Pros and Cons of Advice-Only Financial Planning
In all your daily transactions, you’re used to being quoted a price and paying it. Whether you’re buying groceries, signing up for a streaming service or making a larger purchase like a car, you know how much you’re paying.
Investment management and financial planning fees
There’s one transaction that, for most people, doesn’t follow this tradition. When you receive investment management or financial planning services, you’re rarely told the price you’ll pay. In most cases, the fees you pay either aren’t mentioned, or you’re provided with a percentage that represents how much you’ll pay. This odd situation where you don’t pay an explicit fee is possible because the company already has your money. When you invest your money with most companies, rather than come to you with a bill, they simply withdraw the money from your investments. These fees are difficult to see since your investments are often going up in value over time. However, because of the fees, your investments are going up less than they could be.
What’s more concerning is just how much the average Canadian is paying through these hidden fees. If you invest $50,000 and are charged an annual fee of 2%, you’re paying $1,000 a year in fees. As we’ll go through shortly, there are pros and cons to this type of billing process. However, the fact remains that if you’re not receiving $1,000 in value each year, you may want to reconsider your current arrangement.
As your investments grow, this fee can turn into one of your largest annual expenses, and you may not know you’re paying it.
Advice-only financial planning
An alternative to the uncertainty mentioned above is to work with an advice-only financial planner. Also referred to as fee-only or fee-for-service, the theme is a transparent experience where you know the value you're receiving and the price you're paying.
Advice-only financial planning provides a known service (e.g., retirement plan, investment review, insurance review) for a known fee. This allows you to decide with as much information as possible, ensuring you get value from your money spent.
There’s lots more to a purchase decision than the price. Let’s continue with a full look at the pros and cons of advice-only financial planning to see if it makes sense for you.
Pros of advice-only financial planning
Transparency
When you know the price you’re paying for a service, it allows you to determine whether you’re receiving value. If the benefits you receive outweigh the costs, then it’s worth it. However, this decision is more difficult if you don’t know what you’re paying for and how much it’s costing.
Aligning incentives
People act according to their incentives. Many investment managers and financial planners in Canada are paid based on the products they sell. As a result, they have an incentive to recommend products and services that may not be in your best interest. Since advice-only financial planners don’t sell any products, there’s no incentive for them to recommend something that’s not in your best interest.
Accessibility
Many investment managers and financial planners require a minimum investment amount (e.g., $500,000) before they can work with you. This limits individuals from accessing quality financial planning in their earlier years. If you’re 30 years old, you have 30 or more years to set aside money and a lifetime to benefit from a financial plan. As a result, the people who can benefit most from valuable direction have the hardest time finding it.
Cons of advice-only financial planning
Pain of paying
Psychological research shows that we don’t like paying for things. We experience pain when we part with our money and this pain becomes greater as the transaction becomes more salient. Therefore, it may be harder for you to part with $1,000 in a one-time transaction than to have $1,000 taken from your account gradually over a year. To overcome this, it’s critical to understand the value that a financial plan provides.
Ongoing services
An advice-only financial planner requires ongoing engagements to pay their bills. As a result, they either need to continue working with you over time, or they need to find new clients. This creates an incentive to offer additional services to existing clients that may not be necessary. This is important to consider and comes back to comparing the value of the service being presented to the cost of the service.
Self-management
Because advice-only financial planners don’t sell any products (e.g., investments, insurance, savings accounts) you’ll need to be involved in managing your money. With the plan in hand, and potentially with the help of the financial planner, you’ll need to find the right products and services to meet your needs. This adds additional work that wouldn’t be required if you went to a financial planner or investment manager who could take care of everything in one shop.
Deciding whether you need financial planning services
When it comes to managing your money there are two main options:
Do it yourself (DIY)
Receive assistance from a professional
Paying a financial planner can cost between $100 to $10,000 depending on the complexity of your situation and the questions you’d like answered. As with any purchase, you’ll need to decide if the benefits are worth it. For some, deciding how much to save for retirement and finding a tax-efficient investment with the right amount of risk is a manageable task. Meanwhile, others may not have the time, interest or confidence to do it themselves. In this case, you can gain access to years of expertise by paying someone to help you.
Which service is right for you?
If you decide to pay for assistance, your two main choices are:
Pay through embedded fees in the products you use
Pay explicitly on a one-time or ongoing basis
Advice-only financial planning falls under the second category. It offers transparency, aligns incentives and increases accessibility to planning services. At the same time, it faces challenges from the pain of paying, incentives to recommend ongoing services and the need for some self-management.
If you’re wondering if you could benefit from working with an advice-only financial planner please don’t hesitate to schedule a free 30-minute consultation call. We’ll talk to better understand your needs and existing experience to determine how we could best work together or where else you may be better served. Alternatively, you can read more about our solutions and pricing.