Measuring the value of financial advice
The key is understanding how and what you're paying for—and what you get in exchange
The key is understanding how and what you're paying for—and what you get in exchange
A lot of attention is focused on costs when it comes to working with a financial advisor—and rightfully so. When the typical investor learns for the first time that they’re paying thousands of dollars per year to work with an advisor at their bank, they may get struck with a severe case of sticker shock if they don’t feel they’re actually getting thousands of dollars’ worth of value in return.
Starting July 15, 2016, you can certainly expect to see an upward swing in this type of self-awareness amongst investors. That’s when enhanced disclosure requirements known as Phase III of the Client Relationship Model Phase 2 (or CRM2) finally come into effect. From that point onward, it will be a regulatory requirement for firms and advisors to provide the annual account charges and compensation earned in dollar terms, and to provide annual investment performance reports to their clients.
Once investors see what they’re paying their advisors every year in real dollars and cents, it will no doubt be eye opening for many. (It should be noted that the enhanced cost disclosure will still not include the full product costs in these totals, just the account charges and costs of distributing the products.)
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But even without these types of new disclosure rules, investors would be excused for thinking that the reconciliation between cost and value of financial advice had already been determined. It’s easy to think that value of the service you’re getting is implicit, particularly when various financial industry participants routinely reference a 2012 report by the Centre for Interuniversity Research and Analysis on Organizations (CIRANO) which states that investors who have used a financial advisor for 15 years or longer had 2.73 times the level of assets as investors who don’t use an advisor.
Sounds great, right? Well, not quite. If you dive a little deeper into the methodology of CIRANO’s research, you’ll find that someone who has fired their advisor—presumably for poor performance—is counted as a non-advised household (even if they used an advisor for more than 15 years!).
This is no different than the “survivorship bias” that needs to be corrected for in mutual fund industry returns—that is, the widespread tendency for poorly performing mutual funds to be dropped by mutual fund companies, thereby resulting in an overestimation of the past returns of mutual funds as a whole. If you throw out the worst data points, it’s simply a given that the average is going to look a lot better than the real world experience.
So, by all of this am I saying that there’s no value in financial advice, or that it costs too much across the board? Not at all. Rather, as with all expenses, it’s about understanding both how and what you pay your advisor—and what you get in exchange. Only then can you get a reasonable estimation of the true value of the service you’re getting.
Over the next four parts in this series, I’ll provide a framework for you to analyze your own situation with your advisor. We’ll review cost models, advisor credentials, hidden behavioural costs you may not be aware of, and, finally, how to bring all of this information together to figure out the right investment financial planning advice model for you.
Part 2: Just how are you paying your financial advisor? »
Part 3: What kind of financial advice do you actually need? »
Part 4: How your own bad investing behaviour costs you »
Part 5: The right financial advisor model for you »
*MoneySense Approved rating is created for information purposes only and is not intended as financial advice. MoneySense Approved is not responsible for any advice or other communication provided to an investor by any Financial Advisor. Rogers/MoneySense makes no representations or warranties as to the suitability of any particular Financial Advisor and/or investment for a specific investor. Visit moneysense.ca/approvedmethod for full methodology.
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