There is no such thing as FREE financial advice.
Which financial planning payment style is better? Commission/Managed Fees with product attached, or Fee for Service where you pay a fixed fee for advice?
There has been a lot of debate in the media about which style of remuneration is better for clients. The overwhelming majority of financial advisors in Canada are still commission based, but our opinion is that the landscape is changing as pressure is mounting to have commissions earned by advisors reflected right on client statements.
At Paul Beck Financial Services we believe Fee for Service financial planning is the way forward. We believe that this payment structure offers the best service to our clients and enables us to give advice to our clients in all areas of financial advice. At the end of the day, it is our clients who pay us for our service and advice, and it is our clients for whom we work.
Fee for Service financial planning is much better for clients as it lessens the risk of a conflict of interest. When a financial advisor is paid by a product provider, we believe that they are inclined to work for the commission rather than work for the client. This can result in clients being “sold” into products which may not necessarily be the 100% best option for their needs. In addition, it is a common problem in Canada that most financial advisors do not offer advice in areas such as budgeting, savings, and tax structuring, merely because they do not get paid for the service. For this reason many people are not getting the grassroots financial advice they need.
Fee for Service financial advising and coaching is when a client pays his/her financial advisor an agreed upon fee for the services and advice provided – much like you would pay your mechanic to service your car
So why hire Paul Beck Financial Services? The Main advantage is that the fees you pay us are more transparent than when you receive advice from someone who earns commissions based on the outcome of their advice. This means that you will always know how much you are paying for financial advice and coaching. Also, when you work with us, we will not try and sell you a product you don’t want or need – in fact, as we do not provide investment products, we will not push them on you. Another advantage to hiring us is that our fees may be tax deductable.
Hire us to help you do your tax return, put a budget together, create a onetime financial plan, administer an estate or construct a divorce financial settlement. Click on our “Services” pages for more details and information on service and fees.
Although we don’t provide investment products, we are strong advocates that you should seek the advice of an investment specialist if you don’t feel comfortable choosing your own investments. An investment specialist spends 100% of his/her time researching and monitoring investment products, and your fees and commissions compensate them for their investment research and advice. We can provide a recommendation if you need help selecting an investment advisor.
We are strong advocates of professionals specializing in their chosen fields. A good financial advisor is not necessarily a good investment advisor and a good investment advisor may know very little about true financial planning.
Helping You Understand the Difference
Currently in Canada there are two main ways that advisors are paid: Commissions/Management Fees charged through the sale or management of product as outlined below and, Fee for Service Advice as we discussed above.
1a) Commissions – this is the most common form of remuneration for financial advisors in Canada. It is where product providers or financial institutions pay financial advisers a commission when their client invests or purchases their product or investment. Before your advisor gets paid he/she must sell you something. There are generally two types of commission that are paid:
1b) Upfront commissions also referred to as Deferred Sales Charge (DSC) which is a larger lump sum amount paid to the financial adviser when the product or investment is first set up. This lump sum amount varies depending upon the arrangement with the provider but is generally around 4.9%.
1c) Investment Management Fees – Although less common, Investment Management fees are gaining in popularity among financial advisors. This method does not generate any up front commissions nor does it produce any revenue from trailer fees. What this method of remuneration does do is deduct a monthly fee from your investment account based on an agreed upon annual percentage. Management fees can range from one to two percent per year.
1d) Trail commissions which are a smaller ongoing commission which is paid to the financial advisor usually on a monthly basis for the life of the investment or as long as the client retains the product or advises the provider that they have transferred to another financial advisor. The average trail commission ranges anywhere from .05% per year for funds sold DSC to up to 1.5% for some funds sold on a front end basis.
Fee for Service – this is a less common form of remuneration for financial advisers where instead of receiving payment from the product provider, the client pays their financial advisor directly for their time and advice. Often there will be a set fee either based on an hourly rate and/or packaged based where you can choose to pay for particular services.
Most financial advisors are paid using the commission model. In that model, advisors get most if not all of their income in the form of commissions for selling you stocks or mutual funds. In many cases, if you don’t take their advice they don’t get paid. Their compensation can also vary based on what products they sell you.
Now you are better informed, you can make an educated decision on where to seek advice in achieving your financial goals.