You consult your advisor for financial strategies and investment advice. You can deal with your advisor, their associate, assistant, and other staff in person, by phone, text, email or website. Today’s investor looks for service in a variety of different ways. Investors want both personalized service and digital options available.
Investment advisors are traditionally paid to provide these ongoing services to you each year through the dealerships and companies with whom you have investments, funded by the MER’s (Management Expense Ratio’s) on your investment funds.
In recent years we have seen an increase in the demand for a holistic financial planning approach, encompassing financial plans and goals fully integrated with investment, tax planning and retirement strategies. Investors are looking to advisors to provide a wide range of services and expertise as the financial marketplace has become increasingly complex.
Today there are more options available for investors to structure payment options with their financial advisor to best suit their needs.
In the spirit of providing a high level overview, here are some options available to Canadian investors to pay for the advice and service they receive from their investment advisor.
MER (Management Expense Ratio)
In this link you will find a detailed description on how the MER works. In short, a portion of this MER is paid to your investment advisor to service your account.
If you didn’t pay your advisor an up-front fee, or discuss a fee-based account, then this is most likely the way your advisor is being compensated.
Several years ago, the Canadian Securities Administrators (CSA) believed Canadian investors may not truly understand this particular option despite the fact it has been pretty mainstream in Canada for many years. As a result, in January 2017 Canadian investors started to see their investment statements take on a new look. At that time all dealers (i.e. Manulife Securities) became responsible for preparing client statements with new criteria set out by the Canadian Securities Administrators (CSA) to help investors more clearly understand the breakdown of their investments, returns and any costs associated with investing.
Financial advisors across the country took initiatives to educate their clients to give them a better understanding of how they are paying for the service and advice on their accounts. This MER illustration can be a helpful graphic: MER Explained-Value of Advice (002).pdf
If your investments are with your local bank branch for example, you may deal with an employee who is paid a salary to manage client accounts. The MER you pay on your investment funds goes to the bank which will in pay all associated fund expenses as well as the salary of employees available to service your account.
Fee-based account management
This fee-based account option that was once primarily reserved for high net worth, or private wealth investors has become increasingly available to the average investor in recent years. While minimum investment balances often still apply in order for it to work most efficiently, it has been gaining greater popularity.
In this scenario, the MER on the investment fund is stripped down to include only the portion of the MER that is to go to the investment company for the fund management, operating and trading expenses and taxes. Essentially, the portion of the MER that provides compensation to the dealer and advisor are removed from the MER and replaced by a fee based arrangement with the advisor and client.
In this scenario the advisor and dealer can provide a flexible, competitive fee schedule set up according to the advisor’s value proposition and the investor needs. This fee, normally calculated as a percentage of assets under management, can be paid directly out of the investor’s portfolio at desired intervals, i.e. monthly, quarterly or annual. Alternatively, an investor can choose to pay for these fees from their bank account or credit card rather than from their investment account if they wish. The investor is provided with regular statements of fee payments.
One benefit to this structure for certain investors, particularly those with large non-registered portfolios, is the fees may become a tax write off depending on the investor’s situation. To date, advisors who have switched clients to a fee-based structure have largely focused on transitioning clients who could best benefit from this fee structure given their overall financial and tax situation.
In each of these scenarios above, the investment advisor is paid to for ongoing service of the account, investment recommendations and advice. Some advisors may also include a more enhanced service to take into consideration financial strategies, retirement projections, tax planning and income efficiencies.
Fee For Service or Flat Fee (One-time fee)
Sometimes an investor has a do-it-yourself approach and wants to manage their own investments. Many banks offer self-directed accounts where an investor can buy and sell their own stocks, bonds and investment funds online. This is sometimes referred to as a discount broker. With this option the investor does their own research as the account does not come with any investment advice. These investors don’t have an investment advisor servicing their account but may need to hire a financial planner from time to time.
This is where the flat fee comes in. Self-directed investors may want to have a financial plan created for them by a financial planner but still continue to manage their own investments. In this scenario, the investor can request a plan be created by an advisor who offers financial plans for a fee with no strings attached thereafter and no service. The financial planner may work by billable hours or with set packages. For example, if the financial planner’s hourly rate is $250 and they spend 8 hours on a financial plan and another 2 hours in a client meeting, the total fee would be $2,500. At other times, an advisor may have a packaged fee schedule i.e. $1,000 for a one time individual financial plan or $1,500 for a couple. The price for the plan depends on the complexity and detail required.
Cut through the confusion
All these options may seem overwhelming now that today’s investors have so more choices becoming available on how to pay for advice and service than they once had.
There are critics and proponents of each method and pro’s and con’s for each. In reality, any method can work successfully as long as it’s a good fit and the investor understands how they are paying for their advice and service and what their advisor and their office are providing in return.
Most importantly, there needs to be a good relationship between investor and advisor built on trust and a collaborative approach to managing and servicing the investors account. Financial Planning. Who can you trust? A one on one chat with your advisor at your next meeting will help clarify which arrangement is best for your personal situation, and while there may be a good opportunity to switch methods if a different one appeals to you, there is a good chance you may already be set up with the best option for you. Today’s investors have many options.
Column originally published in September 2015. Updated January 2021.