What is pay-only financial planning?

The world of financial advice is divided into 3 main categories. The traditional financial advisor is what most people are familiar with. This is the most common arrangement where a financial advisor works for an institution and sells products. Financial advice is given “free” and is part of the process of selling these products. The second category of advisor is called a fee-based financial advisor. This type of advisor does the same thing as the traditional advisor, but charges a flat percentage fee based on assets under management rather than per product. The cost may be less, but it can still add up over time because the fees are based on a percentage of the assets you have. The advice remains part of the service and is “free”. The final option is a paid or fee-for-service financial planner. This type of planner only gives advice and does not sell product. The charge for the consultation is a flat dollar amount based on how much time is spent or how complicated the project is.

What are the advantages and disadvantages of each type?


The traditional advisor is usually the most expensive. Fees are based on the dollar amount of the products you purchase. For example, if he invests $100,000 in mutual funds and pays a 2% fee, he is paying $2000 per year for as long as he owns these funds. The 2% figure is an average MER (management expense ratio) based on a mix of equities and fixed income (stocks and bonds). There may be other fees such as sales charges, account fees, merchant fees, advance or referral fees, administrative fees, or penalties for switching or redeeming early. To know the true cost, you would have to add up the costs for your situation.

The fee-based financial advisor may have reduced fees since they are charging a flat percentage instead of a MER plus other costs. The reduced fees are somewhere in the range of 1% to 1.5% for a full account. The problem is that this option is available to people with larger amounts of assets, as the fees charged must be significant enough for it to be profitable. The minimum asset threshold typically starts at $500,000 in investable assets (assets in a trading account). If you have $1 million invested, this fee can be as high as $10,000 to $15,000 per year.

The flat-rate financial planner charges for a plan or project using a flat dollar rate. This means that you would have a plan done once or periodically every 3 or 5 years, and you would pay between $1,000 and $5,000 per plan.

Note: Don’t get too hung up on the names or titles of the person you’re dealing with, ie financial planner versus financial advisor. These names or titles are used interchangeably in Canada and do not specify a particular service or accreditation. There are also additional names like financial consultant, investment adviser, portfolio manager, etc. The key to knowing what you’re dealing with is to ask “what are the dollar rates?” and let me explain this to you. Judging by what you hear, you will know what type of fee structure is being presented.

Conflict of interests

The traditional counselor has to serve many teachers. There is the customer who is paying the bills and you have to take care of him. There is the institution and the boss who wants to make as much money as possible from client fees. Lastly, there is the regulatory/compliance team that makes sure that you, the advisor, are serving the client and not breaking any criminal, industry, or company laws. If your company has products that are below average, you, the consultant, are now in conflict. You can sell the customer a mediocre product and make your boss happy, or tell the customer to go to a competitor and get a better deal that will make the customer happy. Unless you are a very experienced advisor with a substantial business book or don’t need the job, it is very difficult to make everyone happy.

The fee-based financial advisor has a similar dilemma if serving the client means assets must be moved elsewhere. There is also advice to pay debts, buy real estate, use money to buy a business, start an art collection, take money abroad, buy physical metals, etc., which are not products sold by the institution and therefore , they would not generate any Rate.

The single rate scheduler does not have these conflicts because there is only one master: the client. There are no products or assets, only the legal system and the ethics body of the association to which the advisor belongs.

Services matrix

In this area, the traditional advisor has the advantage. If you are in a situation that requires a will, accountant, trustee, mortgage broker, or insurance products, the traditional financial advisor works for an institution that can provide these services. The administrative aspect of this is also handled for you: account opening, trading, portfolio rebalancing, automatic deposits and withdrawals, or form filling.

A fee-based financial planner can provide these additional services, but it will depend on the size of the business. Smaller “boutique” firms may specialize in portfolio or investment management and you may need to recruit a network of professionals if you find yourself in a more complex situation.

The same situation applies to a flat-rate or fee-for-service financial planner. The people doing fee-for-service planning tend to be individuals or small businesses without the resources to provide a network of professionals.

Minimum level of assets

If you are selling products or managing assets, the fees they pay for the entire process, including financial planning, are a percentage of the amount of money used to purchase products or assets. If the amount of money being invested is $100,000 at a 2% rate, you would be paying $2000 per year. The products would likely come from a preset list. A know-your-customer (KYC) survey will be completed and products selected rather than a comprehensive plan. Minimum assets for a financial plan generally start at $500,000 in product or asset purchases, but some companies may provide a plan with a lower number of assets. In the age of robotic planning, a plan can be created using software for less than $1,000, but it may not cover all scenarios, as the software is not complete compared to talking to a human.

In the case of the fee-only financial planner, there is no need for asset minimums because income is not tied to product sales. Revenue generated is tied to time spent and work done, and whether there is a $1,000 transaction or a $100 million purchase of a product, the amount of work to create a plan and allocate assets will be the same.

What type of advisor is right for you? It will depend on what you have, what you need, how much work you are doing yourself, and how knowledgeable and comfortable you are with finances.

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