What is a fair price for financial advice?

I’ve written in the past about the value of advice and how good advice pays for itself. The important question is not should I get advice? But rather, what is a reasonable price to pay for advice?

To answer that, I think we need to look at two separate pieces:

1. What is reasonable to pay for investment management, and 

2. What is a fair price for general financial advice?

At times these costs may be bundled (and are often both bundled and hidden), but any good advisor can unbundle them for you and let you know exactly what you are paying for. Don’t be shy about asking. Ask your advisor to explain in plain language all the fees you are paying, what the expense ratio is on the investments you own, and the breakdown of how much of those expenses or fees are for their advice and how much is for the management of the funds. 

As a sidenote, cost should never be the sole determinant in any decision. It’s always an important part, but it’s only important in the context of value. Personally, I’d rather pay much more and get better returns and advice than pay nothing and earn nothing. What you want is the best value, not necessarily the lowest cost. 

Investment Management is the down-in-the-trenches analyzing and choosing of the specific stocks and bonds that you own directly or indirectly through funds. This may be done by one person, one company, or many companies. My preference is to have specialists so that everyone is focusing on what they are best at. Hockey teams use this tactic by choosing various players that play very different rolls (goalie, defense, forwards, etc.). In the financial world, our left forward may be a Canadian Value specialist and our right forward a Canadian Growth specialist. This is just one way to build a portfolio – there are many other legitimate methods, but regardless of how it’s done, there is a cost.

The Canada Pension Plan (CPP) uses the hockey team approach outlined above and (according to a Fraser Institute study (1) done a few years ago) it does so at a cost of 1.07 percent, expressed in the form of an expense ratio. The CPP manages hundreds of billions of dollars, so they are able to negotiate lower rates than you or I can, but knowing their expense ratio provides us with a useful frame of reference.

Many funds are reasonably double that rate, but again don’t be shy about asking your advisor what that rate is and why. You deserve to know exactly what you are paying for. Then it’s up to you and your advisor to decide if it’s worth it.

Financial Advice is what you get from your personal advisor to assist you in all the various aspects they advise you on. Depending on the advisor and your relationship and/or contract with them, this may include tax planning, investment selection, asset allocation, risk tolerance assessment, retirement planning, estate planning, and much more. You will pay for that advice either bundled in with the expense ratio noted above (in which case the ratio will be even higher) or separately through an advisory fee. 

When done as an advisory fee, it’s usually quoted as an annual rate that is then charged and withdrawn from the account monthly based on the average daily balance of the account. I’ve seen advisory fees range from 0.5 percent to 2 percent depending on the level of advice provided and the size of the accounts. 

Again here, don’t be afraid to ask. Good advisors are not afraid to explain such things to their clients. In fact, most of the advisors I know welcome them.

With both Investment Management fees and Financial Advice fees, it’s becoming more and more commonplace to reduce fees as managed assets grow. It’s reasonable for you to expect to pay less for your advisor to manage a $1,000,000 portfolio than a $100,000 portfolio. 

At the end of the day, it’s your money. Of course, you should trust your advisor, but be engaged and ask questions. Ask tough questions. You may not need to know all the nitty gritty details, but you deserve honest answers when you ask them. Don’t accept less.

Arnold Machel, CFP® lives, works, and worships in the White Rock/South Surrey area. He is a Certified Financial Planner with IPC Investment Corporation and Visionvest Financial Planning & Services. Questions and comments can be directed to him at dr.rrsp@visionvest.ca or through his website at www.visionvest.ca. Please note that all comments are of a general nature and should not be relied upon as individual advice. The views and opinions expressed in this commentary are those of Arnold Machel and may not necessarily reflect those of IPC Investment Corporation. While every attempt is made to ensure accuracy, facts and figures are not guaranteed.  

Arnold is now accepting a limited number of invitations to speak for the 2021/22 calendar years. If you are interested in having him speak to your congregation or other group (when gatherings are allowed to resume) regarding money matters, please contact us at admin@visionvest.ca or (604) 542-2818 with your preferred date and time.  

Sources:

1. Fraser Institute study