The decision to offer broader wealth management services through a fee-based model or adopt a fee-only practice is a major one for advisors, prompting them to consider their philosophy and what they hope to achieve for clients.
Fee-based advisors are licensed to sell products and are paid on a percentage of their clients’ assets under management. Fee-only advisors, also known as advice-only, charge a fee for their financial advice and typically don’t sell products.
“Fee models actually do influence both advisor and investor behaviours,” says Rona Birenbaum, certified financial planner and founder of fee-only financial planning firm Caring for Clients in Toronto.
Advisors on either side of the spectrum say it depends on what clients are looking for, with each model presenting benefits and drawbacks.
Fee-only advisors tout the benefits of unbiased advice and deeper conversations with clients, while fee-based advisors say their model allows them to have holistic, comprehensive relationships and carry out action items in clients’ financial plans.
When Ms. Birenbaum chose her fee structure in 2000, she says it was based partly on her dislike of the commissions-based model at the brokerage she was leaving, and a desire to offer clients comprehensive financial planning and advice.
Caring for Clients offers fee-only comprehensive financial planning at a flat fee or hourly rate, which includes cash flow management, retirement, tax and estate, elder care, and investment planning. It also offers wealth management services to clients on a fee-based methodology. The fee, a percentage of the client’s assets under management, covers all investment management and financial planning services.
She says the fee-based model allows her to work with clients to align their portfolio with their personalities, expectations, and the financial plan they’ve developed together, as well as to set them up with insurance and other products they need.
“Their investment strategy, the decisions we make for short-term planning, are outputs of the financial plan,” Ms. Birenbaum says. “We’re never in a position in which [the client] is overinvested in a volatile asset they’d have to pull from at an inappropriate time because we’re anticipating their future needs.”
Kurt Rosentreter, portfolio manager and senior financial advisor with Manulife Securities in Toronto, says the fee-based model also generally works out to be less expensive for the client than traditional commissions and is fully tax-deductible for taxable accounts.
Combining different approaches
Mr. Rosentreter offers clients five different options depending on their needs. Clients who want a purely financial planning and advice-based relationship can choose an hourly rate for quick, one-time advice on specific topics or a larger project-based fee.
Those who want an “integrated relationship” with advice and investment management can choose a commissions-based approach in which they pay transaction fees on the products the firm buys and sells, or an asset-based fee. They can also choose a customized fee that blends two of his four options.
“The first fork in the road is the design of the relationship. That dictates what fee approaches we put in front of them,” he says, noting that the vast majority of his clients choose an integrated planning and investment management relationship.
While clients have the option of a commissions-based fee structure, he adds that these are charged inside the portfolio and are, therefore, less transparent than asset-based fees, which are charged outside of it.
“Transparency is a big precursor to trust,” he says.
There can be tradeoffs for advisors who run broader wealth management practices, Ms. Birenbaum says.
The work is time-intensive and requires staffing and expertise to support that type of client relationship, including investing in experienced advisors, human resources, technology and systems, compliance and continuing education.
“You’re running, in a way, three businesses – a fee-only planning business, wealth management … and insurance,” she says.
Jordan Damiani, senior wealth advisor at Meridian Credit Union in St. Catharines, Ont., says that while he sees fee-based as the “gold standard” model, it can be inaccessible to lower-income Canadians or those who are just getting their start with investing.
“It’s generally offered at higher-dollar tiers, and that’s consistent across the industry, which has this push and pull between people who have the assets today and models that accommodate newer investors,” he says.
Fee-only not tied to a ‘certain set of products’
When it comes to the fee-only model, Owen Winkelmolen, a fee-only financial planner and founder of PlanEasy Inc. in London, Ont., says it ensures the advisor is “always aligned with the client.”
“Because we don’t sell products, manage investments, mortgages or insurance, the advice is always 100 per cent in the best interest of the client and completely unbiased,” he says.
Mr. Winkelmolen adds the model has engendered a “very high level of trust” from clients because they know they’re paying up-front for his advice.
Fee-only practices tend to face criticism that advisors are constrained because they’re unable to implement their suggestions for the client.
But Mr. Winkelmolen says he doesn’t see it that way. Instead, it has allowed him to have broader conversations about the available products that could fit clients’ needs and compare their benefits and drawbacks, because he’s not financially motivated.
“There’s that saying, ‘if you only have a hammer everything looks like a nail.’ If you only have a certain set of products then naturally you recommend those products and implement them in the plan,” he says.
“We’re less restricted in terms of the discussions we have and the products we explore, and the client can seek out how to implement that plan.”
Based on the financial plans he develops with clients, he’ll refer them out to appropriate product specialists.
He says the fee-only model is a niche that’s growing quite rapidly with the rise of self-directed investors, who may feel they can manage their investments on their own – or not have enough assets to be managed by a professional. But they still want advice for financial concerns such as managing cash flow, planning to start or expand their family, buying a house, tax planning, working toward a sabbatical, and more.
Being a fee-only planner also allows advisors to specialize in a certain segment of clients.
Mr. Winkelmolen’s practice focuses specifically on average Canadian households – dual-income couples, usually with kids – and his firm’s online mode of delivery allows him to work with families across the country.
He notes other fee-only planners have focused on other segments, such as retirement and decumulation or small business owners, and incorporated professionals with specific financial planning needs.
“We can build a whole process around those clients and deliver exactly what they want,” he says.
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