How should a financial planner be paid?

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gaspr
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How should a financial planner be paid?

Post by gaspr »

This subject is something that has bothered me for some time. There is an interesting discussion going on over at "The White Coat Investor". Here is a link...
http://whitecoatinvestor.com/most-finan ... ent-424034

Your thoughts?
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Re: How should a financial planner be paid?

Post by kombat »

The article is interesting, and lays out the argument in a clear, concise manner. However, the incorrect use of the term "financial advisor" kept jarring me. Perhaps I'm wrong, but my understanding is that "financial advisors" are those folks who meet you at your home at no charge, usually work for an insurance company, and sell you a bunch of overpriced mutual funds, from which their fee is taken (mostly invisibly to you). What the article seems to be describing is (again, as I understand it) a "financial PLANNER," i.e., one who does not profit from the particular products sold to you (thus avoiding the distasteful conflict of interest inherent with all financial advisors), and is paid directly by you, and has a fiduciary responsibility to you. Am I wrong?
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Re: How should a financial planner be paid?

Post by Peculiar_Investor »

Advisor compensation can be contentious and bothersome and there are many egregious examples out there. But at the same time, not everyone can and should be going it alone as a do-it-yourself investor, and with careful consider to the services being offered and the costs involved, many could benefit from using the services of a Certified Financial Planner (CFP). But is definitely buyer beware, because it can be a minefield.

For the OP, one of the good guys posts here, DanH. He has discussed the model and fees before. Unfortunately I couldn't quickly find a specific topic/post to link, but this search of his posts might turn up something helpful.
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Re: How should a financial planner be paid?

Post by brucecohen »

kombat wrote:The article is interesting, and lays out the argument in a clear, concise manner. However, the incorrect use of the term "financial advisor" kept jarring me. Perhaps I'm wrong, but my understanding is that "financial advisors" are those folks who meet you at your home at no charge, usually work for an insurance company, and sell you a bunch of overpriced mutual funds, from which their fee is taken (mostly invisibly to you). What the article seems to be describing is (again, as I understand it) a "financial PLANNER," i.e., one who does not profit from the particular products sold to you (thus avoiding the distasteful conflict of interest inherent with all financial advisors), and is paid directly by you, and has a fiduciary responsibility to you. Am I wrong?
IIRC, Quebec is the only province that regulates how financial planners/advisors/consultants refer to themselves. ISTM that today those who use the term "financial planner" tend to be CFPs but that's not universal. CFP is simply a designation and by itself does not indicate whether or not the person sells mutual funds with embedded commissions. Also, whether CFP or generic financial planner, the person is not a fiduciary by law. Unless the landscape has changed over the years, only "investment counsels" are required by law to be fiduciaries. A quick google search indicates that investment counsels now tend to use the title "portfolio manager" but I don't know if the latter has replaced the former in law. ICs also use the terms "investment manager", "asset manager" and "wealth manager" but AFAIK those terms are not legally defined so shyster salesmen might also be using them.
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Re: How should a financial planner be paid?

Post by gaspr »

I would think that most of the best financial advisors/planners in Canada have decided to be paid using the AUM model. I don't believe this is justifiable. The discussion in the link above lays out the arguments very well.
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Re: How should a financial planner be paid?

Post by Peculiar_Investor »

gaspr wrote:I would think that most of the best financial advisors/planners in Canada have decided to be paid using the AUM model. I don't believe this is justifiable. The discussion in the link above lays out the arguments very well.
I wish I could find the post by DanH, but IIRC he laid out details about the regulatory environment and other underlying cost structures that are required to provide the service in a very factual manner and why it supports the AUM model.

Like anything else, an informed consumer is best and ultimately a knowledgeable consumer/investor will have to decide for themselves whether the AUM model is justified and what alternative models are available. I would agree that the link you provided some shine some good light on the subject and relevant arguments.
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Re: How should a financial planner be paid?

Post by OnlyMyOpinion »

The question seems to me to be the tail end or at least part of the larger subject of: financial literacy; the question of when you do you need a FP (purchase of house, start family, certain income or net worth?); the fact that few Canadians actually have a FP but have started to save and invest, usually with bank or ig-type person providing fee-based or high-mer products...

It will be interesting when Ontario's report comes out sometime next year (although it remains to be seen whether it really accomplishes anything):
http://www.theglobeandmail.com/globe-in ... e26114420/

There was a fairly recent discussion on the subject in G&M (not specific to getting paid though): http://www.theglobeandmail.com/globe-in ... e26114420/
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Re: How should a financial planner be paid?

Post by gaspr »

The other issue that is not often discussed regarding the AUM model, is that this model seems to have some perverse incentives. Even as a fiduciary, how many advisors/planners are going to recommend the purchase of an immediate annuity even if it is the right fit for the client? Or how many will advise delaying CPP/OAS and spending down the nest egg, even as this may be the correct and safest course of action for many? Both scenarios reduce AUM and this is the perverse incentive I speak of....
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Re: How should a financial planner be paid?

Post by OnlyMyOpinion »

Info on CFP, PFP, CFA, CIM, CPA, TEP, EPC, RRC, CRC, CPCA, etc., designations from Gail Bebee: http://cawidgets.morningstar.ca/Article ... &id=713670

Really, no BS :) It seems where there is a market, there is a (helpful?) hand being held out.
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Re: How should a financial planner be paid?

Post by DanH »

Bruce I think everything you've written remains current. So good info there for the OP.

PI - thanks for the mention. I recall what you're referring to and I think it was an exchange including GeorgeH. I will try to find it and link it because I don't want to repeat that stuff ;)
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Re: How should a financial planner be paid?

Post by DanH »

Ah, lucky word search. It doesn't go as far back as I thought. If you start reading from this post from ghariton and keep going from there I think you'll hit on the business model stuff that PI was remembering. Hopefully this helps. And I'll try to keep an eye on this thread if there are any questions.
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Re: How should a financial planner be paid?

Post by gaspr »

Here is what Mike Piper, (well known writer,blogger, and boglehead), has to say about AUM based advisors

"Many people claim that the best advisor is one who is paid as a function of your account size (i.e. your "assets under management" or "AUM"). AUM fees tie the advisor's interests to yours--or so goes the claim. What they really do is tie the advisor's interests to your account size, not to your overall financial well-being. For the most part, this is not a problem, but it does present a conflict of interests whenever the most appropriate thing for you to do is liquidate part of you portfolio (for example to pay down your mortgage, buy a lifetime annuity, or buy a piece of real estate).

Example: Dennis is 70 years old. He has no children, and has no desire to leave any money behind when he dies. He has a $500,000 portfolio, from which he needs to withdraw $30,000 each year. In other words, Dennis is looking at a 6% withdrawal rate-higher than many would consider safe, even for a 70 year old.

In such a scenario, a single premium immediate annuity might make a lot of sense. But if Dennis is currently using an advisor who charges based on account size- let's say 1% of assets- the advisor stands to gain thousands of dollars each year by convincing Dennis not to buy the annuity. "
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Re: How should a financial planner be paid?

Post by DanH »

gaspr wrote:Example: Dennis is 70 years old. He has no children, and has no desire to leave any money behind when he dies. He has a $500,000 portfolio, from which he needs to withdraw $30,000 each year. In other words, Dennis is looking at a 6% withdrawal rate-higher than many would consider safe, even for a 70 year old.

In such a scenario, a single premium immediate annuity might make a lot of sense. But if Dennis is currently using an advisor who charges based on account size- let's say 1% of assets- the advisor stands to gain thousands of dollars each year by convincing Dennis not to buy the annuity. "
As usual this isn't so clear cut. If Dennis needs a rising income (usually the case) then a standard annuity will not meet this need. So a 6% initial withdrawal and keeping that dollar amount level may well be safer than a 4% withdrawal that rises 2% or 3% each year (which is the scenario examined to determine safe withdrawal rates).

But yes this is always a potential for conflict. As I wrote many years ago, no fee model is free from potential conflicts.

I know that none of this is directed at any one particular firm or advisor but we have a similar example of this with an existing client. We manager their family portfolio. And they have about $2 million tied up in an insurance product that doesn't meet their needs. They are basically asking us when they should liquidate it so that they can add it to the portfolio we manage for them.

We did the analysis on it and advised them that they'll have to hold on a few more years since liquidating now would trigger excessive exit costs. Sure we miss out on revenue today but what we do is strengthen the trust our client already has in us and we likely enhance the loyalty - and likelihood that they stay clients for many years. From that perspective it is in our interests to give them the right advice since it will benefit us and the client longer term.
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Re: How should a financial planner be paid?

Post by steves »

Dying broke at 95 and assuming his ror is 3%, then Dennis needs to withdraw $36,500. Living in BC, inflation 2%.
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Re: How should a financial planner be paid?

Post by DanH »

Is that $36,500 year in and year out? Or starting at $36.5k per year and bumping it up by assumed 2% inflation?
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Re: How should a financial planner be paid?

Post by steves »

Yes. Bumping it up each year. I included CPP&OAS BTW.
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Re: How should a financial planner be paid?

Post by gaspr »

Here is another good article by Allan Roth. The comments below are even more illuminating...

http://www.wsj.com/articles/how-we-fina ... 1451927924
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Re: How should a financial planner be paid?

Post by gaspr »

And another article by Rick Ferri regarding advisor fees...

http://portfoliosolutions.com/latest-le ... ee-matters
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Re: How should a financial planner be paid?

Post by tedster »

Look for an advisor with the CPF qualification who sells only his/her analysis. Anyone selling annuities, funds, etc, should be avoided. Anyone charging based on asset size should also be avoided. Note, if you think you are going to avoid the drudgery you will still do the majority of the work, as the planner has to have the data, eg, debts, expenses, assets, and so on. Of course, you could just hand over a shoebox filled with receipts and so on, and then the fees will be enormous. :)
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Re: How should a financial planner be paid?

Post by kcowan »

A pure financial planner will not accept a shoebox and will not provide specific investment advice. He will provide you with a financial plan. You will still need an accountant and an investment adviser.
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Re: How should a financial planner be paid?

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Agreed. FWIW, I don't think a % of AUM financial advisor is a bad thing for those that need their hands held and/or to make product selections for the investor to carry out. It is partly a matter of a good advisor earning his/her keep by doing a better job of advising on re-balancing and product picks than the investor would do on a DIY basis. It is also partly a matter of interest and skillset.

As I understand it, there are few 'hourly paid' financial advisors/planners around simply because people hate paying them billable hours like they would an accountant or a lawyer. I have an engineering type (retired) friend in Calgary that decided that DIY was not for them any more and went through this process. It was difficult to find someone who was on the same page with respect to skillsets, personality, etc.
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Re: How should a financial planner be paid?

Post by GreatLaker »

AltaRed wrote:Agreed. FWIW, I don't think a % of AUM financial advisor is a bad thing for those that need their hands held and/or to make product selections for the investor to carry out. It is partly a matter of a good advisor earning his/her keep by doing a better job of advising on re-balancing and product picks than the investor would do on a DIY basis. It is also partly a matter of interest and skillset.

As I understand it, there are few 'hourly paid' financial advisors/planners around simply because people hate paying them billable hours like they would an accountant or a lawyer. I have an engineering type (retired) friend in Calgary that decided that DIY was not for them any more and went through this process. It was difficult to find someone who was on the same page with respect to skillsets, personality, etc.
I use a CFP that I really like, paying on an hourly basis for planning (but not investment advice). I got a full financial plan done once, and now only use her every few years when I have big decisions to make. Once retired I think I will be beyond needing advice. Most people look at me like a skunk at a wedding when I tell them I pay by the hour, then go on to educate me on how they pay nothing by buying no-load mutual funds, and maybe I should get a second opinion from their planner, blind to the fact that they are paying >10x as much in hidden fees.

Even some of the planners I met with in the selection process gave me puzzled looks when I said I only wanted planning, not investment management. She also works on an AUM basis, and said if all her clients were like me she wouldn't have a very successful business. It does take some time for research, portfolio management, cost base tracking and other paperwork, so I understand that some people that are busy with families, work and home, or just don't have the aptitude or interest to manage their own investments, as long as they get fair value.
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Re: How should a financial planner be paid?

Post by Flaccidsteele »

gaspr wrote:How should a financial planner be paid?
By the hour.

Like my accountant and lawyer.
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Re: How should a financial planner be paid?

Post by tedster »

Flaccidsteele wrote
How should a financial planner be paid?


By the hour.

Like my accountant and lawyer.
Of course, you should be very specific about what you expect from them. Usually with an accountant it is pretty obvious and the same with a lawyer, but with a planner?? Not so clear.
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Re: How should a financial planner be paid?

Post by AltaRed »

I think what one wants from a financial planner can be made clear.

When I retired, the company provided me with X hours of freebie time with a 'fee for service' financial planner to help decide on whether I would take part of my DB pension (the unregistered portion that I could) as a LRIF? as compared to an annuity, and that entailed running some 'what if' scenarios including the rest of my portfolio. I specifically asked for a number of scenarios using certain assumptions and they told me what they could acheive within the paid time allotment.

Once a planner sees one's data, i.e. their portfolio, and knows the revenue streams, e.g. DB pension, CPP, OAS, and proposed spending budget, they already know how long it takes to set up the file(s) and run a plan and thus can provide pretty accurate estimates of time requirements. Most already have a fixed cost for certain types of plans.

The problem clients are those that walk in without their data ready, or not knowing what they want, just like people who take a shoebox of paper to their tax accountant. Go prepared and more certainty is possible. I see no difference.
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