What is Advice-Only Financial Planning?
Advice-only—also referred to as fee-only or fee-for-service—financial planning provides a transparent service for a known price. As an example, an advice-only financial planner could help you decide whether to buy or rent your next property and charge a fixed price.
They could help you decide whether your investments are suitable for your situation, and charge by the hour. They could also work with you to create and implement a comprehensive financial plan and charge a fixed monthly fee. These planners are best compared to an accountant, lawyer or other professional services where you pay an hourly or project price for the work provided.
Advice-only financial planners combine an understanding of taxes, financial services, psychology and more to help you get the most from your money. They offer ways to minimize risk, reduce taxes and improve the way you think about money. This provides peace of mind that you’re on track to reach your goals.
Traditional financial planning services
While advice-only financial planning has been around for over 20 years in Canada, it’s still a minor piece of the financial services industry. Most Canadians are more familiar with receiving financial guidance from an advisor in a bank branch.
These more traditional financial planning services are often included when purchasing a financial product (e.g., investments, insurance, loans). Rather than pay upfront for the guidance, you often pay over time through fees charged on the product that you buy.
For instance, you may receive support in creating a retirement plan when you invest your money at a bank. In this case, rather than paying a fee upfront, you’ll pay an annual fee on your investments. There are pros and cons to advice-only financial planning, but the most crucial consideration is the conflict of interest that’s created when you pay through products instead of directly for the service.
When you pay through fees charged on financial products, as is the case with most financial planning services, there’s a conflict of interest. To illustrate, let’s consider an individual with a $200,000 mortgage and $300,000 in investments. Let’s consider two options this individual could pursue if they received a $100,000 inheritance.
One option is to pay down their mortgage and a second could be to invest it. If they ask their bank advisor what they should do, there’s a conflict of interest. This is because the advisor has an incentive for them to invest. After all, the bank will earn higher fees this way. To demonstrate, let’s look at the benefits for the bank and for the individual in each case.
Pay $100,000 towards the mortgage
If they pay $100,000 towards their mortgage, their updated balance would be $100,000 and their investments would remain at $300,000. If the bank is charging 4% interest on the mortgage and a 2% fee on the investments it’ll go from earning $14,000 a year in fees to earning $10,000 a year. This is because they’re no longer collecting interest on $100,000 of the mortgage.
While this may not be in the bank’s best interest, it may be in the individual’s best interest if they’re better able to sleep at night knowing they’re closer to paying off their home.
Add $100,000 to investments
If they invest the $100,000, their updated balance would be $400,000 and they’d still have a $200,000 mortgage. Assuming again a 4% interest rate and 2% annual investment fee, they’d go from paying the bank $14,000 a year in fees to paying $16,000. As a result, the bank stands to earn $16,000 a year if they invest or $10,000 if they pay down the mortgage.
While it may have been the right choice for the individual to invest because they’re comfortable with the risk, there’s still the chance that this type of conflict causes damage in the future.
Working with an advice-only financial planner
If you were facing the above situation and approached an advice-only financial planner, you would be asked to pay a fixed fee regardless of the recommendation. This way, the planner has no incentive to recommend one option over the other.
They’ll speak with you to understand your goals, behaviours and overall situation to recommend the best option for you, with an explanation. The advice-only financial planner wouldn’t sell you the mortgage or investments. Instead, they may refer you to quality options based on their experience or allow you to find the best fit on your own.
Advice-only, fee-only or fee-for-service financial planning services aim to provide informed, objective recommendations on your finances. This way you can understand the fees you’re paying, the services you can expect and any other incentives that may exist.
If you’re wondering if you could benefit from working with an advice-only financial planner we’re available for a free 30-minute consultation call. Alternatively, you can read more about our solutions and pricing or the pros and cons of advice-only financial planning.