The confusing world of financial advice – part 1

By Karin Mizgala

Looking for a financial advisor, but baffled by who to trust, what they do and how they get paid?  You’re not alone.

With the increasing complexity of the financial landscape, high debt levels and the stomach turning market conditions, more people are looking for advice to help them manage their finances.

There is certainly no shortage of people willing to help you out with your money – the challenge is to find a qualified advisor who fits your unique needs, values, and financial situation.

The best place to start your search is to figure out what type of advice you’re looking for and how you want to pay for it.

Ask yourself these questions:

1.  What do I need help with now?  Investing, planning and saving for the future, day to day cash management, getting out of debt, financial decisions relating to retirement or other life transitions?

2.  How do I want to pay for this advice?  Directly through fees or indirectly through product sales like investments, insurance, banking or credit counseling services.

What to expect in terms of Service and Fees

If you’re looking for Investment Advice:
Most financial advisors are focused on helping you manage your investments and are compensated through commissions or charge a percentage of your investments typically in the 1 -2% range depending on the size of your portfolio.  If you want investment advice by someone who is not managing your investments, that’s harder to find.

Because of the securities legislation in Canada, only an advisor who is licensed through a qualified financial institution or portfolio management company is legally allowed to provide you with specific stock, bond or mutual fund recommendations.  You can however pay an independent non-licensed advisor for investment strategy advice, coaching or education – just don’t expect them to tell you what stocks you should invest in.

If you’re looking for Long Term and Life Transitions Planning:
If you’re looking for recommendations on a broader range of financial concerns, including your life goals, cash flow, debt, investments, retirement, insurance and estate needs, a certified financial planner (CFP™) is your best bet.  Financial planners generally fall into 2 categories:

1.     Financial Planners licensed to sell investments or insurance
Typically this type of financial planner will provide you with a financial plan for free if you purchase (or plan to purchase) investments or insurance with them.  Others referred to as “fee-based” financial planners may charge a fee for the plan then give you the option to invest or buy insurance from them.

2.     Financial Planners who don’t sell financial products
“Advice-only financial planners” or CFP™ Money Coaches charge clients a fee either hourly or by project.  Fees typically range in the $1,500-$4,000 depending on the complexity of planning needs.

Note: some financial planners call themselves “advice-only” but have affiliates in their company who are able to sell investments or financial products. 

Rob Carrick’s recent article in the Globe and Mail – The elusive search for the straight dope is a good primer on the different fee models for financial advice and how to find a “advice-only” financial planner if that’s what you’re looking for.

The terminology in the financial advice industry is not standardized so be sure to ask questions and to clarify what you can expect from your advisor no matter what model of financial advice works best for you.

Related articles/resources:
Questions to ask your Financial Advisor
Financial Advice – Are you Getting What You Pay For?
Mutual Fund Lingo – A Primer on Fees
Get the “Load” on Mutual Funds

Part 2 – Who to turn to if you’re struggling with cash flow and debt coming up next week

Karin Mizgala is Money Coaches Canada’s CEO and resident “money shrink”.