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Why Don’t Most Financial Planners Plan Finances?

“If you don’t know where you are going, you will wind up somewhere else.” – Yogi Berra

We went to a fascinating conference a couple weeks back that showed the inner workings of the financial planning industry in Canada. It was the first annual Financial Planning Week in Canada, so all the “experts” met for a day to discuss how the industry is misunderstood. “Financial planning is still about selling” is the title to Jonathan Chevreau’s article.

While many financial planners claim to do financial planning and provide holistic advice, very few actually provide comprehensive planning with written financial plans, as taught in the CFP courses.

The issue is best highlighted by Alan Goldhar, Professor of Financial Planning at York University and Manager for the Ontario Public Trustee. The Public Trustee takes over the finances for people that are mentally unable to make financial decisions. They have taken over more than $500 million in investments for 10,000 clients, most of which had a financial planner, broker or bank advisor. They interview the client and the family and then send in a team to obtain all financial documents.

The shocking fact is that, of the 10,000 clients they took over, none had a financial plan! Not one!

We have reviewed the finances for about 2,000 families and found the same result – none of them had a proper written financial plan prepared in Canada.

Alan Goldhar also teaches Finance at York University, where he says most financial planning students don’t bother completing the CFP designation, because “the industry has jobs for salespeople, not for professional financial planners. It’s like graduating from medical school and then being allowed only to check temperatures and change band aids.”

Cary List, CEO of the Financial Planners Standards Council (FPSC), says: “The single most common misunderstanding about financial planning is that it is all about investing.”

First, to make the issue clear, a financial plan, as defined by the FPSC, is a written document customized for you that gives you complete advice on all areas of your finances, including:

  1. Cash Flow- Helping you understand how you spend your money.
  2. Debt/Asset Management – Structuring your debts and your assets in the most effective way.
  3. Life Goals, including Retirement Plan – Identify your financial goals in detail and strategies to help you achieve them.
  4. Income Tax Planning- Determine most effective strategies to minimize tax over your lifetime.
  5. Estate Planning- Determining the most effective way to transfer your assets to your beneficiaries.
  6. Risk Management- Determine your needs for insurance and which type is the cheapest/most effective for you.
  7. Investment Management- Recommending the strategies and investments appropriate for your plan and keeping you focused on your goals.

In short, it is a complete “road map” to the life you want that allows you to make decisions with your overall plan in mind, instead of making each decision on its own. A plan is not an investment projection, a questionnaire, a goal based on a rule of thumb, or a document with nice graphs printed out in 15 minutes or less.

From experience, we find that the benefits of having and following a plan are far more significant than people realize – and far more significant than Investment A vs. Investment B. For example, the main reason most Canadians will retire at a much lower standard of living than they want is because they never figured out how much they need to invest or what kind of strategies/investments they need to reach their goal.

Just keeping you focused on your goals alone can be the most obvious benefit of a plan. Anyone that lost focus and sold investments since last fall has wiped out years of gains.

“They did not plan to fail – they just failed to plan.”

Why is the industry focused on sales, instead of financial planning? What needs to happen so that Canadians will get real professional plans from their financial planners?

Here are the main suggestions at the conference for why most financial planners don’t plan finances:

  1. Blame the public – Financial planning is misunderstood by the public. Most people think short term and do not understand why they need a financial plan. Canadians do not ask that their advisor to do a comprehensive, written plan for them.
  2. Blame the schools – Financial education is not taught in schools, even though it is a basic life skill.
  3. Blame the industry organizations – They have not effectively educated the public on the need for a plan. They also have a confusing list of degrees, instead of focusing on the CFP designation.
  4. Blame “financial planners” – Most advisors focus on the investments or insurance that make them money and consider financial planning to be unpaid service work.
  5. Blame the banks, insurance companies and planning firms – They have not been able to figure out a good business model that includes financial planning.
  6. Blame the regulators – They focus regulation on products and disclosure related to products, and do not make allowances for advice that is part of a comprehensive plan.
  7. Blame the government – There are no national restrictions on who can call themselves a “financial planner” or “financial advisor”. Those that do not write professional financial plans and have the qualifications should have to call themselves what they are: “mutual fund salesperson” or “insurance rep”.
  8. Blame the industry –The industry has effectively taught the public that most “financial planners” are just salespeople. Most people have met with or know a “financial planner” and the planner did not do a plan, but mainly just tried to sell them a mutual fund or insurance.

What do you think? Why don’t most financial planners plan finances?

Ed Rempel is a Certified Financial Planner (CFP) and Certified Management Accountant (CMA) who built his practice by providing his clients solid, comprehensive financial plans and personal coaching.  If you would like to contact Ed, you can leave a comment in this post, or visit his website EdRempel.com.  You can read his other articles here.







52 Comments, Comment or Ping

  1. 1. Ben

    Why don’t most financial planners plan finances?

    Earning more money is a more powerful motivator than helping others succeed. Activities that generate more revenue for the “planner” in the short-term will, on average, receive more attention than activities that achieve greater financial success for the client.

    Smart planners would see a different long-term picture – if the client gets wealthier, they get wealthier too. It might be hard for planners to delay the financial rewards.

  2. Because financial planners arae salespeople first, last and always.

    This is an excellent article describing the major problems. Like many other situations, the solutions stare us in the face, but more regulation and more restrictions won’t suffice. How are we going to educate the public? How can we force planners to accept a fiduciary responsibility that ensures the customer comes first? Well nigh impossible.

  3. 3. Chris L.

    Because they actually don’t know how (it’s complicated), it’s time consuming and it’s not rewarded with money for the planner so there is no inherent incentive to do it.

  4. 4. tt

    I’ve met with a few what so call financial planner but really they should change their name to insurance sale reps. I am not sure how much they make by getting us to sign for Universal Life but that’s what we suppose to get into every time.

  5. 5. Nick

    In ther early 90s, I watched my parents use a financial planner for several years. He was with one of the big mutual or insurance providers, and so his services were free provided my parents bought his products.

    We recieved tons of pointless promo swag – pens, calculators, desktop calendards, etc.

    Eventually, my parents became frustrated with his services, and let him go.

    Getting fired for providing a “free” service – a new standard in customer service.

  6. I have often wondered if the fact there are not many fee-based financial planners around is a function of the sales mentality of the industry or the fact most people won’t pay for it or both.

    If we moved purely to a fee based model- no commissions, trailers or hidden compensation- how many of us would actually pay for financial services in a world where we are conditioned that everything is free or really cheap?

  7. 7. Observer

    The main problem is that people fall for financial planners who appear to do their work for free, missing the fact that these salespeople are actually incented salespeople. Since it’s “free” the customers neglect to ask what services are being provided and therefore don’t judge if it’s the ones they need.

    I use a financial planner who is fee based ($/mo and % of AuM). He does the planning part as well (all what is listed above), does our taxes, provides advice as needed as well as manages investments on a discretionary basis with transparency on costs – and he refunds us any incentives/bonuses/commissions he gets from investment firms in the case they apply. Each year I’m on the fence whether he provides his money’s worth to us – I feel I could do nearly the same just less efficiently but I just don’t have the time – but I respect that the services he provides are appropriate, helpful, and that his compensation is transparent.

  8. I am really shocked: that in the first annual Financial Planning Week in Canada more than 1000,0 clients are there to join the financial plan meeting and they have no financial plan then for what purpose they are in Canada .its to funny and amazing.

  9. 9. ldk

    Timely post for me as this a topic of conversation currently ongoing in my home as we prepare for a meeting with our advisor. We are frustrated as we are looking for a comprehensive ‘big picture’ type strategy that takes into account all aspects of our finances, but feel like our financial planner is acting solely as an ‘investment portfolio’ manager….. and the reason for why they don’t “plan finances” and concentrate on the investments alone has got to be that they don’t get paid to. Full stop. The more of our money they are managing the more they earn. It is not in their best interest to advise us to look at increasing our real estate holdings or cash position (for example) because they don’t stand to benefit from it. So the question remains, where do you go for comprehensive financial planning? My sense is we are all really on our own for the most part–scouring websites and blogs like these for small bits of information we can use and share to improve our situations.

  10. Thicken MW:

    Maybe no one would buy the services.

    But right now, being railroaded into terrible investments so that a salesman can earn a commission is something that ought to be banned by law.

    No chance of that. Caveat Emptor doesn’t work when the customer is ignorant and trusting.

  11. A couple of the reasons I changed my practice:

    1) The profit motive tends to be on the acquisition of new clients, rather than servicing currently existing clients

    2) Client problems aren’t always solved with investment products, and are often symptoms of poor financial health in the household

    That said, the fee-for-service platform is difficult for many clients to stomach, as Canadians just aren’t used to paying an advisor out of pocket. That’s partially our fault, as we’ve conditioned clients to place no value on the planning process, and all value on investment returns.

    Hopefully that changes as more of us start to wake up.

  12. First, Mark bite me! I’ll make the generalization that all Options Mentors are a-holes. Second, as a CFP I can tell you we are NOT all salespeople. I would love nothing more than to have a steady stream of people requiring nothing more than complete financial plans. Do the work, give them the plan, get paid and see them next year for a review. No MFDA compliance headaches, no sales reps from the Fundco’s, no underwriting headaches from life insurers, no clients with tiny accounts that take up five times as much of my time as my larger clients. But not one client I have or person I have approched about financial planning has opted to pay me upfront for a plan. Given the choice they ALL opt for the commission approach. This after I explain exactly how I get paid. I would trade all the aggravation of the current system in a heartbeat if I thought I could ,make a living as a fee only planner.

  13. I think that the biggest reason all comes down to money. Most people are not willing to pay the fee that is required to do a comprehensive financial plan because they do not think they really need and in turn most financial planners realize this and therefore don’t really push the service too much.

  14. Planning is boring, time-consuming and painful.

    Most people don’t like to plan unless forced. How do you get people to pay hundreds or thousands of dollars for something they don’t really want. Even when a plan is developed, how many people have the discipline to follow it?

    How many advisors have the skills to develop meaningful personalized financial plans? How many advisors have/follow their own financial plans?

    Canadians know about RRSPs (and now TFSAs) yet how many use these savings vehicles? We set short term goals like losing weight or exercising but quit. What are our chances with attaining lifetime goals?

    By the way, financial planning is an effective marketing technique. Clients who agree to the process accept the recommendations and are less likely to bolt to another advisor.

    If only planning were simple, quick and fun. Let’s not go to the movies tonight. Let’s work on our budget instead.

    Thanks for the article and comments.

  15. It’s interesting to read the “blaming” section. It basically applies to everyone – not just financial planners – everyone wants to blame others for their own mistakes; and actually our biggest downfall in human history.

  16. 16. Blue Collar Capitalist

    I think it’s tricky. From what I hear, charter banks pay their people salary + commish, lessening the planner/ advisor/ salesperson’s interest in your success. A ‘good’ planner/ advisor/ salesperson on 100% commish would make more money the better the client does; greater returns + excellent service (including follow-ups to ensure the client’s situation is up-to-date) = referrals = more business?

    I ask this knowing they make their commissions no matter how the client’s portfolio does, but a happy client is more likely to refer, which is what I’d think a planner/ advisor/ salesperson would want?

    I also understand there are a lot of slick hitmen out there who just make their sales and disappear. I think it’s like anything else – caveat emptor. If you buy a Bimmer in Newmarket and had bad service, wouldn’t you bring your car to another dealership or keep getting abused and ignored? Hopefully in this climate, they’ll be weeded out.

    This post is more of a question than a comment. Sorry for the poor formatting – long day!

  17. 17. Ed Rempel

    Hi Thicken,

    Good point about commissions. Some people think the problem would be solved if nobody was paid commissions. I’m not sure this would help at all. Taking away a major income source would probably just result in a lot fewer planners – and less advice available to the public, both for planning and investments.

    In Canada, doctors are essentially paid with buried commissions. This is often used to explain why doctors rush patients through and don’t take time to provide prevention. But if we eliminated their billings and made them invoice patients directly, I don’t think that would help either. It would just mean fewer doctors.

    In Canada, we are not used to paying for many professional services.

    Ed

  18. 18. CanadianChicken

    Ummm… fear and procrastination?

    As a just-graduated student in my first job and saddled with debt, I was introduced to a planner who offered the whole meal deal. He was recommended by a friend, who at 29, was enviably well off and thanked her planner for helping get her there. I met him for the first free consultation after procrastinating horribly, always finding reasons not to look for old bills and a copy of my will. Although he was knowledgeable and friendly, I found the dissection of my finances painful and somewhat humiliating. Not that this should matter, but I knew that I was probably the planner’s lowest or close to lowest (negative) net worth client, and the realization only added to the overall pain. I resolved to come back with a cheque and undergo a plan but never did.

    I guess the reason I’ve never returned is the feeling that I should be able to use my business degree for something useful, combined with the memory of squirming in my chair and the anticipation of similar discomfort at the next meeting. I am an avid reader of financial news, blogs, articles and books, and never invest without thorough research.

    So, call it what you will, fear or procrastination, but I thought an honest tale of why I didn’t at least get that plan should help enlighten the discussion.

  19. 19. jesse

    Why don’t FPs plan finances? There’s no money in it, as mentioned. They earn a big share, if not all, of their $ from commissions on investments and insurance. I hate to put it this way but this payment scheme has corrupted the industry. There is a fundamental disconnect between the planners’ incentives and the customers’ interests.

    I would advise to hire a financial planner whose business model is exclusively on a fee-for-service basis. If s/he offers good well-presented advice, keep paying them; if not, fire their ass and move on to someone else. Anyone who receives ANY commission should not even be considered IMO. There is too much that would always be suspect in the relationship.

  20. Being a Financial Planner myself, I am quite disappointed in the industry.

    I work for a bank and they all ask to sell stuff and do plans. However, plans are made in a way that you end-up with an investment proposal.

    In order to give a “real” plan to my clients, I have decided to include recommendations on all financial planning fields (mentioned in Ed’s article). While I don’t sell anything by telling my client to look at their will or how to manage their budget, I feel that I do my real job ;-)

    Unfortunately, several people now see

  21. oops…

    Unfortunately, several people now see financial planners as salesperson…

    We have to fight against the perception and convince them that doing a plan is good for them. I don’t always succeed and not all my clients have plans. But I am trying to make as many plan as possible so those people have a chance to have a great retirement and are covered in most financial planning aspect of their lives.

  22. Ed R.
    Just wondering what you thought of this survey saying ” 97% of planners do a full financial plan for at least some of their clients, while only 40% do so for “most,”

    http://www.investmentexecutive.com/client/en/News/DetailNews.asp?Id=44474&cat=158&IdSection=158&PageMem=&nbNews=

  23. Ed R.
    What do you think of this survey saying ” 97% of planners do a full financial plan for at least some of their clients, while only 40% do so for “most,”

    http://www.investmentexecutive.com/client/en/News/DetailNews.asp?Id=44474&cat=158&IdSection=158&PageMem=&nbNews=

  24. 24. Ed Rempel

    Hi Larry,

    I don’t believe those numbers. It is like the “dirty little secret” of financial planners, that everyone wants to CLAIM they do planning.

    When we talk with advisors we meet at the CFP Conference and ask them about their practice, nearly all claim to do holistic advice and planning. However, if I ask them any details about it, they look at me like I’m speaking Greek.

    I often ask: “What nest egg are you finding that your clients typically need at retirement to have the retirement they want?” I usually get dumb-founded responses or they change the topic. If they actually had done any planning, they would be able to recall a detail from some recent plan.

    Allan Goldhar says they often see what he calls “fake plans”. Often they are just a questionnaire to determine a need so they can sell a product, an investment projection, or a quick plan based on a rule of thumb.

    In our opinion, most of the financial planning software is designed for a quick plan. You can enter a few facts, put in that the client wants to retire on 75% of today’s income, and hit a button. You get a nice plan, with pretty graphs, sometimes complete with generic commentary.

    I’ve had people tell me they got a nice, printed financial plan after a 15 minute meeting at the bank, which included time to sell investments.

    The same article says that 70% of people have worked with a financial advisor, but “fewer than 10% claimed to have actually used these other services” (services other than investments). If so many advisors do planning, then why would less than 10% of the public claim to have used any other advice from a financial planner?

    We’ve also found the same tendency among the public, where many people want to CLAIM they have a financial plan. However, after I ask them about it, they don’t know where it is, don’t know what it says, and don’t know what the goals in the plan are.

    It takes work to make a plan real for clients, which is what a REAL plan needs. Early in my career, I used to do plans that I thought were thorough, but the client did not understand them or believe them.

    In the end, a plan is only a REAL: plan if the client understands it, believes it, and accepts that the goals are what they want to achieve.

    Ed

  25. 25. cannon_fodder

    Ed – do you think there is an opportunity to sell a DIY financial plan software tool? I’m imagining that the cost for a full scale financial plan is in the $300 or so range.

    However, a comprehensive DIY software tool for $49.95 might be the price point which would allow people to do an annual “check up”.

    In the several instances I’ve had an “FP” or advisor, I’ve never once received a financial plan. Came pretty close at RBC but they took forever and I dumped them and went on my own again.

  26. 26. Ed Rempel

    Hi Cannon,

    Interesting idea. A proper financial plan would be fully custom and there are many options that could not be built effectively into software. There are also a lot of concepts that would require explanations, since most people have a generally low knowledge and may have a completely wrong understanding of things like stock market risk.

    You are low on the cost of a plan, though. Most fee-only planners would charge $2-5,000, depending on the complexity. Our financial plans take 20-30 man-hours to create and implement. We don’t charge for them (since we only do them for clients that work 100% with us), but IF we did, we would charge $3,500 + GST.

    An on-line planning tool, could include the basics, though.

    It’s hard to measure the market. The public would need a lot of education to see the benefits of financial planning and many people are not interested enough to do it on their own.

    There is a substantial DIY community, but many would hesitate to pay fees. There are on-line calculators for retirement, etc. DIYer’s may or may not do the initial plan, but would probably be unlikely to review it annually for a fee.

    That is an interesting question for this blog. What would the readers here be willing to pay for a comprehensive financial plan done by a software tool – both the cost of the initial plan and access for regular annual (or any time) reviews?

    If you are reading this, what would you be willing to pay?

    Ed

  27. Why Is Financial Planning Ignored?

    This post and the comments led to a related blog post at http://bit.ly/noFinPlan

  28. 28. cannon_fodder

    Ed,

    Wow! I had no idea how comprehensive such a financial plan is nor how much time it takes. It makes me think if there are better ways to ‘automate’ some of the processes required to do the plan. Or, perhaps, there could be different levels of a financial plan – Bronze, Silver and Gold for example.

    Maybe someone like yourself with years of experience could understand that there will be some people who don’t need the same level of investigation and proposals as others would. Part of that may be where they are in life, how many dependents, how complex and valuable their investments are, etc.

    For myself, I think $99 is the most I’d pay for a software tool that I could use to provide analysis and guidance. I think that if I’m doing the work, I shouldn’t have to pay much for it. (This is why I don’t like self-checkout lanes for more than a couple of items – why should I pay the same amount for my groceries/goods when the cashiers didn’t have to do any work?)

  29. 29. Ed Rempel

    Hi Cannon,

    Do you mean $99 one-time or annually?

    I noticed nobody else is commenting on price. Does that mean nobody would be willing to pay for a financial planning software tool???

    Ed

  30. 30. Melanie Samson

    I’ve seen the “Blame the schools” argument several times in the PF blog circuit and as a teaching, I find this very frustrating for several reasons.

    1) Personal finance IS being taught in schools. I can’t vouch for all provinces, but as a student in Nova Scotia in the 90s, I was taught personal finance in the high school course “Career and Life Management”. It was also touched on in math, economics and family studies courses. In Newfoundland, it is a very important part of the high school Human Dynamics course as well as appearing in the curriculum of other courses.

    2) It’s easy to blame schools for how kids turn out instead of taking the responsibility of teaching our kids life lessons. The basics of personal finance are better learned at home where it can be applied in a real-world context. Teachers can’t control what students do with their money; their parents can.

    3) Schools being assigned the task of teaching more and more life skills while the pressure to teach the basics remains the same or higher in the midst of standardized testing. Unless society decides that we need to keep kids in school longer hours or more days in a year, something has to be pushed aside.

    Before blaming schools (or anyone else for that matter), I wish people would consider that it’s not that simple.

  31. 31. Brendan

    Here are my thoughts.

    I firmly believe that a dollar in my pocket is better than anyone else’s pocket.
    I also believe that you USUALLY get what you pay for , and that everyone who works deserves to get paid. I expect to be paid, so why not the FP?

    I think the real issue is what are you getting for your dollars spent?

    My advisor from years back was a nice fellow who “retired” from BMO and started up a FP practice with Nesbitt Burns (owned by BMO).

    All I got from him was the standard cookie cutter “100 minus age = amount to invest in equities” financial plan. The plan was delivered via BMO mutual funds.

    He built up a nice practice because a lot of long time banking customers switched to his practice because they knew him. They all got the same “plan”.

    Years later I read about his new 5200 (yes 5200) square foot home he built.

    Like I said I have no problems with people getting paid but one has to ask, “where are the customers yachts?”

    2 phone calls one around RSP time, and halfway through the year with him sounding like he was reading off a sheet of paper. Actually I still get email 7 years later from him.

    ANy questions about “the big picture” i.e estate planning, smith manouevre etc were met with blank stares.

    There is no way there is any value in what he provided. I could simply construct a couch potato index fund portfolio and I would be way ahead of the game.

    Investors Group, same thing. I felt like I was being sold mutual funds rather than any actual planning. Sure I got the “comprehensive
    plan” that was spit out in seconds with a few inputs. No value whatsoever.

    Again some of the senior “planners” at IG dress well, have nice cars and houses, but where is MY yacht?

    My cousin worked years ago at IG and said the “planners” dont even put their own money into IG funds, but rather company stock, namely Power corportion, and Power Financial.

    I have read many an article that says to skip the funds and by the fund company.

    Obviously I am biased against “financial planners” in general based on personal experience BUT I do see the other side.

    Let me rant further on this.

    As I said a dollar is better in my pocket, BUT if I can pay someone a dollar and get back 2 dollars in my pocket then I am more than willing to sit down and talk.

    This is the “yacht” I am talking about. Sure if you build up a client base that will afford you a big house, vacation home etc BUT I am getting something in return then I have no problem with this.

    If I can structure my finances to save a few K in taxes, or pay off a mortgage early and build a huge non registered portfolio at the same time then yes this is a value added service.

    I like calling my own shots for my investments, but I would pay for advice on the “whole picture”.

    I would also consider mutual funds if I felt comfortable with the advisor. One that actually listens and is not there to simply sell you something.

    Just as you get what you pay for, it also applies to “planners”. You dont get my money for doing something that I can do myself.
    The fact that I am still getting emails years later from my old “planner” tells me that he really doesnt care about clients. Why not call me up and see how things are doing going the solo route?

    The problem is that people dont really have a clue what they are paying and how they are paying for it.

    Ed mentions doctors. I agree that if we paid doctors ourselves there would be less doctors because people would stop seeing many of them and they would be out of business.

    Medical care is not free. We pay for it with higher taxes. Nothing is free in life and we pay one way or another.

    The real question is not what we pay but what we are getting for the money.

    If my planner is doing well I expect to be doing well too. By this I mean mutual fund returns that beat the index over the long term, and tax savings through REAL planning.
    Also a nice non registered portfolio courtesy of the SM that I would not have had otherwise would also qualify here.

    I dont expect to build a 5200 square foot house , or attain the wealth my planner does, but if you are gonna sell me IG funds and then put your own money into Power stock then something is not right here.

    As for how much would I pay? I really don’t have an answer yet.

    I dont want to be sold mutual funds. TD e series index funds will do the trick and be as good as if not slightly better than 90% of the “planners” out there.

    I am looking for advice, and an actual plan. If the plan is good, and I believe and have faith in the person selling me the plan then maybe buying funds would work.

    Just remember i want a “yacht” too. Being sold underperforming mutual funds, and getting a christmas card every year, along with a cheap, chinese made calculator after my yearly RSP contribution while you kick off your shoes in your large home just doesnt cut it.

    What is reasonable? Fee only? The advantage is the fee would not drag your return down, and it would be deductible.

    One time fee is not a good idea either. What if I get cancer, get married, lose my job, have a kid, win the lottery etc.

    Perhaps a one time set up fee to compensate the planner for the 20-30 hours , and the a yearly “trailer” paid by the customer?

    This way the planner is paid, and the client can walk away 3 years later if he/she feels they are “just another number”.

    What about a one time set up fee, and a percentage “management fee” based on asset value. Again the planner is compensated initially and subsequently as the investments go up in value. he would also recieve a growing fee as the non registered plan grows in value.

    It goes like this:
    I pay a set up fee of 1k? 2K? 3k? PLanner compensated, I am set up with a real plan, plus I can deduct the fee.

    As my assets grow in value my planner makes a higher management fee. He is compensated and my “yacht” is a growing RSP.

    My planner gets me to do a SM, saving me thousands in mortgage interest, plus I now have a growing non registered portfolio . Two more yachts for me and the planner receives his extra yacht via growing management fee based on the new non registered porfolio.

    Next year the TFSA is introduced. My planner tells me having 10K in a savings account is silly and I should open 2 TFSA’s. ONe for me and one for the Ms’s. I save a couple hundred in income tax for another yacht, and the advisor now makes a bit more in management fees for his yacht. I am doing well, getting good advice so i continue to stay with my advisor.

    Year after year I am happy and my RSP is growing. The TFSA is growing as well as the SM porfolio.

    As tax laws change, and new investments become available my planner is on top of it. Based on his advice I save taxes, structure my finances to be efficient. He points out that in my tax bracket with a defined pension I will lose my OAS unless I drop my dividend income and receive capital gains income. Wow, another yacht.

    Let’s not forget that as I accumulate yachts, I refer a dozen new customers to my planner. More yachts for him.

    I dont want the 5200 square foot house now, I need a marina to store all these damn yachts! And so does my financial planner.

  32. 32. Brendan

    politically correct Disclaimer to post 31 above.

    No offense was intended toward chinese people regarding the poorly constructed calculator. It was poorly made and the country of manufacture was China.

    The reference to a christmas card was an actual situation in which a card was sent to my home in celebration of the winter solstice holiday,practiced within the most enjoyable traditions of the religious persuasion of your choice, or secular practices of your choice, with respect for the religious/secular persuasions and/or traditions of others,or their choice not to practice religious or secular traditions at all.

  33. 33. Ed Rempel

    Hi Brendan,

    Great comment. You are very insightful.

    So, you think the best compensation for planners should be an initial fee of $1-3,000 for a REAL plan, and then a percent of assets after that?

    Ed

  34. 34. Brendan

    Hi Ed.

    I think that blame can be shared equally among planners, the industry(fund companies), and the investing public.

    These 3 components comprise “the system”, which I think is broke.
    I also think we are dealing with a chicken/egg situation.

    Let me explain.

    Investors want returns. Planners want to provide this, and earn a living. The industry wants to provide returns, and earn money as well.

    We all want to live and eat, and be rewarded for our efforts. Otherwise we would all sit at home on welfare.

    Investor seeks planner, and is sold funds. Planner means well, and selects funds for the client and gets paid. It is year 2k and even the pool boy is a paper millionaire thanks to Yahoo. Investor is mad because he is “only” getting a 15% rate of return, dumps his advisor.

    Advisor is out of some income even though he has invested time in a written plan.

    Fund company wants to provide nice returns but feels pressure because they are “only” returning 15% and are bleeding customers who want in on Yahoo. Fund company changes focus and jumps on the band wagon.

    Investor wants instant fortune, fund company tries to deliver , for a price. Advisor is biased towards higher trailer commissions because he is losing customers and has to make it up somewhere.

    And round and round we go on the vicious circle.

    I think the system is designed to prey upon human instinct and greed. It seems for one component of the system to succeed, another has to be on the losing end.

    I understand from the view of a planner to take several hours to set up a plan only to have a client bail 2 years later because their plan doesnt incorporate the latest tech fund. The planner is in it for the long term and had good intentions.

    On the other hand I cant justify a front load, 2.5% MER and a huge trailer for a closet index fund.

    The system is broke and seems to be slanted in favor for the industry. Heads they win, tails they also win.

    Ed i am not sure what the best compensation system would be.

    Personally i would feel that with the current system, an advisor may or may not be encouraging a particular fund because of a higher trailer.

    I think it would be fair to compensate the planner initially for the plan, and then on an ongoing basis. As I grow wealthy, so does the planner.

    Both parties are served as both benefit from growing assets be they stocks, funds, flow throughs.

    Think of it like a car purchase. I buy a car and the company makes money off the sale. Salesperson makes a nice commission too.

    Over the next few years I go back for service. Dealer makes more money with this ongoing relationship.

    BUT start to screw me around, charge double what other dealers are charging and not fixing the problem then i walk.

    Here is another idea:

    Lower the MER and trailers to start with. If the fund really is that good, then they charge a bonus, and forward a higher trailer.

    Now the fund has to perform or lose the bonus. PLanner has incentive to pick good funds or lose bonus trailer.

    INvestor has already paid 1-3k for a plan and will not do it again unless the planner is really bad.

    There needs to be a way to do things fairly .

    A long term partnership in which everyone benefits is what is needed.

    I feel that 1-3K dependent on how complex is reasonable. Management fee based on asset value would eliminate the MER/trailer/commission bias, real or perceived.

    This way the planner gets paid for his initial work, and since the investors goal is to grow wealth, if the planner is able to do this, he will grow his income as well.

    I also believe this will encourage longer term clients. Clients will not think they are being talked into a crap fund because it pays a higher trailer, thinking they are getting screwed (while the planner enjoys his 5200 Square foot home) and jumps ship to another planner.

    I can’t say if this is the best compensation system for planners, but as an investor it seems like it would be fair to everyone involved, and I would feel very comfortable with this arrangement.

  35. 35. Brendan

    Forgot to add this in but what about a system similar to the early Buffet partnerships?

    I think Buffet used the 20-30 year bond yield or something. He would charge no fee if returns were lower than what one could achieve on their own by simply buying gov’t bonds.

    Anything over that, and Buffet would rake in 25% of profits.
    Now there is incentive.

    I also forgot to add that investors can cause funds to perform badly too, panicking causing fund managers to sell low for redemptions , and buy high when there are massive influxes of money.

    Money (greed) always chases yesterdays performers. We are all to blame.

  36. 36. cannon_fodder

    Ed,

    I mean $99 one time. I would think that there would be a need for updates periodically but not that frequently. Certainly when something new like the TFSA comes out that will require an update. But, if I own the licence to the software and my personal situation changes, I should be able to run through it again without having to pay another fee.

  37. 37. cannon_fodder

    Melanie,

    I think it is a fair criticism, not of teachers, but of the Ministry of Education that they don’t adapt to the needs of students. If we accept the premise that personal financial management is a critical skill perhaps only surpassed by the ability to read and write, then why isn’t a commensurate amount of time being spent in schools teaching about this?

    Did I really need to study history year after year after year? Did it benefit me as much as learning how to read and write? Basic math is very important – are advanced math subjects critical to only those who need it as part of their path to a university degree or should all children take it?

    There will have to be tradeoffs because there is a finite amount of time and resources. And the fact of the matter is, teenagers spend far more time in school than they do in the company of their family. So, instead of saying it is one group’s responsibility, it really needs to be a shared responsibility.

    At home, we lead by example and we try to drive home the point many, many times. We aren’t professionals who have been educated on how to educate so our efforts may not be as efficient as teachers. Regardless, one hopes that through constant repetition and instruction that the children become aware from family, school and friends.

    With two daughters currently in high school, I have never seen evidence of more than a cursory discussion on financial management. To me, reading and writing and financial management will be skills that we can all use in every aspect of our lives for our entire lives. Knowing how to solve a quadratic equation, the US’ fight for independence from Britain, or how Einstein leveraged E=mc2 to create several equations that changed our views of the extremely small to the extremely large are not as important.

    Apparently the school curriculum reflects a different perspective than mine.

  38. 38. cannon_fodder

    Brendan,

    I think there is a growing distaste for guaranteed payouts whether it is CEO’s or sports athletes – or even coworkers.

    We want pay for performance and that is probably how it works to a large degree in the fund management companies. But, we, as clients, would prefer a similar situation with our advisors.

    For example, if we come to an agreement with a plan and it is followed, then we look at it after the year and determine what the advisor should be paid. If it performed poorly, advisor doesn’t get paid anything. If it exceeds expectations, advisor gets paid more and the more it exceeds the greater the benefit to the advisor.

    Now, before those advisors decry the fact that they worked hard and, through no fault of their own, external factors caused the results to not meet targets, let me remind you of one thing – you may be out a few thousand dollars at most – I might be out tens and tens of thousands of dollars. Do you really think you are suffering as much as I am?

    When an advisor looks at it like a true partnership – i.e. they suffer when I suffer and they profit when I profit – then maybe we have made a shift for the better.

  39. 39. Brendan

    Cannon, I dont expect a planner to suffer with me, although it would be comforting to know that he/she has their own money where mine is.

    If IG funds are so great for me, then why do many of their own advisors own POW, and PWF?

    Same goes for my old advisor, enjoying his huge house while I enjoy mediocre results from BMO funds.

    I don’t mind paying up for something as long as I am getting something of value in return.

  40. 40. Ed Rempel

    HI Cannon,

    I think you are missing the point. Here is the point:

    1. If you are getting REAL advice from your financial planner, then most of the benefit is NOT related to investments.
    2. The most beneficial investment advice you get from your financial planner comes during the years you lose money.

    Basing your financial planners compensation on your investment returns goes back to the mistaken belief that the main thing a financial planner does is investments.

    The benefits NOT related to investments are far greater and are there every year, regardless of markets.

    Most of the benefit comes from having a plan, knowing that you are on track for your goals, knowing how much you need to invest to get where you want to go, following the right tax strategies, planning your overall tax position and minimizing tax by adjusting your taxable income to tax bracket breaks, knowing you are doing the strategies that will be most effective over your life, controlling risk, having an emergency source of funds, etc.

    We sit down every day with people and help them document their goals specifically. The most common goal is a retirement plan. The vast majority would be nowhere close to achieving their goal no matter how high their investment returns are!

    Most are not investing nearly enough, are not using effective strategies, make each decision on its own, don’t know what they can or cannot afford, invest far too conservatively to achieve their goals, get caught up in fads or change investments in down markets.

    If they invest with Canada’s #1 investment advisor, they will still retire with less than half the nest egg they need to retire the way they want – because they mainly need all kinds of other advice.

    A simple example of the benefit of a plan is just having the discipline to stick with investments when they are down. The average investor loses 6-7%/year over their life because they change to more conservative investments once or twice per decade after a market crash. A financial planner only costs perhaps 1%/year (or nothing if you are also recommended investments better than you would buy otherwise).

    How many people, with or without advice, changed to more conservative investments since last September? I would contend that mistake alone will cost more than a financial advisor costs in a decade.

    If an advisor can persuade you to stick with your investments when they are down because you need to stay focused on your long term plan, that is probably far more beneficial investment A vs. investment B, the timing of transactions, asset allocation, or other less important decisions.

    I agree in principle that financial planners should be paid in proportion to how much benefit you get from their advice. However, this can be hard to measure, since most of the benefits are not related to the investments. And the most beneficial investment advice comes in years you lose money.

    Ed

  41. I’ve often wondered about these specific issues related to financial planners.

    Thanks for providing a little more insight.

  42. 42. Ed Rempel

    Hi Brendan,’

    The bonus-type MER system you mentioned exists now with hedge funds, but not with mutual funds. Note this is for investment, not for financial planning.

    It makes some sense with hedge funds, since many strategies can make money in any market.

    Most hedge funds pay the fund manager a base fee (1% or 2% of assets) and there is a bonus of 10% or 20% of the profit above the risk-free rate (e.g. T-bills).

    Most of these also have a “high-water mark”, which means that if the fund loses money, the fund manager gets no bonus until the fund is above its previous high point.

    Some hedge funds share a small piece (perhaps 10% of the bonus) with the financial advisor.

    This may sound ideal and has a lot of benefits for a good hedge fund manager. Mainly, it is a great motivator! There are also some potential negatives, since this promotes mediocre fund managers taking huge gambles.

    It is not easy to determine the exceptional fund manager from the lucky fund manager. This is especially true since many of the 14 categories of hedge fund strategies take special training to understand.

    We think this compensation method has created quite a few ordinary fund managers taking gambles and a handful of exceptional fund managers that are highly motivated.

    This also creates a huge MER for a successful hedge fund manager, which may be warranted. If a fund made an MER of 17% for the year because the fund made 75% after the MER, is that good or bad?

    Ed

  43. 43. Mark in Nepean

    Financial Planners are no different than any other salesperson in any other sector; they are pushing products. That plain, that simple :-). Good post, hopefully it provides some insight to others…

    Cheers!

  44. 44. Jason

    Great discussions. Many great insights.

    Ideally I think a financial planner is the person that provides the big picture, offers advices on multiple things covering all aspects of personal finances from budgeting, investment, tax planning, risk management (insurance), and estate planning (wills, power of attorneys, trusts, etc.). His role should be a point of contact for the client and he brings in other professionals (investment managers, accountant, lawyer, insurance brokers, etc.).

    He ought to be on top of all aspects of tax and law changes and do an annual checkup of how everything is still on track with the big picture and keep in mind that he is doing this for the client, not for the other professionals. Investment managers want clients to invest this and that. The financial planner has the job of really making sure that that meets the big picture goals of the client. Insurance brokers may try to sell insurance policies that the clients don’t need and it is the financial planner’s job to make sure that it meets the big picture goals of the client.

    If an insurance person is trying to sell more than what the client needs, the financial planner should stop him from doing so or get someone else.

    Many years ago, I once dealt with the financial planning group of TD and I enjoyed it because he made the effort of going outside of TD products to find the one that suited me the most. He had since left TD because TD asked him to only sell TD mutual funds, TD insurance policies, and TD everything because he is an employee at TD. He knew that he would get more commission if he sold me the TD products but if he felt there was a better product out there (where it’s more cost effective, better managed, etc.), he would not hesitate to get them for me.

    I don’t know how to compensate these professionals so that they will always focus on their clients. I think it has to come from the planner him/herself.

  45. 45. Gates VP

    Hey @Ed;

    I’m late to the punch, but I’m coming out of the wood-works for this one:

    Canadians do not ask that their advisor to do a comprehensive, written plan for them.

    That’s it. In fact, it’s worse than that. It’s not that they don’t ask, it’s not that don’t know to ask, it’s that they don’t want to ask (let alone pay for it!)

    A good financial plan involves answering fundamental questions around the topic of “What do I want to with my/our life? Specifically?”

    This is probably the single scariest question that an average person faces. Let alone an average couple. “Most men lead lives of quiet desperation”

    What you do with your money is what you do with your life and trying to plan your finances is synonymous with trying to plan your life. But most people aren’t “living their dream”, heck most people don’t have a dream that extends beyond car, kids, house, tv. Most people don’t wake up in the morning passionate about what they do. They know they want to “retire”, but what they really mean by “retire” is they don’t still want to be doing the same job when they’re old.

    Lots of people don’t have constructive hobbies, they’re not aching for retirement so they can spend more time doing what they love.

    Now I don’t want to be a total downer. I’m not describing everyone. But the reason financial planners aren’t “planning”, the reason points 2 through 8 are never corrected is really simply that people don’t care and they don’t want to.

    If we really cared, everything else would fall into place.

  46. 46. aolis

    “If you are getting REAL advice from your financial planner, then most of the benefit is NOT related to investments.”

    However, the planner is paid based upon the investments they sell. This turns them into salespeople.

    I can’t just blaim the planners though. Most of my friends are willfully ignorant of their finances and it is difficult for me to casually discuss it with them.

    It also scares me how banks are getting into the action, even with insurance. Most people trust the banks and end up trusting them with major decisions after only short meetings. I can’t think of any other reason that someone would buy mortgage insurance from a bank.

    As for paying an annual fee, the situation is similar to doing taxes. I do my own taxes using software. I’d be unlikely to have them reviewed even for a small fee. But I also don’t know what small details I’m missing out on.

  47. 47. Ed Rempel

    Hi Gates VP,

    That is a very insightful comment. Most people do tend to wander through life. When we ask people how they ended up in the job they are in, the answer usually just that events led them there. Few people chose the road they are on.

    However, with financial planning, most people have no grand plan for retirement and just want to maintain their current lifestyle, less the mortgage and the cost of the kids, plus some money for entertainment and travel.

    That may not sound like much, but without a plan, few people will build up the nest egg they need to a maintain their lifestyle.

    Even though most people don’t plan their lives, they still need to plan their finances just so they will be able to afford to keep doing what they are doing.

    Ed

  48. 48. Gates VP

    @Ed: “…most people have no grand plan for retirement and just want to maintain their current lifestyle…That may not sound like much, but without a plan, few people will build up the nest egg they need to a maintain their lifestyle.”

    Maybe I should clarify, I think that everyone should have a financial planner in their life. (Their spouse at the very least :)

    And I think your quote above is really zooms in on why people don’t plan and don’t want a planner.

    It starts with admitting that all we want from life is just to keep living our current lifestyle. It’s really hard to admit when you’re 25 or even 35, that “yeah, this is pretty much all I want to do”. Even when your lifestyle demonstrates that “this” is all you’ve done for the last decade, this truth can be hard to accept.

    It’s hard to sit around at 30 and imagine that in 20 years you’ll be watching Super Bowl LX with your adult children in the same house you bought last year doing the same job you did last Friday.

    And of course if you’re OK with the notion that that’s what you’ll be doing, then, hey, who needs a planner for that? I’m already doing that, what could possibly go wrong?

    So if planners really want financial planning to be a wide-spread activity, then the public needs to be convinced of two things:
    - That it’s not shameful to want what you already have. Nor is it shameful to want a little more. You don’t have to retire rich, but you do need enough money to get to the end.
    - That good time with a paid financial planner will help give you the stability and growth that you desire. (people resist change, and we really don’t like going backwards, but we’re OK with growth)

  49. Because they actually don’t know how (it’s complicated), it’s time consuming and it’s not rewarded with money for the planner so there is no inherent incentive to do it.

  50. 50. Tommy

    This is a very interesting blog. I recently transitioned myself from banking to Financial Planing industry (or investment funds and insurance to be more specific). My idea of financial planning is a holistic approach to one’s financial well-being, taking into account cash flow, debt/income, investment, goals etc. After being in this industry for 6 months, I realize that almost all financial planners/advisors are just sales people. Very few really take the time to sit down with clients and discuss about “other aspects of finance” except retirement planning and risk protection (insurance).

    I attribute my experience to the following:
    1) financial planners/advisors are ONLY getting paid if they make a sale (either an insurance product or your investments); traditional planners are in the business of creating “residual income” from trailers and insurance premiums. This is the “game”. A successful advisor can build up a decent size portfolio and eventually sell his or her practices at 3 to 5 times the residual income. It is really a game of building a business! *Only very few are fee-based planners.

    2) clients, themselves, have an expectation of FREE advise. Typically, lawyers and accoutants charge $200-500 an hour for their work. And they get repeat business because clients constantly need advise and work done. In contrast, how often do you need to see a financial advisor? Once a plan is done, you really don’t need to see your advisor for a long-time.. and even if you do, how much are u willing to pay? This is one of the reasons why mutual funds have trailers built-in for residual income.

    And realistically, an advisor can not survive by giving free advise and not making a sale. This expectation has led advisors to focus on creating sales opportunities. Conversation on debt, cash flow, mortgage is just a way to entice clients to buy insurance and invest with the advisors.

    3) Registered money = $$ I don’t see in ages. This attitude has turned a lot of clients into being PASSIVE about their financials. Hence, many are being taken advantages of by financial advisors who sell back-end load funds.

    There’s so much to talk about… I am just going to stop for now…

  51. 51. Jason

    This is a great article and it’s bang on. I am training to be a financial planner (one that does comprehensive plans, rather than focusing only the product sales side). As I build my qualifications and experience I will be focusing on educating people, particularly young adults, about the importance of thinking about and planning their financial futures today rather than waiting until they are in a crunch.

    To address the question, “Why don’t most financial planners plan finances?”, I would say it’s because the industry’s focus is on volume of customers rather that quality of service. It takes time to draft a comprehensive plan, time many advisors would rather spend networking or generating business. And to be fair, most financial planning / advisor positions are 100% commission-based, so if you’re not generating leads and converting them to clients you’re not generating income. Perhaps the missing ingredient is that these firms should either revamp their compensation structure or employ in-house financial planners to do the comprehensive plans while the product experts focus on the sales.

    Thanks for this post. All my best.

  52. I am a financial planner and would blame the government and educational system, for not teaching people thebasic skills of money management. Our government is conflicted and banks rule this land. They benefit from peoples ignorance and encourage them to consume and spend more by means of credit and loans. But ultimately the responsability and blame is on people, because they have grown lazy to learn and cheap to pay for service. I believe a planner that is employed by the bank or sells products should disclose this conflict and the impact on their plans to the consumer. Most people buy into the cheap free plan instead on seeking a planner that builds a plan from the ground up for a fee that is by the way tax deductible like other professional services. You get what you pay for, want cheap or free dont come nack crying later.

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