It is a common question that arises in lectures and webcasts when a participant asks the speaker how the Registered Disability Savings Plan (RDSP) should be invested. A typical response is to ask a “financial planner”. This isn’t about the instructor being dismissive or rude, but a candid recognition that the question is just too complex. Providing good investment advice requires a comprehensive understanding of the beneficiary’s situation, including knowledge of their financial status, time horizon, appetite for risk, capacity for risk, and long-term goals. While the math of investing has been largely solved, the art of financial planning remains a highly personal and complicated puzzle.
How a financial advisor earns their salary usually determines whose interests they’re really serving. It is imperative that Canadians to understand their options before selecting the appropriate financial planner.
The free bank advisor – aka the sales model
A lot of Canadians default to this route because it’s convenient and familiar. They walk into their local bank branch and a so called financial advisor will guide them with no upfront cost. Typically the bank representative will ask the client a few questions to gauge their risk tolerance and investment horizon before suggesting appropriate financial products to meet those goals. The drawback is that they will almost exclusively recommend their own bank’s managed mutual funds which carry high Management Expense Ratios (MERs) between 2% and 3% and more often than not fail to beat the market. And because they only sell their own products as they have been trained to do, they will not consider other options such as low fee index funds, ETFs, or even better performing funds from a competitor.
The advice only advisor – aka fee for service
This model is fast becoming the gold standard for those seeking a clear financial roadmap without the pressure of a sales pitch. Because these advisors charge either a flat fee or an hourly rate, they have no incentive to push specific products. They are simply selling their knowledge and objective advice. This type of professional is best for clients who want an unbiased opinion on their retirement strategy, tax advice, or estate planning. These professionals usually hold the CFP (Certified Financial Planner) or QAFP (Qualified Associate Financial Planner) designations. According to Dan Bortolotti, a comprehensive retirement plan from this type of advisor typically costs between $3,500 and $7,000. While that upfront price tag may seem high, it’s probably a bargain compared to the hidden costs of mutual fund advisors who charge an average of 2% to 3% annually while providing little to no actual financial guidance.
The fee based brokerage advisor
These types of financial planners typically work for a private investment firm or a full service brokerage. They usually charge a percentage of the total assets inside the account, typically between 1% and 1.5% of asset under management. The advantage is that the advisor’s compensation is tied directly to their client’s success, so there is clear incentive to maximize returns for customers. The disadvantage is that ongoing annual fees between 1% and 1.5% can be expensive as the portfolio grows, so it is essential to be sure the level of service justifies the high price tag.