Fee Only Financial Planners – What is Fee Only?
October 2024
I have been an “hourly-based, fee only” financial planner – sometimes called a “fee for service” planner. A true fee for service planner sells no product and receives no commissions. Some may receive referral fees for sending clients to other advisors selling products, but it is not something which I believe is appropriate, unless there is full disclosure of the fees and the arrangement with the customer. It still introduces issues of objectivity and independence. However, not all fee only planners are the same. You need to exercise caution as the term “fee only” can be interpreted several ways.
There are financial planners and investment advisors who sell products on a “fee only” basis, but the fees are based on a percentage of the asset value in your account. For example, if you have $100,000 of investments with this type of fee only advisor, your “asset based” fee may be 2.00% per year, regardless of the number of investments you own or the amount of time you spend with your advisor. If you have more money, such as $1 million of investments, you may only pay 1.5% per year. Each advisor or firm will have their own rate structure. This fee structure differs from those who charge a commission based on each time you buy or sell a security. However, both of these types of advisors receive money based on selling you investments, and you therefore need to exercise your own due diligence to see if you are being aggressively sold securities which are not appropriate for you. See my other articles for investment strategies and questions to ask your advisors for more information on what is appropriate. Also, be careful when you have an advisor charging you an asset based percentage fee, but also sells you GICs and mutual funds. Determine whether the GICs and mutual funds are included in the base for the fee calculation. There should be no fee on GICs, and unless the mutual funds are of a special type (e.g. “F” Class or “I” Class), your advisor (or your financial institution) is likely paid by the mutual fund directly on your behalf.
There are also financial planners who will charge on an hourly basis, like me. However, upon completion of their financial plan, they also sell investments and receive fees or commissions for the sale of those investments. In these cases, you need to second-guess the objectivity of the hourly-based financial plan to ensure that the recommendations were not biased toward the selling product from which future fees or commissions would be obtained.
Whatever fee you pay, make sure you know how much it is, or will be, in dollars, not percentages. This is more obvious for a fee for service planner – because you are paying the bill directly. However, for percentage types of fees, 2% sounds inexpensive, but if your rate of return is only 4% to begin with, then it is 50% of your income. If you have $100,000 invested, then it is $2,000 per year. If you only meet and review your account once a year for two hours, that is $1,000 per hour (or maybe $500 per hour if your planner spends two hours reviewing your account before you arrive for your meeting). Multiply all those figures by 5 if you have $1,000,000 on account at 1% – e.g., $10,000 per year, and $5,000 or $2,500 per hour for the annual meeting and preparation). Some financial institutions indicate that they do not pay by commission – but ask if they receive performance bonuses, and you will likely have a positive answer, which introduces the same biases. Bottom line – be sure you are getting your money’s worth.
Finding an hourly based fee only financial planner can be a challenge, because most advisors realize that more money can be made from commissions and asset based fees than by hourly based fees. In past years, without having my underlying tax and accounting practice on which to generate much of my revenue, I could not have afforded to carry on a fee for service financial planning practice because of the small market in which I am located. For someone who is not offering other services as a Chartered Professional Accountant, like I am, or has other business interests, operating fee for service financial planning services by the hour in low population areas such as Atlantic Canada would be challenging.
Although the link was no longer working last time I checked (July 23, 2018), MoneySense magazine may provide a listing of MoneySense Approved Financial Advisors, with a category for fee only advisors. (These names are trademarks of Rogers Media.) As they state on their website, “To be included in this program, advisors also pay a fee to MoneySense but only those with top marks make it onto our list.” Until 2015, this was a free website listing and I was included. However, I declined to pay, and therefore to be listed, when the fee was introduced in 2015, which has an annual value of $2,499. I have a policy of not paying other parties to obtain my clients. I also think the price should be disclosed to users of the web site, in the same way that I think investment advisory fees should be disclosed to investors. However, use of such websites is an option available to you, particularly in the larger centres. Otherwise, word-of-mouth by asking your friends and colleagues may provide you with leads.
If you are dealing with advisors that sell products, another way of ensuring objectivity is to obtain a second opinion from another advisor. I strongly recommend that you use financial planners with professional designations, such as the Registered Financial Planner (R.F.P.), Certified Financial Planner (CFP), Personal Financial Planner (PFP) or Chartered Financial Consultant (Ch.F.C.). Many more designations are popping up recently, but I know these from past experience. These are financial planning designations, all of which are accompanied by professional associations governing a code of ethics for their members. If you are dealing with investment advisors or insurance advisors, etc., there will be other appropriate designations for those specialties. Be forewarned – know whether you are looking only for investment advice and an investment plan, or if you are looking for a “personal financial plan.” However, it is the financial planner that looks at the high level scenarios, those dealing with many different aspects of your life, including retirement, investing, insurance, taxes, estate planning, etc. Some planners only look at the investing or insurance aspects, which is fine if that is all you want.
Following a meeting with a financial planner, you may very well need to speak to other specialty advisors to implement the recommendations. This is the case when you work with a fee for service planner because they do not sell product. You would need to deal with, for example, an investment advisor to acquire investments (unless you are comfortable doing it yourself).
Remember – buyer beware. If you have some money, it is likely someone else wants at least a piece of it – protect it wisely because it is your future.
Blair Corkum, CPA, CA, R.F.P., CFP, CFDS, CLU, CHS holds his Chartered Professional Accountant, Chartered Accountant, Registered Financial Planner, Chartered Financial Divorce Specialist as well as several other financial planning related designations. Blair offers hourly based fee-only personal financial planning, holds no investment or insurance licenses, and receives no commissions or referral fees. This publication should not be construed as legal or investment advice. It is neither a definitive analysis of the law nor a substitute for professional advice which you should obtain before acting on information in this article. Information may change as a result of legislation or regulations issued after this article was written.©Blair Corkum