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?