And I suppose you'd be referring oodles of clients to me ;) if I was still operating on an hourly model (as I did from 2004-09). Another under-rated option is to find a broker who will operate on a commission model - but one that isn't churning of course. They tend to be older and they're not a fit for a lot of people but they're around. Jon Chevreau has written about this in the past as an option he likes because of the low cost.

So if a friend came to you asking for a referral to an advisor and had zero interest in DIY; what would you suggest to this hypothetical friend? Is there a real life scenario that mirrors this? And if so, what did you suggest?
User avatar
ghariton
Veteran Contributor
Veteran Contributor
Posts: 15954
Joined: 18 Feb 2005 18:59
Location: Ottawa

Re: How should a financial planner be paid?

Post by ghariton »

DanH wrote:The only way it might work is using a retainer model with a minimum annual fee. Otherwise, it's a non-starter.
Yes. That's the model I've set up for my wife after I die. An hourly fee of $300, with an annual minimum of $5000.

I was very fortunate to find someone whom I trust and whom my wife trusts. She has the same philosophy as me, and seems knowledgeable enough for our fairly simple situation. She will do everything except taxes, but will oversee that, done by someone who is knowledgeable there.

Works for us. May not work for other people.

George
The juice is worth the squeeze
like_to_retire
Veteran Contributor
Veteran Contributor
Posts: 5923
Joined: 27 Feb 2005 07:14
Location: Canada

Re: How should a financial planner be paid?

Post by like_to_retire »

ghariton wrote:.....an annual minimum of $5000
Holy cow, that's a lot of money, and that's a minimum. If your situation is as simple as you say, then what could someone possibly do that would justify $5000 a year minimum when you also say your wife is knowledgeable?

ltr
tedster
Veteran Contributor
Veteran Contributor
Posts: 8515
Joined: 27 Feb 2005 10:11
Location: Montreal

Re: How should a financial planner be paid?

Post by tedster »

ghariton wrote
someone whom I trust and whom my wife trusts.
Trust is key when it comes to professional help. Money, taxes, legal stuff. My concerns re the choice of the ones who manage my RRIF also included "backup". IOW, what happens if the key person drops dead? Does the company continue? Are there others with competence as well?
User avatar
ghariton
Veteran Contributor
Veteran Contributor
Posts: 15954
Joined: 18 Feb 2005 18:59
Location: Ottawa

Re: How should a financial planner be paid?

Post by ghariton »

like_to_retire wrote:you also say your wife is knowledgeable?
Sorry, pronouns are misleading. The trustee (who is also the advisor) is knowledgeable. My wife is not. After twenty years of explanations, my wife has finally mastered the difference between a stock and a bond -- on good days.

George
The juice is worth the squeeze
User avatar
ghariton
Veteran Contributor
Veteran Contributor
Posts: 15954
Joined: 18 Feb 2005 18:59
Location: Ottawa

Re: How should a financial planner be paid?

Post by ghariton »

tedster wrote:IOW, what happens if the key person drops dead? Does the company continue? Are there others with competence as well?
She is a sole practitioner, but has arrangements in place just in case something happens to her. We have met her designated successor and are comfortable there too.

George
The juice is worth the squeeze
tedster
Veteran Contributor
Veteran Contributor
Posts: 8515
Joined: 27 Feb 2005 10:11
Location: Montreal

Re: How should a financial planner be paid?

Post by tedster »

:thumbsup:
Post Reply