The 4 Biggest Issues With the Financial Planning Industry
How can you protect yourself?
There are many good things that financial advisors and Certified Financial Planners do for their clients, but there are also a lot of issues in the industry today. What are the issues and how do you protect yourself?
Issue # 1 - High Investment Fees
In the last few years, there have been a lot of positive changes in this regard, as the large corporations are starting to understand that clients are now paying attention to fees, but it's still not great.
The majority of Canadians are paying investment fees of >2.0% on their investment portfolios, even though there are a lot of great options available at a much lower cost.
Paying lower fees does not guarantee that you are going to see higher returns, but it does significantly increase the possibility that you will see better returns. Who doesn't like better odds and seeing their money grow at a higher rate?
Usually these low cost investments are only presented to high net worth clients, because the large banks and financial institutions can't make enough money by selling them to smaller clients.
So... What are your options?
- Invest your money yourself and do your own planning research.
There are tons of resources online that teach people how to create really low-cost portfolios.
- Use a Robo-Advisor
With a very simple process, anyone can transfer all of their investments to an online robo-advisor and have their money invested in low-cost ETF portfolios that are built to suit your needs. These portfolios are built, rebalanced and managed at a very low cost.
The biggest issue with these two options, is that you can't really get a comprehensive financial plan or ongoing planning advice. Working with a planner is proven to significantly increase the net worth of clients of all sizes.
So how can you get both?
- Get a Fee-for-Service Planner
A fee-for-service planner will complete a comprehensive financial plan for their clients at a cost and it will be up to the client to implement the strategies recommended in the plan. This is a good option for people who are willing to pay out of pocket for advice.
- Work With K4 Financial (or another company like it)
Our overhead is way lower than large companies and we have cut out as many middle-men as possible, so this enables us to pass on the savings to our clients, while still being able to make a living. We believe this model will become a lot more common in the years to come (even though we would prefer it doesn't).
Issue # 2 - Most Financial Advisors aren't Very Qualified
Only about 20% of all of the financial advisors in Canada are actually CERTIFIED FINANCIAL PLANNER Professionals, which is an internationally recognized designation and is basically the gold standard to look for when searching for someone to give you financial advice.
It's actually extremely easy to get a license to sell investment products to Canadians, which we see as a significant issue.
However, if you are working with a CFP Professional, you can be certain of a few things:
- They have adequate work experience (4 years in the business).
- They have been comprehensively educated in all 6 areas of financial planning and are always improving their knowledge base with continuing education.
- They have to adhere to a specific code of ethics.
If you aren't working with a CFP Professional, there is a chance that the only experience your advisor has is that he or she took a course for a few days and then passed a moderately difficult exam. It is our belief that this is something that needs to change as soon as possible.
If you have been passed off from advisor to advisor, it is most likely because you have never worked with a CFP.
We believe that anyone entering this business should not be allowed to have clients of their own until they have worked as an "Apprentice" of sorts under a qualified advisor and until they complete the CFP designation.
You just can't know enough after passing one exam to be able to give people solid advice and it gives the qualified advisors a bad name.
The only way to help yourself with this is to seek out an advisor who has this symbol on their business card.
Issue # 3 - High Net Worth Clients Pay Lower Fees and Get Better Advice and Service
This isn't always true, just like it isn't always true that you will get better returns if you have lower fees, or that you'll have a better advisor if they're a CFP, but chances are a lot higher for all three points.
Due to the extremely significant changes that have happened in the industry in the last couple of years and the changes that are still happening, smaller clients (those with under $100,000) are going to suffer, because most qualified planners won't even give them the time of day. We have a serious problem with this. Understandably, it makes sense that larger clients will have access to lower-cost products (even though we give all of our clients access to lower-cost funds), but that doesn't mean advice shouldn't be available to anyone who wants it.
This next part is 100% just my opinion and it is exactly why I created this company the way I did.
I do not like the idea of telling someone they aren't wealthy enough to deserve my time. You have probably heard about an advisor that someone you know uses that won't talk to someone unless they have a certain level of assets. I do not like this elitist attitude and it bothers me to know that a hard working couple, not unlike myself and my wife, wouldn't be allowed to talk to someone because we haven't saved enough money yet. Not that we need advice from anyone, but you catch my drift.
I also know that there are a lot of rich people who like the idea of getting offers that aren't available to people who haven't been as successful as them. I'm not really a fan of people like that, so this is a good way for me to weed out potential clients who think they are above other people. I'd much prefer to work with people who are down-to-earth.
That is why I decided a long time ago that I would deal with anyone who wants to deal with me as long as they're engaged in the process. I have found something to be true since I set my company up this way.
Anyone who is willing to put in the initial effort that I ask of them when I send them my forms to fill out, is at a point where they are wanting to improve their financial lives, so I know for certain that they will eventually become good clients. Even if they just start with $10,000 and I know that I am only going to make $5/month to be their financial planner in the beginning, I also know that this will increase over time because they are willing to put in the effort. Financial planning is a lifelong process and hopefully a lifelong relationship and that's why I will deal with anyone who put forth some effort and initiative of their own.
Issue # 4 - Lack of Disclosure
This has also gotten a bit better as of late, due to the government forcing investment management companies to disclose fees and returns to their clients with something called CRM2.
However, CRM2 is kind of a joke, because it only tells a part of the story. Your statements will now show you the "advisor fees" you've paid in a year, but that doesn't include all of the fees you have paid. It just shows the portion that is allocated to the advisor and the branch they work for and doesn't show how much the entire company is making off of you every year.
I think it was actually a terrible break for advisors and a lucky break for the huge firms, because it makes it look like your advisor makes more than he does and that the firm is only charging you about half of what they are charging in total.
Because disclosure is pretty weak, this can lead clients - of all kinds - totally susceptible to terrible advice that goes completely against their own best interests. What conflicts of interest am I talking about and how can this happen?
- Some advisors make more money for selling certain investment products. This often leads people to buy investments that don't match their risk tolerance, or are extremely high-priced investments.
- Some bank branch advisors are incentivized to push certain products, especially debt products - like credit cards and loans - that might actually put their clients in a worse financial position than when they walked in the door.
- The worst culprits are insurance salespeople who are not financial planners. The insurance industry is not nearly as regulated as the investment industry, so there are a lot of salespeople out there who are selling crazy insurance products to people who have no business buying them. This - of course - is because they will make very high commissions for selling more expensive policies to their clients. They are often only selling them to make a sale and not to compliment their overall financial plan or even provide the best protection for their clients.
So what can you do?
I would suggest that you ask your advisor or insurance salesman exactly how much money they are going to make if you go along with their advice and exactly how much money you are being charged on an annual basis for your investment portfolio.
Don't think of this as a rude question and if they seem hesitant to answer or become defensive, then I would probably look for another advisor.
Remember, this is your money and your future and there are things you can do to protect yourself.