30 Dec What are you really paying your advisor for?
It still amazes me how so many Canadians either don’t know what they are paying their advisor and more importantly what they are actually paying for?
Long are the days that you simply paid a “financial advisor” to access global markets for merely investing. Anyone with an internet connection can easily set up an investment account in minutes.
So what should you actually be paying your advisor for?
It is not just about portfolio management anymore…
It has been well documented that throughout history over 96% of all actively managed investments do not outpace the broad market. And yet Canadians continue to throw their hard earned investment dollars at “professionals” in desperate attempt to grow their wealth.
So you may be asking yourself….
If only 4% of advisors beat the market over a 10 year period then what am I actually paying for?
That is the million dollar question!!!
Honestly, I’m not really sure.
With average mutual fund and portfolio management expenses ranging anywhere from 1.5% up to the more common 3% it has to leave clients wondering where the actual value is coming from.
Now, I’m not saying that you should not be paying for professional advice. After all, we at Precedence Private Wealth do not run a “non-profit” organization either. But Canadians do need to start asking the right questions when it comes to managing their money.
They should start with….. “What exact value am I getting for this fee?”
You would never pay more money for a vehicle that gets worse mileage, has fewer options, and has worse performance would you….
And yet we continue to show up with bags of money in hope that our “advisors” have a crystal ball and can somehow miraculously outperform the market.
So what should you actually be paying your advisor for exactly?
Here is our opinion….take it for what it’s worth:
1. Asset Allocation:
- The single most contributing factor that effects the overall performance of your investment portfolio is asset allocation. This does not mean speculating on what investment asset classes will outperform next.
- Advisors that state they can do this are grossly overstating their abilities!
2. Written Comprehensive Financial Plan:
- True Fact: Less than 30% of Canadians claim to have a financial plan.
- And those that do for the most part merely have some sort of loosely illustrated retirement projection….
This is NOT a financial plan.
Could you imagine a home builder scratching out some building projections without much effort or analysis and without using an exact detailed blue print? What would be the result? Can you say “train wreck!?”
A properly constructed financial plan should provide detailed illustrations and solutions that include the following areas:
Clear description of your goals, dreams and desires
Again not a sloppy account of what you ‘would like’ to see happen. But clear concrete objectives and goals. Besides without a clear why there can be no focus and commitment.
Cash flow Analysis
This does not mean going on a budget. It simply means gaining a thorough understanding of your spending patterns and ensuring that they match what exactly is most important in your life. Most people minor in major things including what they spend their money on.
This does not mean how to pay off your debt faster by slamming more hard earned resources at your liabilities. It does mean ensuring that you have the most efficient debt possible. This includes paying the least amount of interest possible but also transitioning your debt to being tax deductible whenever possible. The Tax Deductible Mortgage Strategy is just one example of proper debt management.
Yes, the actual portfolio management is still important. However, not from the traditional sense. You want to ensure that you are well educated on the realities and truths about investing. A smart passive approach to investing is sure to trump the more commonly suggest active management that we are often sold on.
“The finance and banking industry is a massive marketing machine geared towards moving money from your family’s nest egg often in the form of inflated fees and commissions.”
Proper Risk & Insurance Plan:
Everyone owns some form of insurance. But very few people actually understand the details of what coverage they actually own.
“If you were to jump out of a plan, would you not want to ensure your parachute will open properly?”
A thorough analysis of all of the insurance coverage you require as well as the options for keeping premiums at a minimum is an integral part of a financial plan. It should never be separate or considered an afterthought. Defense matters.
Wills & Estate Planning:
Only 1 in 5 adult Canadians currently have a will. And many of these are so far out of date that they are simply useless. Although lawyers provide an important part of drafting the appropriate documentation such as wills and power of attorneys, many do not provide any type of consultation and thorough planning. More importantly they often do not consider the tax consequences of such decisions. Properly advising on preparing a will and estate plan should be an integral part of the financial advisors role.
Accounting is not tax planning. I repeat….
“Accounting is NOT Tax planning!!!”
Proper tax planning is essential. Income tax is by far the highest expense that Canadians face within their lifetime. And yet is garnished the least attention.
However, we have been lead to believe that accounting is the same as tax planning. Couldn’t be further from the truth.
Filing your taxes is not only a necessity but an obligation. Proper use of the tax code is not unfortunately.
Because of its importance, a written tax plan has to be provided each and every year to ensure that you are fully maximizing your opportunities to reduce your taxes….Period.
The unfortunate reality is not that advisors are being paid too much. It is simply that they are not providing enough value to their clients. So before you consider paying your financial advisor their fee…I would take a long hard look at the topics outlined above and ensure you are being properly advised on all of these important areas.
If you are not, then you at least know what difficult questions you should begin to ask.