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Imagine a world where there was a value of financial advice that wasn't driven by commission and everyone understood what they would get for what they paid.

Imagine (it’s easy if you try) a world where financial advice was priced by a competitive and efficient market in which everyone understood what they would get for what they paid.  Now that would be a beautiful thing.  One of our most controversial and commented-upon articles here at Y &T is our look at MER fees and the overall compensation model the investment industry encourages.  Before I get onto my soapbox and talk about how Canada would look if I was made Czar of Financial Regulation for the day, I should preface my comments with the statement that I don’t think being an investment adviser makes you a bad person!  Cue the usual *I’ve got several friends who are _________*.  But seriously, I think a lot of investment advisors get into the industry because they want to help people in an area where there is a huge deficit of knowledge, and make a little money doing it.  In my opinion, the main problems all revolve around the compensation models and the general structure of the financial industry.  If you look through the comments of that the aforementioned article, you’ll see several investment advisors that are well-intentioned and bright individuals – this doesn’t mean using their services in the current context is a good idea however.  As a side note, another of our popular articles here at Y & T revolves around real estate commissions.  I find it humorous and interesting that real estate agents and investment advisers love to point out the flaws in each other’s compensation structure on a public forum.  “Hey pot, have I introduced you to kettle?”  😉

Why You Should Get Financial Advice From Somewhere

Before I get all negative and piss off the money caste that runs most peoples’ retirement savings accounts, let’s start with some of the reasons you should probably get some professional help with your financial life:

1) Statistically speaking, most people have no idea how to manage their own financial affairs, including credit, budgeting and an assortment of other personal finance basics.

2) For certain niche parts of personal finance such as writing wills, or making sure you’re at peak tax efficiency, it is often beneficial to enlist the help of a specialist.

3) Just from an investment standpoint, peoples’ instincts are hardwired to do exactly the wrong thing when it comes to investing money (in regards to dealing with risk and being loss-averse).  For more information on this check out recent books such as Sway and Thinking Fast and Slow.

Investment advisors can help to some degree in all of these areas.  Industry propaganda is not wrong to state that on average, people with financial advisors are better off than those that don’t.  Now the level of causation vs spurious correlation amongst those statistics is certainly debatable.  One thing is for certain, depending on your level of personal finance knowledge, and your motivation to learn more, the services of a financial advisor will have varying levels of value to you.

In other words, people who read PF blogs will need much less from any sort of financial advisor than people who aren’t really sure how a mortgage works or what a mutual fund is.  Some people might only need help with certain aspects of financial planning such as how to best organize their small business they’re starting on the side.  Others might need a much more comprehensive package that includes things like insurance information and help understanding the principles behind credit/debt (since we refuse to do this in schools).

Mo Money Mo Problems

Hey, I sympathize with young people out there who are drawn to a career that involves providing financial services for people.  Even if you want to simply get paid “fairly” for what you do for a living, it is very difficult to simply put out your shingle and become a fee-only financial advisor in Canada today.  Canadians are used to paying $0 in upfront fees for their financial advice that I’m sure it is extremely difficult trying to convince the average person they are better off giving you $1,500 upfront than it is to say, “I’ve got this fund that has beaten the market for the last five years, not only will it make you rich by the time your 65, it will also pay me at the same time.”  Since the average person has very little understanding of what fancy terms like “diversification,” “return on investment,” or Management Expense Ratio mean, it is much easier to work within the current structure than trying to reform it.  Not only that, but several advisors have pointed out to me that the major players in the financial industry have access to advanced software that would be very expensive to obtain on an individual basis if they were to set up shop for themselves.  In today’s world of open-source software I question how long that advantage can last, but I understand the allure of putting your energy into benefiting from the current system as opposed to trying to change the way the game is played.

One thing is for sure, with robo advisors and online-only banks such as Tangerine coming in and disrupting financial norms over the last couple of years the traditional way of doing things is going to feel some heat.  As more and more “digital natives” come to an age where they have financial assets to manage (it will happen eventually guys – I swear it!) their inherent distrust of these commission-based models is going to make itself known.  Just look at how quickly Wealthsimple went from start up to managing over a billion dollars!  See our Wealthsimple review here and use our exclusive promo offer code to give their services a try for free.

Who Couldn’t Use a Little Transparency?

Wouldn’t it be great though if it didn’t have to be this way?  What if it was the norm was to be able to call four different financial advisers and get an upfront price quote for the piece of your personal financial plan you needed help with?  Right now, the debate amongst DIY people like me (who hate mutual funds and all the structural inefficiencies they spawn) and financial advisors boils down to if the sacrificed returns someone will have to suffer if they go with an advisor is worth the help they provide with all of the other aspects they help with other than investments (since there is no data out there that supports the idea that anyone can pick mutual fund winners ahead of time).  I think there is a very solid argument that only a very few advisors could provide enough value to offset the aforementioned loss of investment returns; however, even if one takes a position favorable to the industry in this debate, I think everyone would admit that most people really have no idea how or what they are paying for what they are getting.  What this results in is a very inefficient market.

It also allows the few fee-only advisors on the market right now to charge a solid premium for their product since there isn’t much competition for their niche.  My theory is that if the whole industry moved this way (through education of the population or through regulations) people/clients would be far more able to understand exactly how much they were paying for specific financial services.  Consequently, the competition within the sector would almost guarantee fee-only prices would go down, and investors would see far less money piled into terrible-performing mutual funds.  After all, it isn’t like there is a shortage of financial advisers out there – in fact they’re almost as numerous as know-it-all personal finance bloggers.

This transparent pricing would also have the side benefit of giving personal finance advisors much more positive incentives to always put the best interests of their clients first.  There are obviously many advisors that do this already; however, there are also many advisors that recommend their clients take large investment loans that don’t make sense for their situation, or tell them to put money into investment products as opposed to paying down credit card debt (which they get no compensation from).  This doesn’t get into smaller issues such as recommending one insurance company over another simply because of commission rates, instead of suitability of the product to the client.  In a more transparent market, advisors success would ultimately depend on their ability to help their clients out the most, for the least amount of money (providing the best value for their service).  When you combine that hypothetical advance with the easy comparison power of the internet, I think a beneficial market for all involved would evolve rather quickly.  Doesn’t that sound much preferable to the current system that exploits a gaping hole in our education system and which a massive majority of the population doesn’t really understand?

So then the question becomes, who stands to gain from the current model, and why haven’t we changed already?

Article comments

Cathryn says:

It is fine to go to a fee-only financial advisor. Then would you
take this ‘financial plan’ to some-one who was going to invest for you?

Then this second Advisor, how is he/she going to be paid?

And this second person, are they not going to have their own opinions
on the first person’s plan?

If you are going to invest yourself, then you only need yourself,
but you still have to pay a broker.

If you do it for yourself, it is a full time job.
Investment Policy, tracking the investments and analyzing
Managements Performance and putting the whole thing together.

It is all set up to make money for Tax Advisors, Lawyers,
various kinds of planners, various kinds of Brokers and Investment People.

Meaning that it only works for the extremly wealthy who don’t have
time to notice the fees that they are paying as they still get
to keep a significant amount of money.


Kyle says:

Pretty much wrong on every level there Cathryn:

1) Why do I need to go to a different person to invest for me? If I want to keep my life SUPER SIMPLE, I’ll just pick an adviser that can invest my money in plain jane vanilla mutual funds that track an index…


2) I would say 90%+ of people are quite capable of getting a discount broker and implementing a basic index plan. See our FREE ETF ebook for more information. This is very cheap.

3) You’re assertion of a full-time is ridiculous. I know several millionaires who implement basic index investing plans and spend less than 5 hours a year on their investments. Please quit sipping the financial services kool aid.

4) Why do you need tax advisers and lawyers? Unless you are in the top 1-2% of earners you’re investments are probably pretty to prepare taxes for, and I’m still not sure what you need the lawyer for except for maybe planning a will which is a one time expense.

Financial Planning Guy says:

There in lies the crux. People are inherently irrational.

I am aware of the causation and correlation arguments. It is definitely one of the areas that needs to be studied more to make sure they can isolate those variables. But you will notice that I tried to isolate the data that corrected for those problems. In the Canadian study the conclusion I quoted was corrected to be the exact same person w vs w/o advice. In the US study it was an isolated group with the exact same investment options and corrected for age, income and savings rate. It would be fairly reasonable to extrapolate that if they had a basket of index funds and ETF’s to choose from (they didn’t outline what investment choices there were), the results would be exactly the same, that those that sought advice would outperform by 2-3%. The reason being that left to our own devices without accountability, we inevitably make poor choices. We actually see this if you look at fund flows of ETF’s and Index funds. Investors constantly sell when they shouldn’t and buy when it’s most expensive. And this is the platform that is supposed to be a passive strategy. Investors are inherently impatient. You can see this in the comment section of your Investors group post well. We are coming up on 6 years of the TSX returning almost exactly 0% and you can see the frustration that they lost 8% one year. If they had used an index strategy, the frustration wouldn’t be any different because even though we say we understand the market, we behave contrary to that knowledge.

The value of financial advice is so much more than picking an asset allocation and letting it ride with 30min of maintenance a quarter. The platforms, plans, products, strategies and client management will always need a specialist to help the masses. There may be a select group that take the time to understand, implement and succeed, but I figure it’s kinda like me doing the electrical work when I finished my basement. It’s pretty easy to learn the basics, and you can do it yourself. But for the masses, there is the potential to screw it up with disastrous results. For that reason there will always be a market for financial advice that has value far greater than the fees that we pay.

On a side note, I have to admit that I am severely disappointed in you. I thought you were an overly analytical information geek such as myself, so I made sure to pick a Canadian study that had data showing that committed DIY investors actual perform better than those with advisors. But since we can throw away the study funded by major Canadian finance institutions, it must not be true 😉

Teacher Man says:

So then we get back to the original argument of is the value of handholding in down markets, and other assorted financial planning services worth the tens of thousands of dollars in sacrificed investment returns that most people are looking at if they go with mutual funds? I think in Canada, with our highest MERs in the world, it certainly is not worth it, and if we went to a more transparent model we would quickly see just who was right. I think you’re also overestimating the value of “platforms, plans, products, strategies, and client management”. Most people would be just fine with a very simple plan that they stuck too.

I’m definitely not overly analytical when it comes to comparing slanted information in the financial sector. The entire mutual fund/financial advisor is massive, and wants to stay that way. Therefore they are able to generate a ton of studies and “information” that are flawed, but appear convincing to the average Joe. I know that every impartial academic study done in the last fifty years shows mutual funds to be a atrocious investment, so any financial advice that gives incentives to put money into them is a terrible deal.

Financial Planning Guy says:

Alright, one more comment and then I’ll drift off into the sunset on this topic. I’m going to get away from the passive vs active debate on fees and get back to the original point of this article, finding the value of an advisor. Not sure if you have seen these studies, but here are 2 interesting ones that try to quantify this very question.


While there is more work to do to clarify this particular study and get more detailed results, here is one conclusion they had. It’s refering not to ROR, but to the disciplined savings rate of an identical person with or without an advisor:

“From these numbers and using statistically significant coefficient estimates (See the
final column of Table II1.2), one can infer that for two identical individuals, the one with a financial advisor will have 106% more financial assets, or 2.06x the level of financial assets of the non-advised respondent.”

And one study from the States looking at guidance vs non-guidance in work based 401k programs.


“When considering the difference in median returns across the different age groups, Help participants, on average, experienced returns nearly 3% (292 basis points) higher than Non-Help Participants, net of fees. The performance difference ranged from 2.53% to 3.40% across the age groups.”

Not sure if that helps or not, but they were the best ones I could find that try to actually quantify results that you may be able to value in dollars and cents what you would be willing to pay for that type of guidance.

Teacher Man says:

Thanks for bringing logical arguments and statistics FPC – I think our readers get a lot of valuable info in back-and-forths like this.

These studies don’t surprise me at all and they have actually been referred to me before. In our Investor’s Group article several financial advisors actually used similar – but more aggressive numbers that measured the same variables.

Here’s the thing about those statistics though – and it’s the very reason that large financial services companies love them – they only give a very small part of the picture and they fail to differentiate between causation and correlation. There is undoubtedly a strong correlation between people having invested assets and people having financial advisors. Now the real question becomes does having the financial advisor cause people to have more assets, or do people with higher than average natural savings habits and higher than average interest in growing their money tend to seek out financial advisors (in large part because that is by far the most common way to handle finances in North America)? Those are very difficult questions to answer, and there is no lobby group interested in funding those studies (on behalf of DIY investing).

To me the much more relevant question is simply “Can your investor recommend investments that only trail the basic benchmark indexes by the amount their services are worth”? If the mutual fund recommendations only trail the benchmark by .5% or something like that over the long term there is a strong case to be made for a commission and an even stronger case to be made for a fee-only advisor that recommends mutual funds (although it’s telling that most don’t recommend any mutual funds at all). The rationale I use is that ANYONE can put money in a basic index time after time, so there is really little value to be had unless you can outperform that. I have yet to see data that will convince me that advisors at large can pick the 1% or so of mutual funds that will outperform long-term.

I should definitely admit one thing (and I referenced it in the article) if you have absolutely no clue about the investment world and refuse to do a couple hours of reading, then some advisors can probably earn back their commissions by holding your hand and telling you not to sell when everyone else is selling. I just think this is such a basic concept, that people should simply be educated for 20 minutes at some point during their 13-year stint in public schools as to how equities and markets generally work – thus allaying the completely irrational behaviour we often see retail investors cling too.

This is my favourite part: financial advisors are “almost as numerous as know-it-all personal finance bloggers.” Oh, the PFHacks…bless them.

Teacher Man says:

Haha, glad someone picked on the self-deprecating humor Sandi!

thefiscallyfit says:

In reference to MER, we are not talking about mutual funds are we? as ETFs have a MER as well… as well as segregated funds. All of which are neither good nor bad. They are simply tools for specific jobs. I won’t comment on ignorance of MER understanding but the average investor does need to learn more about his or her finances.

But how is it difficult to compare the two “compensation packages”? We have no idea what the lawyer is actually earning as income from the fee and it doesn’t really matter does it? and the same goes for financial planner. The cost of the legal “stuff” is $800-$1000. The cost for the investment if the MER is 1.6% on your $100k is $1600.

Teacher Man says:

We are definitely talking about mutual funds. Please don’t paint the .06% MER on broad-based ETFs with the same brush you use to show that mutual funds in Canada have ridiculous fees that are often well over 2% – there is a massive difference there. I don’t think there is any job for mutual funds at all to be honest, they are categorically terrible performing investments and the only reason they get recommended is due to the current compensation structure of advisors in Canada.

The packages are very different. What the lawyer or the advisor actually “takes home” is irrelevant in both cases. The fact that everyone can understand how the lawyer gets paid and make a cost analysis decision based on that is a big deal. Your MER calculation is also flawed in that it only shows the cost the first year and fails to show how much gets sacrificed over time. Your MER figure is also extremely low for a Canadian mutual fund.

Financial Planning Guy says:

TM – I think one of the problems we’re running into is that we are comparing 2 services, a lawyer and financial advisor that are doing 2 different types of jobs. One is a task that has a specific start and completion date, the other is an ongoing plan for advice and direction. The other thing that’s happening is we are comparing ETF’s that have no built in cost for advice, guidance or direction to a Mutual Fund that assumes in it’s model that there is a value for the advice and guidance being given. What happens if we go to a fee for service model that charges $1500-$3000/year for an investment plan and it’s implemented with an ETF portfolio? I’m not so certain it will be much different than the current model we’re in. There hasn’t been long enough to study the different models around the world but early research is suggesting that the costs are not significantly different from current models and there is some research showing that the costs of an unbundled compensation structure actually increase to clients.

Please don’t take this as me defending the mutual fund industry or bundled compensation, all I’m saying is that the dramatic differences that some think it will make, might not be all they are cracked up to be.

Teacher Man says:

The point about 2 different types of services is a valid one FPG. My proposed “perfect world” would move a financial advisor’s role much closer to that of a lawyer in that the services they offer would have much more of a start and end date. After all, once you teach someone how to use broad-based asset allocation and what re-balancing means, that’s about 90% of what most people need to know, and most good financial advisors could teach the majority of adults to do that in an afternoon.

A fee for service model that charges $2,000 or so for the upfront costs to create an overarching financial plan, and set up an initial portfolio would not need to charge that every year. After all the legwork has been done, it would take maybe a half hour of work every quarter for most advisors to re-balance their client’s portfolio and report to them the update. I think the market would soon dictate a much lower price for this annual, bi-annual or quarterly maitenance.

Also, I’m absolutely certain that it would much different investing with ETFs seeing as how several prominent studies (such as the ones quoted in my free ebook) show just how badly most mutual funds trail their benchmark when looking at 10-year records even BEFORE MER fees are taken into consideration.

I think that we are only just beginning to see the benefits of a fee-only system whereas the mutual fund industry has a HUGE army of extremely well-paid spin doctors and lobbyists to help keep entrenched interests satisfied and move the status quo along.

thefiscallyfit says:

But is it really that different? As there are “seedy” lawyers and advisors, let us assume that we are discussing reputable trustworthy individuals that are are “competent” in their respective fields. How is that value determination different? (good discussion btw haha)

Teacher Man says:

The difference lies in the ability of people to accurately judge the value of something due to a complete lack of general understanding of one compensation package relative to another one which is much easier to understand.

Financial Planning Guy says:

Sorry to insert myself here, but they are maybe not as different as you may think. You paid $800-$1000 for your legal advice/service, but how much did the lawyer get paid out of that? How much did his secretary get paid? How much went to overhead? How many hours did the lawyer spend on the documents? The difference is that the lawyer is giving you a one time service that has a definite conclusion, but what he gets paid is not necessarily as clear as you may think. Also just like any business, they are trying to maximize billable hours vs amount of work done to take care of their responsibility to make money for the firm.

When you purchase an investment, you know exactly what the MER is, ignorance of the basics of MER’s is no excuse, they’ve been around as long as investments have been. It is also not a static solution like getting a will drawn up, or buying a house. It needs to be managed and adjusted on an ongoing basis justifying an ongoing fee. In fact, someone with $10k to invest would pay a far lower cost than someone with $100k for pretty much the same amount of work and advice. One may be able to argue that in a fee for service model where you would charge $1000 for an investment plan regardless of assets, those just getting in would be potentially subsidizing the larger plans and paying significantly higher % for advice.

Teacher Man says:

No problem on inserting into the convo FPC – what else are internet comment boards for?!

I don’t see the parallels between the lawyer and the investment advisor’s compensation. Regardless of what the lawyer does, his upfront fee is what determines the value of their service. What they do with the money once it’s out of my pocket is irrelevant to the value I receive. By the same token, however much money an advisor receives from investing fees is irrelevant in terms of the value I get – the only thing that matter is what I get for the money I pay.

Saying ignorance of MERs is not an excuse is a pretty tough line to take in the Canadian market. I just think it is such a non-transparent way to get paid, and judging by the Financial Post’s articles over the past week I’m not the only one!

Also, as a side note, mutual fund managers on average just really suck at their job – there is no statistical proof otherwise. John Bogle shows the average mutual fund vastly underperforms its benchmark for several reasons.

Thefiscallyfit says:

So you got a lawyer to perform legal service

Teacher Man says:

Oh it’s definitely possible FF, in fact I’d say it’s pretty likely if I was choosy enough and put a lot of energy into finding the right one. The question is, what is the value of their insight? With the lawyer, he told me upfront it would about $800-$1,000 to tie up all of the legal stuff surrounding the house so I was easily able to make a value determination. Investment advisors/planners currently operate in a much different context right?

Thefiscallyfit says:

Or more specifically paid for advice from a financial planner(cfp)

thefiscallyfit says:

interesting read. As the real issue is not so much fees as it is value and disclosure IMO; teacherman, what is your experience with both a fee only financial planner and a financial planner that deals with an embedded commission? Positive? Negative? Indifferent? (this is obviously assuming that you have dealt with both structures for your personal situation)

Teacher Man says:

I have to admit fiscally fit that I have never dealt with a planner that uses an embedded commission. I’m relatively young and I was fortunate enough to do a lot of reading on the topic of personal finance before I had any assets to invest; therefore, I never put myself in a position where my money would be handled with someone whose best interests did not align with my own. I’ve written quite a bit about this on our Investor’s Group article.

Thefiscallyfit says:

So you have paid for advice?

Teacher Man says:

I have paid to get a will done very recently (which I consider specialty financial advice). I have also paid for certain legal services surrounding the purchase of my house. I have never actually paid someone who is “only” a financial planner and offered no legal advice.

Financial Planning Guy says:

I’m very interested as this whole thing plays itself out to see where the baseline cost of financial advice goes. There is such a wide range of models right from the uber rich who don’t really care what the fees are as long as they perceive that they are getting value for their money. I read an article the other day that some hedge fund managers charge 2% of assets plus 20-50% of profits and billions of dollars are being invested in these funds, right down to the diy investors that don’t perceive any value from advisors and are unwilling to pay anything for services. And finally the hybrid where people will pay $1-3K for a financial plan and then have to go to another person to implement the plan and pay fees for their products anyways. It will be an interesting next 3-10 years as it shakes itself out.

What would be the ideal model in your mind?

Teacher Man says:

Hey Financial Planning Guy,

“2 and 20” is pretty standard in the hedge fund industry from what I understand.

Personally, I’d like to see a fee-only service that basically eliminates 90%+ of mutual funds and their trailer fees. I’m all for everyone getting their fair compensation, but it’s impossible for anything to be “fair” when it’s not transparent in the least.

Financial Planning Guy says:

Here’s the article I was reading talkjng about the one guy that has a 50% performance fee

So you prefer the Australian model where the client physically writes a cheque? Or are you fine with a % of assets fee arrangement?

Teacher Man says:

To be honest FPG I hadn’t read up much on the Australian model, but it appears both the Australian and British industries have been going towards exactly the type of reforms I would like to see in place. I think writing a cheque up front would be the best case scenario because it would be the most transparent and allow the market to be pretty efficient. What do you think as someone in the industry? I think really good financial advisors would be rewarded with this sort of regulation, but it would certainly mean less money for the financial services industry overall I would expect.

Thanks for pointing out that this is already being done somewhere, that makes it seem even more ridiculous that Canada hasn’t moved more in that direction. From what I read online though the reforms are pretty recent right?

Financial Planning Guy says:

Honestly, for me it really doesn’t matter what kind of compensation model exists. Good advisors will be successful under any model. One of my colleagues was talking with a lady from Great Britain about how their experience with the change. Because it was new, clients had an adjustment phase and a lot of new young advisors were forced out of the business, but things settled down eventually and there are a lot of positives. When people see exactly what they are paying, they will evaluate the services they receive, and decide what to do. I’m not convinced that fees will come down overall, they will just change how they are paid. I could be wrong. One concern I have is that if clients are faced with physically writing a cheque, they may abandon seeking advice altogether, and that would be a detrimental outcome. Other than that I welcome any changes, like I said, good advisors will thrive in any model.

On the other hand, part of me doesn’t get what the big deal is. If you know your MER, what difference does it make who gets paid what out of it. The whole trailer argument about conflict of interest is a little bit of a red herring. Mostly the trailers are standardized and the ones that vary, it’s not worth the time and effort to alter a whole block of clients to get .3 basis points of comp difference, it will cost you way more in time and energy to set it up than it’s worth. I read an post by Boomer and Echo the other day about restaurants and how they make money through different cost strategies. However, when I go and buy a meal, I don’t really care what the cook, waiter, host and owner get paid. I just care if I enjoy the meal and decide if the experience was worth the $.

Some thoughts FWIW

Teacher Man says:

The big deal for me is two-part FPC. First of all, I would be willing to bet a lot of money that less than 5% of Canadians have any clue what an MER is or how it relates to sacrificed returns. I agree that switching between mutual funds likely isn’t a problem for most managers, the problem is that they are recommending mutual funds at all! John Bogle and many other economists have pretty conclusively proven that the vast majority of mutual funds are terrible investments for a variety of reasons. If advisors were paid out front, I highly doubt most would put their clients in mutual funds – afterall, less than 2% beat their benchmarks over 10 year periods – and there is very little evidence that anyone can pick out the winners ahead of time.

The good metaphor is a tough one for me to swallow 😉 The problem is that most people can tell you what a good meal and good service looks like. The vast majority of people have no idea what a good financial plan or investment portfolio looks like.

But it sounds like we’re on a similar page in agreeing that good financial advisors will be in high-demand no matter how the compensation system shakes out.