How much should you pay for financial advice?

I want to change advisers this year because I think I am paying too much. What should I be paying for a portfolio of about $500,000?

Thanks,

John

Many Canadians worry about the fees they pay their advisers and wonder if they’re paying too much regardless of the amount they have saved. Having been an investment banker for over 30 years, I can tell you that you do get what you pay for. However, fees, inflation, and future market volatility will always eat away at your retirement capital, decreasing your purchasing power, and eventually forcing you to modify your lifestyle as you age.

Remember, the key is to maintain a well-diversified portfolio which includes bonds, cash, and high-quality stocks. When you’re looking for an investment “partner,” try to pick an adviser who really has your best interests at heart and can help you financially plan your future. Ask what their goals are for your portfolio and how they plan to achieve them. Understand how they’re paid and question the commissions they receive on your investments.

So, let’s talk about that – what should you pay? There are two basic fee structures most advisers adhere to – transactional or fee-based.

Transactional fees are charged with every investment transaction. This is often the case when you buy fixed-income investments such as bonds. A fee is charged when you purchase the bond and then again when you sell it. There are not many advisers who still offer transactional fee structures when buying securities. They seem to have left the industry with the vintage, old-school stockbrokers who had to do multiple trades every month to make any money – a method we used to call “pump and dump” back in the day. Now we have investment advisers who want to put you in fee-based plans, designed to offer more protection for clients along with a consistent revenue stream for advisers and brokerage firms.

At the retail level, many financial planners are paid a base salary with a commission matrix based on how they grow their book of business and bring on new clients. Typically, fees are preset and based on the mutual fund you choose ranging from one per cent to 2.95 per cent. Investment advisers are usually on straight commission, which makes them much more motivated to ensure you make a profit which they, in turn, are compensated on. Fee-based services range from .75 per cent all the way up to 3 per cent. Some advisers act as personal bankers for ultra-rich clients, doing everything for them, and can thus justify the higher fee structure. But most of us don’t need someone to pay our bills and handle our budgets, so if you are paying more than 1.5 per cent for a fee-based portfolio, you may be paying too much. If you have different, separately managed accounts (or SMAs) your adviser may increase the fee up to a max of 1.75 per cent

Really John, the bottom line is that fees are all over the map and vary from one adviser to another. The price you pay for professional financial advice should be based on your own personal comfort zone.

Is your adviser a valued partner you are willing to pay for and, most importantly, are you satisfied with their services? It’s always a good idea to periodically check out the competition, talk to your friends and see what they pay. Remember, as you age and move investments into secure fixed-income products with lower risk and smaller gains, your No. 1 issue will be fees and expenses.