Which Institution Is Best?

The Pros and Cons of Each Type of Institution

I am going to do my best here to just state the facts as I am aware of them. As I have not worked for every specific financial institution, it is impossible for me to know exactly how the inner operations and sales quotas work, but I do have a fairly good idea.

I assume you have all seen the report stating that bank employees have been pressured to do things to drive revenue, even if it’s not in the best interest of the consumer. Link to the article here

I personally believe that the cons outweigh the pros as far as what options the consumer has in the financial marketplace, but there are some pros for each environment, so I will include those.

Also, I will point out one thing. I know that there are good and bad people that work for every institution I’m about to list, and a good advisor from any one of these institutions can help in a lot of ways. My fight will never be against good people who are trying to help others and I do believe advisors generally earn fair compensation for what they do. Study after study will show that working with an advisor has a very positive effect on overall net worth over time. But, study after study will also show that reducing your investment fees will improve investment performance, so I’ve attempted to create the best of both worlds.

These are generalities and as such, you can expect that there will be exceptions to each rule.

Full Service Financial Institution (Investors Group, Sun Life, London Life, Freedom 55, WFG*, Edward Jones, TransAmerica*, etc)

Pros:

  1. Advisor has the ability to give you advice in all areas of financial planning.
  2. Advisor “owns” their book, so he or she builds their own business that they care about. This should ideally lead to good service.
  3. Backed by a big corporation.
  4. Access to a lot of different products.
  5. Should have a high level of ongoing training.
  6. Commission-based model (Pro) – It is in their best-interest to have you save more money, which in the end is probably in your best interest.
  7. Generally work flexible hours and meet when and where is convenient for you.
  8. They buy you things and treat you to events if you’re a good client.

Cons:

  1. Advisor can qualify to be your “advisor” after taking 4-day course.
  2. High investment fees (Generally >2.0%)
  3. Your investments are owned by the firm and not the advisor, so if he or she moves (or is told to choose between comedy or their business), you are somewhat handcuffed to stay. Part of their business model is built on attrition, so they hire 100 new “Advisors” a year to bring in family and friends money. >60% of these new “Advisors” fail and now the company has a bunch of new clients money and that gets divided up between senior advisors.
  4. Commission-based model (Con) – There are sales competitions and incentives for advisors to sell certain products as it may pay more to give one piece of advice over the other. This often becomes a gigantic conflict of interest.
  5. Huge institutions, which means they are slow to adapt and are extremely expensive to run. That is why they have to charge such high investment fees.
  6. High-pressure sales
  7. Wealthier clients will get better service. This is obviously a pro if you’re wealthy

WFG and TransAmerica:

  1. All the same pros and cons apply, except you must understand that your WFG and TransAmerica “Advisor” is more worried about hiring more part-time advisors to work under him than he is about giving you advice. A lot of them will care a lot more about building their team rather than their client base. You’d think you’d rather work with a person who is 100% focused on their clients.
  2. These advisors are somehow allowed to work part-time. You’d think it would be important for the person who advises you about your hard-earned money that they take it seriously enough to spend their days immersed in it.
  3. Basically I’m telling you to get away from WFG or TransAmerica as soon as possible.

Banks

Pros:

  1. People love and trust banks.
  2. You can have your investments, mortgage, loans and insurance at the same place as you bank. Some level of convenience.
  3. Access to a wide variety of products.
  4. Backed by a crazy amount of money, so they’re stable.
  5. Should have a high level of ongoing training.

Cons:

  1. Your advisor only needs to take that same 4-day course to become an “Advisor.”
  2. Your “Advisor” is only allowed to give you limited advice. Meaning they are not allowed to speak to you about insurance products and may have to refer you to a mortgage specialist. This gives you the appearance that you have all areas of financial planning covered, but they can seriously contradict each other with their advice, putting you in a poor position. Also, takes away some of that convenience, because you now have three people to meet instead of one. This means your advisor isn’t really fully on board with your affairs and isn’t focused on the entire picture.
  3. Still have high fees. Generally slightly lower, but still too high as they obviously have very high overhead.
  4. “Advisors” are given pretty strict quotas. Sell “x” number of GICs, sign up “x” number of credit cards, make sure to sell creditor insurance on top of any loan, etc. This can often lead to conflicts of interest and poor advice and extra costs to you – the consumer. This is backed up by the CBC article.
  5. Have to meet during bank hours.
  6. Good Advisors are often promoted and you’ll then find yourself getting advice from the next teller in line who got promoted from there. They don’t have to build their own business, so the loyalty to you probably won’t be there.

Brokerages (RBC Dominion Securities, CIBC Woodgundy, Richardson GMP, TD Waterhouse, BMO Nesbitt Burns, etc)

Pros:

  1. It is likely that your broker is quite qualified when it comes to giving investment advice.
  2. In a lot of cases, you pay a set and “fully disclosed” fee for their services. You know how they’re paid to manage your money and how much.
  3. You should get some pretty fancy treatment. If you’re rich enough, they will take you on trips and stuff.
  4. You can feel like a big shot when you walk into their fancy office.
  5. Lower fees than with the banks and full-service institutions.

Cons:

  1. The biggest issue is that some brokers don’t really care about financial planning and only care about investments. You can miss out on some pretty crucial advice if that’s the case.
  2. You have to have a certain amount of money to even speak to them. Obviously not a con if you have money.
  3. Some brokers sell you on the idea that they are smarter than the market and take unnecessary risks with your money.
  4. The fees can still be substantial.
  5. High-pressure sales.

 

K4 Financial

K4 Financial

 

Pros:

  1. Lower fees than all three options.
  2. You know I am qualified as I am a CFP®
  3. Offer fee-for service plans and ongoing service for a fully disclosed asset management fee of 0.60%. Meaning your total MER will be 1.15% to work with K4 Financial. That’s about half of what average Canadians are paying right now.
  4. Focus on financial planning.
  5. Leave investment management to a solidly-funded, cutting-edge company with a proven investment model. I don’t think I am smarter than the market and would never feel comfortable taking risks with your money.
  6. Zero conflict of interest risk with investment advice. Meaning the fees are the same no matter which investment strategy fits your risk tolerance, so there is no incentive to put you in a portfolio that you wouldn’t be comfortable with.
  7. Require all of your information before I start a plan. Meaning that I base my advice on knowing as much about you as possible. You can’t just test the waters with K4. That doesn’t mean you have to move all of your money with us to work with us, but you do have to tell us what you have so we can give you advice that makes sense. I will always base the reputation of this company on providing solid financial plans based on actual information.
  8. You are not tied to me or WealthSimple. You can stop using me as your advisor at any time you wish and move your money elsewhere with no penalty should you so choose.
  9. Small company (pro), I can and will adapt when I see better opportunities for clients.
  10. Zero-pressure sales. I lay out the options and how much K4 would make from each option and you can decide what is best for you.
  11. If you gather your info and I do a plan for you and you don’t like my advice, then don’t work with me. All you’ll lose is some time.
  12. I have no minimums. I have developed my system so that I can help people who are just starting out. I cut down my costs and the time needed to do the same job, which means I don’t need to charge you a fortune to get good advice.
  13. I can get you great insurance coverage without you ever having to get off the couch. For that matter, everything we ever do could be done while you sit in your underwear and drink a beer.
  14. I am funny. Or at least some people think I am.

Cons:

  1. Small company. I may go out of business (I believe this is highly unlikely), but can understand the hesitation, meaning you have to go get advice again. However, you’ll still have your framework of your plan in place. You can also keep your money where I know it will work best for you at the lowest cost.
  2. Don’t generally meet face-to-face. This allows me to keep my costs extremely low as it saves tons of time, especially in the introductory phase. Can also help people from across Canada because of this, with the exception of Quebec.
  3. I’m only one man and can’t know everything. I know enough to help almost everyone, but as I’ve said before, if I feel like I can’t help you I will send you to a professional who can.
  4. You have to take it upon yourself to start the process with me by contacting me and gathering your information. This saves me time, which allows me to run on lower costs, which saves you money. I think it’s a pro, but you do have to do some gathering of info and that feels like homework to some people.

I guess the bottom line is that there are Pros and Cons to working with each type of institution. Personally I believe that it’s important to work with someone you like and trust, but I think it’s also really important to look out for yourself and give yourself the best chance at success. If that relationship is going to potentially reduce your retirement income by a very large percentage, is it worth it?

If you’re not working with anyone, what is the risk in contacting me to see if we can be a good fit?

If you are working with someone, what the risk in contacting me to see if my advice is better than theirs? I know my investment advice will be, but I’d also put what I know up against anybody.

Stop thinking about it and do it. You won’t regret it.

kenttilley@k4financial.ca