WFG - The Worst Financial Plan I have Ever Seen

The Setup

A few weeks ago I met with a potential client who had also just met with a brand new advisor who was recently licensed to sell mutual funds and insurance. This advisor was working for WFG and was working under the guidance of her “trainer.”

What is WFG?

WFG is formerly World Financial Group. They rebranded a few years ago for reasons I can only assume. In my personal opinion, WFG is set up in a way that it is almost impossible for their advisors to give financial planning advice that is completely in the best interest of the client. Don’t get me wrong, there are – of course – good planners working for WFG, but there are also very bad ones. That’s the same with every firm, but today I can specifically call out a bad advisor.

Why Don’t I Like This Setup?

WFG is build like any other Multi-Level Marketing Company (MLM), or as a lot of people like to call them, “Pyramid Schemes.”

I’m not going to get into MLM Companies right now, other than to say, I don’t love them, but I also don’t hate them when they allow certain hard workers, especially moms who are home with their kids, to bring in some extra income for their family. Money is almost always tight in the early years of starting a family, so any boost is a good thing in my opinion.

With that said, I absolutely hate it when it is setup so that people are being recruited to work as “Financial Advisors,” in their part-time. At WFG, somehow they have gotten around the loophole of allowing people to do this work part-time, which as far as I know is a violation of the MFDA (Mutual Funds Dealers Association). So that means that your “Money Guy,” might be a part-time “Business Owner,” that barely knows anything about financial planning, investments and insurance.

I think they get away with the MFDA loophole, because they initially train their new “Advisors” or whatever they call themselves to only really sell insurance. That’s because the insurance regulations in this country are much less strict than the investment regulations.

The Biggest Issue

Most “Advisors” are only really interested in finding people to work under them to build their pyramid (I mean team). That means 2 things:

  1. They are more interested in recruiting new people to sell mutual funds and insurance than they are with the well-being of their clients.
  2. It will be in their financial interest to train their new team members to generate as much commission off of their friends and family as possible.

This is exactly what I was just witness to and it drove me near insanity. The number of recommendations – that were only placed in order to generate commission and not benefit the client – were absolutely insane. It should have actually been criminal to fleece someone out of this money if he had taken the recommendations.

Before I go ahead, I want to point out that I don’t actually place ANY blame on this new “Advisor,” because they would have been so green that they couldn’t have known how bad this advice really was.

So let’s get into it:

The Client

40ish year old, single father of 2 children (11 and 14).

Salary of about $80,000/year.

Normal Alberta mortgage with about 20 years left (paid off before retirement).

Some credit card and line-of-credit debt.

Limited savings.

Lives a modest lifestyle, now within his means. However kids are expensive, so it’s not perfect.

Wants to retire at 70 with about $2,500/month in after-tax dollars.

 

As you can see, this is a pretty ordinary scenario. A pretty common set of circumstances and the only real issue we should note above is the small amount of debt.

Where his extra money goes in a month:

Group RRSP:     $400 (Company matches 50%, so they add $200/month)

2 RESPs:             $200 (Each kid gets $100 plus the 20% Grant)

Life Insurance:  $200 (Has a $500,000 permanent policy)

What you need to know:

I love Group RRSPs, as they are free money, so anyone should use them to their advantage as much as they can. He was doing that. His Group RRSP has about $60,000 in it. Sometimes it makes sense to transfer a portion of this account, if you can, to your own personal RRSP as you may have better investment options.

The RESP accounts were set up under a Group RESP. I did a video about why I don’t like them here: https://youtu.be/HdiP5SUODJc

If you don’t feel like watching, just know that I don’t like them because you’re basically caught in a contract and if you stop contributing you could basically lose your investments. They are riskier than they are made out to be when they’re sold.

As you can see, his kids are older, so the accounts have been going for a while.

The Life Insurance. I didn’t like this policy, because I felt like he was not in a position to be having an expensive policy like that in place, because he could have got an inexpensive term policy and used the excess to help fund other areas, such as pay off his debt. However, this was something he wanted. He said that he set it up when the kids were young, because he knew he wanted to leave them with some money no matter when he passed away. This would solve that, so he got what he wanted.

The Advice from WFG

  1. Transfer $50,000 of Group RRSP to Personal RRSP at WFG
  2. Reduce monthly Contributions into Group RRSP to $200/month
  3. Set up TFSA at WFG and invest $200/month (Saved from reducing Group RRSP)
  4. Stop paying $200/month into Group RESP
  5. Buy $100/month Universal Life Policy for each child (Saved from stopping Group RESP)
  6. Cancel Life Insurance
  7. Start new $200/month Universal Life Policy with WFG (Saved from cancelling Life Insurance)

The Reasoning

  1. We can manage it better – Maybe they can, but I think their fees were actually higher.
  2. ???? – This is just plain terrible advice.
  3. Great tax-free savings – True, BUT!!
  4. ???? – This is just plain terrible advice.
  5. To generate commission – However they would say (Future insurability, tax savings, borrow against value, use for other stuff than school, low-risk investments).
  6. ???? – To free up $200/month to sell a replacement policy that’s not as good.
  7. To generate commission – However they would say (Leave an estate, tax-savings, borrow against value, low-risk and tax-efficient investments).

Why This is THE WORST ADVICE I have Ever seen?

  1. Even if they could manage it better, he only had access to move $37,000, so if he pulled $50,000 he would lose a lot of the free money he once had.
  2. Why in the world would anybody tell someone to stop getting free money??? I have no words for this.
  3. Sure, I love TFSAs, but he didn’t have the cash flow to have one yet and he would have been way better off using this $200 to pay off his Visa, unless you were somehow telling him he’d get a better than 20% return.
  4. If he stops paying into these “Contracts” he will lose the benefit of paying into them for a combined 25 years at $100/month. Really good advice there you idiot. He could lose up to $30,000 plus growth that he’s saved for his children.
  5. Some of those reasons for buying children’s insurance are true, however, they are not a better way for them to save for anything and I can personally guarantee that it was only suggested to generate commission.
  6. This advice was given no thought. It was only given to try and free up $200/month.
  7. They just told him to cancel a policy that he’s paid almost $20,000 into to open a new one when he’s 10-years older to now start from scratch to achieve the same end result. Do you think there’s any chance this will end in a better end result for anyone except for the “Advisor?”

I talk about when Permanent Insurance is a good idea in this video: https://youtu.be/zdYZ0igTVFM

The Commission

I can’t know exactly how their pay structure works over at WFG, but I have an idea how everything pays and I would suggest that this advice would have generated somewhere between $1,500 and $2,000 for the investments and $3,000 to $5,000 for the insurance advice.

A total of up to $7,000 for the new “Advisor” plus I am guessing a pretty hefty little bonus for her “Trainer.”

This advice was absolute trash that was only given to generate commission and if I ever see this guy I will tell him he is a snake-oil salesman straight to his face. Sad part is that he probably makes way more than I ever have in my entire life.

What Did I Say?

I told him to keep putting the $400/month into his Group RRSP to get the free match. This rate of savings was going to get him close to his retirement goal and I had some other tips for him as we move forward in the years to come. I’m going to help him get there no problem.

I told him to transfer the $37,000 he could from his Group RRSP to WealthSimple under my referral code. This would drop his MER on those Funds from 2.50% to 1.15%. This would save him $500/year in investment fees. I doubt there were any fee savings involved in moving the money to WFG. We would then do that each year going forward with the allowable amount. This will save him tens of thousands of dollars before retirement.

I told him to keep paying into the Group RESP until the contracts were up. When they were, we would discuss what the best use for the additional income was.

I gave him some debt reduction strategies based on other information I haven’t included.

I spoke to him about the pros and cons of keeping his Insurance policy. As I said, I don’t love what he had, but I get it, so I spoke to him of potential alternatives if he were to replace it with a way less expensive term policy and utilize the freed up money to his advantage. There was no right or wrong answer here, but it warranted a conversation. If we replaced it with a term policy, the premiums would have been about $35/month.

Lastly I spoke to him about the idea of getting a Critical Illness Insurance policy for $50,000 at a premium of about $30/month. We just wanted to double check his benefits first, because it appeared that he had quite a comprehensive Disability Policy that is much better than what most people have with their employer. In most other cases, I would really stress the need for this coverage, especially since he is the sole-income earner in his family.

Beyond that, I also completed a report that detailed how we were going to not only hit, but exceed his retirement goals without making any major changes, but properly planning when opportunities arise as he ages.

My Potential Commission

For the $37,000 transfer, K4 Financial would be paid $222/year for those assets. If he were to do both insurance policies I suggested above, K4 Financial would be paid about $750.

Total Maximum Commission of $972, but likely only $222.

However, that comes with an absolute clean peace of mind on my end and his. Hopefully a client for life and a good referral source for my company. A company that built on the idea that all Canadians can receive great advice that isn’t one-sided.

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