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Fee-only Financial Planning

By: Jason Heath
March 2011

Financial planning is not just about investments and insurance – and it is definitely not doled out by your father’s door-to-door salesman type of financial advisor any more. There is a new age of financial planning that is emerging as the gold standard in light of the 2008 financial crisis and a decade of disappointing stock market returns around the world. 

Financial planning is generically defined as the integration of all aspects of your family’s finances, including retirement, tax and estate planning, coupled with investment, and insurance strategies. It is occasionally a value-added service provided by banks and investment firms, but, in some cases, it is nothing more than a loss leader for their lucrative investment management business.

Fee-only Financial Planning

Investment Advice

For most Canadians, investment advice is the only real financial advice they get. Even tax planning advice is elusive, given that most people’s accountants simply do their tax return and nothing more.

An elite style of financial planning called fee-only financial planning brings the integration of all areas of personal finance to the forefront and makes it the sole goal of the client-advisor relationship. True fee-only financial planning ensures that the planner and their company are compensated solely by agreed upon fees paid by the client. This means there are no hidden costs, third party financial motivations, or kick-backs – the planner represents the client and only the client. Objectivity is the name of the game, which is important in a global financial market that can be fraught with conflicts of interest.

Fee-only financial planning should not be confused with fee-based investment management, where an investor pays an annual fee to their investment advisor based on a percentage of their investments. A fee-based approach is simply a way to pay your investment advisor – and even then, there is a fierce debate as to whether or not this is in the best interest of the investor or the advisor.

Fee-only financial planning fees are charged for comprehensive financial advice and are based solely on time. They typically take the form of an annual fee ranging from $2,000 to $5,000 and upwards depending on the mandate and whether tax preparation is included. In some cases, the fees may be tax-deductible. They have nothing to do with a client’s income or assets, meaning every client is just as important as the next. This is in stark contrast to most financial advice, where higher fees are paid by clients with larger accounts and different compensation is paid to the advisor by different products. It means fee-only financial planning is accessible by anybody and everybody on a level playing field.

That said, those with a high net worth probably have the most to gain from working with a fee-only financial planner because the economies of scale are that much more compelling relative to the cost of the service. In essence, the return on investment can be that much greater. Compared to the typical fees on a $1 million investment portfolio, which typically range from $10,000 to $20,000 a year, even at $5,000 a year, fee-only financial planning is a bargain.

No products are sold by a fee-only financial planner or their company. The advice and potential products are kept entirely separate, so most clients who work with a fee-only financial planner will also have a separate investment advisor and insurance agent.

No Integration

Some people are reluctant to add another advisor to their repertoire. They already meet with their investment advisor in February to make their RRSP contribution. They meet with their accountant in April to get their income taxes completed. They have an insurance agent who has arranged their insurance policies. They have a lawyer who has updates their wills and powers of attorney from time to time. The problem is, even though these various professionals may be great at what they do individually, collectively, there is no integration of their recommendations.

Fee-only financial planners are comprehensive advisors who can help you fit together all the different pieces of your financial puzzle. They also have a short list of third-party professionals who they can refer you to if you need to purchase a product as a result of their recommendations – without accepting a kick-back or commission. In most cases, the third parties discount their fees for the client, in lieu of a referral fee that might otherwise be paid to the planner. In some cases, the discounts put more money back in a client’s pocket than the cost of the fee-only financial planner’s fee in the first place. 

Many companies have started to add fee-only financial planning as a perk for their senior executives. It helps keep top talent focused on corporate business because they know their personal business is well-organized by a professional who is on their side. Furthermore, the group benefits provider or pension administrator that works with the broader employee base may do an excellent job for most employees, but may not be well-equipped to counsel a company’s senior management. Retirement planning provided by a fee-only financial planner is also one of the few employee benefits that is not taxable on an employee’s T4 here in Canada. As such, it can be a way to compensate an employee without having the employee taxed on that compensation.

It is estimated there are 150 fee-only financial planners in Canada. That is 150 individuals, not 150 companies. In contrast, there are 17,000 Certified Financial Planners (CFPs).

Jason Heath is a fee-only Certified Financial Planner (CFP) and income tax professional for Objective Financial Partners Inc. in Toronto, Ontario.
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