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)

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

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.

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.

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.

Cheers!

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

Thanks for providing a little more insight.

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

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.

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.

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.

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.

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.

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.

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

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.

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.

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.