Fee based financial advice

[WattyBo]

I'm looking to get some direction on where to find a great fee based financial advisor. I'm currently utilizing a family member to help with financial planning and I'm disappointed on how it has worked out. I currently have no plan and really need some direction. Help!

[DanH]

Try this for starters.

[NormR]

A little off topic but,

Fee-based accounts a "future landmine," says panel

As an example, in 2007, UBS Financial Services was fined $23.3 million in connection with fee-based account abuses. In one case, the company charged a 91-year-old more than $35,000 for just four trades over two years — that's about $8,800 per trade. This was $33,000 more than what the client would have paid in a traditional brokerage account.

I don't know the details of this case. But talking more generally.

It strikes me that it might be entirely sensible for an adviser to advise against frequent trading. (ETF-oriented buy-and-hold advisers come to mind.) But would such advice face potential problems with the regulators or the legal system? It seems like a strange world if you have to trade client accounts frequently to justify a 1% asset-based fee.

[jackbauer]

Before everybody here starts ripping advisors over this, I'd like to make a couple of comments.

$35,000 for 4 trades is over the top. Unless that is, the account in question was several million dollars and the advisor was heavily involved in the day-to-day financial dealing of the client.

If all this advisor did was make 4 trades, then he/she should be in trouble. But maybe there was numerous times the advisor said to hold? Maybe there was an in-depth tax and estate plan done? People will be all over the fact that only 4 trades were done, but there is the possibility that much more than pulling the trigger on 4 trades was done.

One of the main reasons to go to a fee-based practice is to eliminate commisions for executing trades, and to pay for advice and other services instead of just order entry. Fee-based models are not for advisors to have a way to get paid for doing nothing.

[AltaRed]

Little is known about the facts in this particular case and perhaps the list of services was not clearly spelled out in that case. That 91 year old may have been getting exactly what was contracted for. I agree with NormR that 4 trades may have been the right answer for the mandate.

I find it offensive that fee based services are singled out for potential elder abuse any more than churn (or unsuitable investments) in commission based accounts. There have been a few testy threads on this latter situation on this forum.

[twa2w]

Is the OP really looking for a fee based investment advisor or a fee only fianncial planner?
There is a world of difference. WattyBo, what are yu looking to have this person do for you?
Manage your investments in return for a fee based on a percentage of your assets that they manage? (and maybe for this fee they will help you with tax, estate planning etc
or
are you looking for a planner to assist you with preparing aplan including tax, estate, investment guidelines etc for a one time fee, and perhaps a small fee each year there after to review the plan and ensure you are on track. You would then have someone else, or yourself, do the investing?

Cheers
J

[WattyBo]

Is the OP really looking for a fee based investment advisor or a fee only fianncial planner?
There is a world of difference. WattyBo, what are yu looking to have this person do for you?
Manage your investments in return for a fee based on a percentage of your assets that they manage? (and maybe for this fee they will help you with tax, estate planning etc
or
are you looking for a planner to assist you with preparing aplan including tax, estate, investment guidelines etc for a one time fee, and perhaps a small fee each year there after to review the plan and ensure you are on track. You would then have someone else, or yourself, do the investing?

Great question. I am looking for the financial planner.

Cheers
J

[Bylo Selhi]

Fee-based accounts sound good, but they're just as open to abuse

Securities regulators are taking a close look at an increasingly popular trend where people pay for investment advice through a regular flow of fees based on the size of their account. Disputes over fee-based accounts have resulted in millions of dollars in fines against the U.S. investment industry, and Canadian regulators are now giving them more scrutiny...

Reputable people in the investment industry believe fee-based accounts are the most ethical way to do business because they eliminate the bias for advisers to recommend products that benefit them more than clients. But it's now obvious clients can be exploited in fee-based accounts, too.

What's an investor to do? Put integrity at the top of your list of requirements when finding an adviser. More on how to do this in a future column.

[DanH]

Fee-only pioneers keep time

Hourly rates range from $150 to $250, depending on the consultant's experience. So a $1,500 fee for a basic financial checkup and annual tax preparation gets you 10 hours of time. The goal is to find enough savings, including negotiated discounts on external investment counsellors, that the fee pays for itself. "I don't want to be a cost to somebody. I want to be an investment," Heath says. Go towww.eesfinancial.com for a complete menu of options.

...

Throughout E.E.S.'s 40-year history, the only real commodity it had to sell was time. However, in a few months, it plans to introduce its first real product: a web-based personal financial-planning service with a $300 price even cash-strapped young couples could benefit from. Users download a questionnaire and e-mail their answers, which E.E.S. will use to prepare a comprehensive financial plan running between 50 and 70 pages.

[Bylo Selhi]

Then there's also the Garrett Planning Network model.

[Bylo Selhi]

Finally an article that clarifies the difference between fee-based, asset-based and true fee-only. Fee-only must mean just that

MacKenzie says the trend has been for some firms originally grounded in true fee-only planning to drift into the more lucrative field of fee-based or what might be more accurately termed "asset-based" compensation. "There is a difference between what I would call pure fee-only planning where the fee is based on the time involved, and fee-only planning where the fee is based on the size of the account."

He says a conflict arises in that asset-based fee-only advisors have an incentive to recommend investments with higher growth potential. Or to cite last week's example, asset-based advisors have less motivation to suggest clients first pay down debt...

[NormR]

Finally an article that clarifies the difference between fee-based, asset-based and true fee-only. Fee-only must mean just that

MacKenzie says the trend has been for some firms originally grounded in true fee-only planning to drift into the more lucrative field of fee-based or what might be more accurately termed "asset-based" compensation. "There is a difference between what I would call pure fee-only planning where the fee is based on the time involved, and fee-only planning where the fee is based on the size of the account."

He says a conflict arises in that asset-based fee-only advisors have an incentive to recommend investments with higher growth potential. Or to cite last week's example, asset-based advisors have less motivation to suggest clients first pay down debt...

Good luck with obtaining fee-only (as in 'charged by the hour') investment advice (as opposed to financial planning) in Canada. I don't know of a firm that currently does it. Anyone know of one?

[Bylo Selhi]

Good luck... I don't know of a firm that currently does it. Anyone know of one?

Norm, meet Norbert in June

[NormR]

Good luck... I don't know of a firm that currently does it. Anyone know of one?

Norm, meet Norbert in June

Keep in mind, I'm talking about investment advice which requires registration with a securities commission. I don't want to knock Norbert, but I believe that he's a financial planner.

[Bylo Selhi]

Keep in mind, I'm talking about investment advice

I believe so is Norbert when he says

We recommend the least expensive solutions that are appropriate to our clients' needs... Our typical client faces ongoing charges of between 0.10% and 0.50% per year, which pays product providers. None of it comes back to Libra to skew our view of what solutions we should recommend.

which requires registration with a securities commission.

Which I believe he is in at least BC.

[Norbert Schlenker]

I'm not registered anywhere.

I've asked OtherWise to chime in because, based on a recent conversation, the business model might match what Norm is looking for.

[Bylo Selhi]

OK, I sit corrected. Sorry for stirring up needless confusion.

[NormR]

I've asked OtherWise to chime in because, based on a recent conversation, the business model might match what Norm is looking for.

I think they run a half and half operation. Planning by the hour, investment advice by assets. Perhaps more common is planning by the hour and investment advice by commission.

My claim, and I hope to be proven wrong, is that no one currently offers investment advice by the hour in Canada.

[Bylo Selhi]

My claim, and I hope to be proven wrong, is that no one currently offers investment advice by the hour in Canada.

Why is that? I can understand that some people prefer to pay by embedded commissions and trailers rather than by writing quarterly cheques. But why should an investor resist paying $x/hr, perhaps with an annual retainer, in favour of paying y% of assets, especially if the dollar amounts in both cases are similar? After all, they pay their lawyer for ongoing legal advice using the former model.

[NormR]

My claim, and I hope to be proven wrong, is that no one currently offers investment advice by the hour in Canada.

Why is that? I can understand that some people prefer to pay by embedded commissions and trailers rather than by writing quarterly cheques. But why should an investor resist paying $x/hr, perhaps with an annual retainer, in favour of paying y% of assets, especially if the dollar amounts in both cases are similar? After all, they pay their lawyer for ongoing legal advice using the former model.

The common explanation is that certain expenses vary depending on client assets. That is, some variable costs grow with client assets. Thus charging a fixed rate that does not take this into account is problematic.

More cynically, investors who are concerned about fees are probably not looking for advice. But those who think that the advice is 'free', balk at paying an hourly rate. But I'll let others continue the cynicism.

In any event, I'm still looking for the black swan advisor who charges for investment advice by the hour (for Canadian residents).

[Flights of Fancy]

One or two thoughts on black swans (well, this particular black swan example):

Is there a dealership, whether IDA or MFDA, in Canada that would support the pay-by-the-hour model?

My second thought is that the relatively high costs associated with being a registered investment advisor preclude this model just on a business case base.

My third (extra!) thought is that in this model the advisor provides advice but the client reaps the reward in terms of savings (no ongoing fee or large upfront commission to the advisor). What would the hourly rate need to be to appropriately compensate the advisor in this model? Why would the advisor agree to provide (highly regulated, relatively expensive to offer) advice while assuming risk with no ongoing form of reward? The business model of finding clients one by one and providing limited, perhaps one-off engagements is a hard one to sustain over time (particularly at the outset), and provides for really lumpy (and uncertain) revenue streams.

Granted, if we had a securities industry that was already set up this way, this model might work (as in, for example, the legal profession); but we don't, hence I wonder whether we will ever see such a creature.

[squash500]

Is there a dealership, whether IDA or MFDA, in Canada that would support the pay-by-the-hour model?

IMHO, this will never happen. The only chance a diy investor has is to use some sort of couch potato portfolio made up predominantly of etfs. This would eliminate using any sort of advisor. AS you correctly stated; the revenue stream of most pay by the hour planners is too haphazard for most advisors. It seems that the advisors and the big bank brokerages have us just where they want us . However, I personally am not falling for it----at least for now

[DanH]

Folks, under the current system, a charge-by-the-hour model for investment advice works fine and is quite profitable if run right and built for that model from day one. But such advice can only include advice since handling or touching client money introduces additional regulatory requirements and costs that rise driectly with the level of assets advised. Mixing fixed revenue with variable costs will kill a business in any industry.

However, Registration Reform will make sure that nobody will ever try to launch a legitimate, licensed charge-by-the-hour investment advice model. My firm has been offering such a service since Jan 2004 but I'm at capacity, and have been for some time. So, go ahead an thank regulators for protecting you from the charge-by-the-hour provider[s]s[/s].

Indeed, I spoke up during the last comment period. A new draft is available and some comments have already come in, like this one from Tom Stanley. But the current comment period ends on May 28, 2008. I plan to make another submission. If you really want an industry which makes this model possible, get up off your duffs and submit comments.

[Norbert Schlenker]

Folks, under the current system, a charge-by-the-hour model for investment advice works fine and is quite profitable if run right and built for that model from day one. But such advice can only include advice since handling or touching client money introduces additional regulatory requirements and costs that rise driectly with the level of assets advised. Mixing fixed revenue with variable costs will kill a business in any industry.

There is a counter-example: discount brokers do not levy asset-based fees on accounts per se. Of course I expect you to argue that accounts full of mutual funds pay trailers to the broker but the accountholder is not obliged to hold mutual funds either. And the discounters are happier to get big accounts than little accounts, so the costs can't scale perfectly.

However, Registration Reform will make sure that nobody will ever try to launch a legitimate, licensed charge-by-the-hour investment advice model. My firm has been offering such a service since Jan 2004 but I'm at capacity, and have been for some time. So, go ahead an thank regulators for protecting you from the charge-by-the-hour provider[s]s[/s]... If you really want an industry which makes this model possible, get up off your duffs and submit comments.

Regrettably, I believe this amounts to spitting into the wind. As has happened many times before, the regulators have been captured by those they regulate and in particular by their bigger regulatees. Consumer protection will be the ostensible goal but the end result is the mandated erection of enormous and complex compliance structures. The very high fixed costs will drive small shops out of business. It's the Walmartization of investment management.

[DanH]

Folks, under the current system, a charge-by-the-hour model for investment advice works fine and is quite profitable if run right and built for that model from day one. But such advice can only include advice since handling or touching client money introduces additional regulatory requirements and costs that rise driectly with the level of assets advised. Mixing fixed revenue with variable costs will kill a business in any industry.

There is a counter-example: discount brokers do not levy asset-based fees on accounts per se. Of course I expect you to argue that accounts full of mutual funds pay trailers to the broker but the accountholder is not obliged to hold mutual funds either. And the discounters are happier to get big accounts than little accounts, so the costs can't scale perfectly.

There are two key differences. We're talking about flat $ fee advice provided by a skilled professional - not a technology platform with a call centre of low-paid workers. Plus, discount brokers allow this because they know that investors, left to their own devices, trade heavily in stocks and get loured into enough trailer-fee paying funds to make it worthwhile. (Even the no load shops pay trailers. All but PH&N, Leith Wheeler, and Steadyhand pay trailers as far as I know. Even bank index funds pay trailers; CIBC pays 0.5% annually.)

Let's have all of E*Trade Canada's clients buy nothing but PH&N, and let's see how quickly they implement a per trade cost or front end load.

Regrettably, I believe this amounts to spitting into the wind. As has happened many times before, the regulators have been captured by those they regulate and in particular by their bigger regulatees. Consumer protection will be the ostensible goal but the end result is the mandated erection of enormous and complex compliance structures. The very high fixed costs will drive small shops out of business. It's the Walmartization of investment management.

I don't doubt what you say. I've never been called an idealist. But it's this very state of affairs that motivates me to get involved and speak up. Somehow, I simply think that it's best to make an effort, rather than bending over and waiting for it. Besides, what good does it do for the posters her to complain that no such option exists. If they really believe in this model and want it available for themselves and future generations, better to try to effect change rather than rolling over and then complaining that it wasn't done for them.