‘Someone is getting paid somewhere’: An explainer on financial planning fees

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While personal, your relationship with your wealth planner is also highly transactional, so understanding how these fees are structured is important when it comes to growing your money over time.

It can be confusing to pick a planner with the right credentials and investment style, as well as understand their fees, financial educator Kelley Keehn said.

The basic rule of thumb is that no service or advice comes for free.

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“Nobody is working for free for you when it comes to your money,” said the founder of Money Wise Workplaces. “Someone is getting paid somewhere.”

Generally, there are three ways wealth professionals get paid, Ian Tam, director of investment research at Morningstar Canada, said.

Commission-based advice is the oldest and most common of all, he said. Typically, commission-based advice is what’s offered to a consumer who walks into a retail bank branch.

It stems from the mutual fund world where an investor pays a bundled fee and a part of it goes to an investment manager or the fund company, Tam said. The customer in this case often invests in a banking product or fund.

“As an investor, you don’t have the option to opt out of that bundled fee,” he said.

Fee-based advisers, who charge based on asset size, typically work better for people with more assets and dollars to invest.

Tam said fee-based financial planning aligns the motivation of an adviser with the client.

“They’re not going to be motivated to do what we call churning your accounts, or selling and buying similar mutual funds, so they can make a commission,” he said.

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On average, fee-based planners charge a flat rate of one per cent and provide holistic advice such as tax planning, estate planning and even everyday financial planning during uncertain economic times.

While uncommon, fee-only, advice-only financial planners are another way to seek help with your money. This type of planner reviews the client’s finances and makes recommendations. It’s then left up to the client to implement those recommendations.

These advisers simply provide guidance and do not sell investment products, Tam said.

“It truly is a decoupling of advice versus sales, which we think is a very positive thing,” he said.

The fee is typically charged at a flat rate, Tam added.

Keehn suggested taking stock of your assets and income before reaching out to a financial planner.

“The adviser or planner that charges based on assets is not going to help you out much … if you don’t have money for them to make money off of,” she said.

This is especially true for people in their 20s and 30s. If a person doesn’t have a lot of money, Keehn suggested opting for a fee-only planner.

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That would work best when a person is making a decent income and has questions they need answered, such as whether they should use a tax refund to pay down their debt or invest in their child’s registered education savings plan, she said.

Some people also consult fee-only advisers as a sounding board to get a second opinion on their financial plans.

For young people, Keehn suggested building a good relationship with their bank and bank adviser.

“You’re going to need your bank heavily over the next couple of decades when you’re in your 20s,” she said. “You’re not going to accumulate a lot of wealth in that time because you’re buying cars and homes and paying off student loans.”

She added that consulting an hour-based or fee-only financial planner once every few years could complement bank investments, such as answering questions about life insurance or tax-free savings and pension plans.

“For young people, to understand that as an adjunct, like an add-on, the fee-only financial planner can be a godsend,” Keehn said.

But she warned to look out for red flags.

“You definitely want to have everything in writing: what are you going to do for me and what is it going to cost?” Keehn said.

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If a client gets pushback when asking about the fees charged, that’s a big red flag because no experienced and qualified adviser would have a problem sharing a breakdown of fees, she said.

Tam said it is important to know the fee structure before signing up for financial services — or it could take more wealth out of your pocket and delay you achieving your financial goals.

“Fees are the only consistent, proven academically, (way) to detract from your wealth over time,” he said. “It’s not interest rates, not market volatility. It’s fees.”

He said a combination of roboadvisers, research and robust financial advice from wealth planners can offer a holistic plan, and help strike a balance between fee and service.

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