Financial advisor compensation
In exchange for the variety of services offered to clients, I believe a good financial advisor is worth at least 1% per year of the client assets managed. In other words, about $1,000 per year for every $100,000 dollars of client investments. There are five ways an advisor can earn this:
- Helping you earn more – a 1% higher rate of return for example
- Helping you avoid mistakes which cost 1% or more
- Helping you reduce taxes or debt costs or other savings of 1% or more
- Helping you implement a written plan which saves you 1% in time, energy, worry and/or record keeping.
- Any combination of the above.
Note that if the advisor can help you accomplish ANY ONE of these then the advisor is adding value to your life. Given that a large proportion of investors:
a) earn a far lower return than they should because of mistakes or;
b) invest in a low returning asset class or;
c) they have a poor understanding of how our tax system can be used to their advantage or;
d) rarely have a complete written financial plan;
I believe it is elementary for a good advisor to add much more than 1% to your financial life. In fact, advice is usually the difference between success and failure.
This is not to say that all advisors earn their 1% all the time. I believe many do not since they fall victim to the same mistakes made by investors. It can be hard for you to tell a good advisor from a poor one, so look carefully at the advisor’s philosophy to determine if is is designed to tell you what you think you want or what the advisor knows you need. These are often mutually exclusive.
There are a few models used by advisors to earn this 1%:
- The 1% is embedded in the financial product only (most mutual funds, segregated funds, bonds, GIC’s.
- The 1% is billed directly to your account (fee-only account).
- The 1% is billed to you regardless of your account (fee-only advisor).
- The 1% is billed to your investment and itemized (wrap program).
- Some combination of the above.
Watch out for mechanisms where the advisor is getting both embedded compensation and charging you for advice too. I have heard of cases where the advisor was in effect double billing the client. This sometimes occurs when investments are switched, so ask about this when switches occur.
If you would like to know exactly how we are earning our 1% please refer to your plan, to a mutual fund prospectus or ask us.