The difference between fee-only and fee-based financial planners

There is a lot of confusion about what fee-only actually means and what such planners can and cannot do for do-it-yourself investors.

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While MoneySense is intended to help empower individual investors, it’s a rare person that needs absolutely no financial help or advice. This blog continually makes the point that while self-directed investors can lower costs by buying index funds or ETFs at discount brokerages, that doesn’t mean they have to forgo financial planning help, advice or guidance.

Over the last decade or so, there has been a gradual shift from commission-based financial advice to fee-based advice. That is, instead of paying a traditional stockbroker commissions to buy a stock (or ETF these days) and then pay again to sell them, the industry is moving to a fee-based model that imposes an annual fee based on percentage of client assets: typically ranging between 1% and 2%. That is, on a $100,000 portfolio, you might expect to pay between $1,000 and $2,000 a year in fees, often via traditional mutual funds, wrap accounts or investment counsel. Not a bad deal at that level of wealth, if you’re getting good advice on asset allocation, security selection, financial planning, insurance and estate planning and the whole gamut of financial advice.

The problem is at greater levels of wealth—and sometimes greater financial sophistication on the part of clients—high fees start to add up: 2% of a million-dollar portfolio is $20,000 a year. Little wonder investors are trying to cut that down in this era of ultra-low interest rates and volatile stock returns. Fortunately, the industry usually starts to taper fees down at such levels of wealth. I’d regard 1% as reasonable but that’s still $10,000 a year.

Many MoneySense readers are tempted to go it alone by picking their own stocks and bonds, or ETFs, at discount brokerages. Our Feb/March 2013 issue catered to this audience with the first annual feature on the ETF All-Stars. Then in the June 2013 issue, we introduced another new feature: Canada’s Best Discount Brokerages. Both features were written by editor at large Dan Bortolotti, who also writes our popular Index Investor column and his own Canadian Couch Potato blog.

These investors will find Bortolotti’s book, the MoneySense Guide to the Perfect Portfolio, invaluable. It’s a terrific introduction to indexing and discount brokerages. But as even he has discovered, many of these investors may still need some help or guidance in choosing ETFs, settling on an appropriate asset allocation, rebalancing or even with financial issues that go well beyond managing investment portfolios—more holistic challenges like tax-efficient withdrawal strategies, insurance and estate planning, debt management and the like.

Such investors are often told to find a fee-only financial planner and MoneySense has catered to this by providing an online directory that points out fee-only advisors here. But there is a lot of confusion about what fee-only actually means and what such planners can and cannot do for such investors. In practice, our list of supposedly fee-only planners includes some who appear to be predominantly fee-based or—a term I prefer—asset-based.

Fee-only planners vs. asset-based planners

Here’s the difference. Say you have a $500,000 portfolio that you manage with the help of a fee-based (that is, asset-based) adviser charging 1.5% of your portfolio’s value each year. In that case, you’re paying $7,500 a year for that service. On the other hand, a self-directed investor with the same $500,000 who is buying their own ETFs at a discount brokerage will be paying only small commissions to buy and sell securities (typically $10 per transaction) plus whatever the underlying MERs of their investments are. If mutual funds, they’re back around 2%; if ETFs, those MERs will range from 0.08% to 0.55% typically in Canada, with a broader range of fees for ETFs trading on US exchanges.

If this self-directed investor wishes to purchase à la carte financial planning services he or she could go to a true fee-only planner who charges by the project (perhaps a one-time charge of $2,500 for a comprehensive financial plan), or possibly via hourly charges like $250/hour. I’m told the latter are hard to find, as are those who charge monthly or quarterly retainers but they do exist. These fee-only planners are not investment specialists and can’t usually recommend specific stocks or ETFs.

What is a money coach?

There’s a relatively new term, “money coach,” which nicely differentiates true fee-only planners from fee-based (i.e. asset-based) advisers. Regular MoneySense readers may know about Money Coaches Canada, which is a network of roughly 21 fee-only money coaches across Canada. Co-founders  Karin Mizgala and Sheila Walkington are often quoted in our magazine.

The pair has also published a book called Unstuck: How to Get Out of Your Money Rut, which nicely lays out the philosophy. They make the point that  financial planners that are fee-based are licensed to sell investments or insurance, while fee-only planners or money coaches do not sell financial products. They charge by the hour or by the project: at Money Coaches Canada, a coaching engagement of three or four months will range in cost from $2,000 to $3,500.


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6 comments on “The difference between fee-only and fee-based financial planners

  1. IF your 1.5% fee is ALL inclusive then yes, it is $7,500 per year

    however, many representatives simply put a 1.5% wrapper/fee/trailer/asset mgmt fee over the portfolio which still attracts 'other fees'

    for example if your 500k holds f class funds, they still pay the fund mer of .5 – 1.%

    if they hold etfs, they still attract the underlying etf mer of .1 – .5%

    there are a myriad of fees that fall outside the 1.5% advisor fee (custodian, rrsp trustee fee etc), so best ask what they are lest you assume the 1.5% is ALL IN

    and be wary of the saw " in an asset management fee" arrangement mrs client we are on the same side of the table; too often the client starts with a fund portfolio with an mer of 2.5% and after switching to F class funds and adding back the 1point whatever fee, ends up with a portfolio of mutual funds with an mer of 2.5%

    finally, I have read, and understand to be true, that the deductibility of fees amounts to approx. .15% or 15 basis points annually, hardly a case for conversion

    Reply

    • You may some excellent points; thanks for taking the time to post them here.

      Reply

  2. I would like to see an article on T Series Mutual Funds that seem to be a good deal for people wanting income now with perhaps some preservation of capital or value down the road The T series are a return of capital for about 10 years with no tax payable until the cost base is down to zero & it will become capital gains at a good tax rate A retirie at say 70 can enjoy a tax free 5-8% income for aprox 10 yr & still have some value for estate or some futher income for their 80s on The mers are the same as the regular funds but can surprise in a given year with some large taxable distributions CI & TD & others offer this vechicle Your comments please B T METCALFE

    Reply

    • I agree T series and also Corporate Class funds are one place where it's possible for funds to recoup some of their own costs and maybe more through tax efficiency. Suzane Abboud wrote just that about corporate class funds in a MoneySense column late in 2012.

      Reply

  3. Pingback: Advisor Compensation-Why It Isn’t as Important as People Say | Gary's $$$ and Sense Blog

  4. Money coach? What a joke. It is quite straightforward to develop a financial plan. It requires no more than grade 10 math. These planners should have calculators and simulators that crunch the numbers. Paying someone a percantage of your assets with no guarantee of performance is a waste of money. Studies show most active managers fail to even match the index, so why not just buy the indexes and stay invested instead of giving your money to people who don’t work for it and don’t deserve it. If you have 500K investments and you even pay one percent, that is 5k a year. Even at 100 dollars per hour, which these charlatans don’t deserve they would work 50 hours a year on your portfolio. When in real life, they probably spend more like 10 hours a year. The industry needs reform. THese people make far more than they deserve.

    Reply

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