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Fee based financial planning critique

I believe fee based financial planning has it’s place. In some instances, it’s entirely suitable for Canadian consumers. I know a number of fee based financial planners, and they’re outstanding individuals – sharp, knowledgeable, and consumer-centric.

BUT. The consensus seems to be that fee based financial planners are automatically better than investment advisors who are paid by commission. The rationale is that investment advisors are all horribly biased over their commissions. Read most information from fee based financial planners, and there’s only ever vitrol that investment advisors are screwing their clients over for whatever product has the highest commissions. C’mon – does that sound real?

In the industry’s defence, there’s plenty of ethical advisors perfectly able to shop the market and offer independent advice free from commission advice. While I don’t personally do financial planning, the same holds true in the life insurance industry. Some people sell products based on commmission. But I don’t – ever. And I’m not alone. There’s no reason it wouldn’t be the same in the financial advice/investment industry. There are perfectly good people providing perfectly good advice, and earning a reasonable income from it.

So let’s start with the idea that there actually is an industry with commissioned advisors who actually do what’s best for their clients. That dispels the argument of product bias. All consumers need to do is shop around a bit and compare to find advisors with these qualifications. And if that’s the case, now how do fee based financial advisors compare? It turns out, there’s some substantial drawbacks that the industry never seems to disclose publicly. So here for perhaps the first time, drawbacks to fee based financial planners:

  1. Advise once, pay twice. You pay a fee based financial planner for investment advice. As the planners don’t actually sell product, you have to go down the street and buy the product from someone who is commissioned. Pay the planner first, then pay the investment advisor anyway.
  2. No qualifications. What are the qualifications for fee based financial planners? Nothing’s required. No certification. Maybe all the qualifications are that they were unsuccessful advising clients on investments for commission – couldn’t cut it in the field. Maybe they read and commented about the subject. None of that qualifies one to advise people on financial advice.
  3. No regulations, no government oversight. The investment industy is heavily regulated and monitored by the government – for your protection. Investment advisors have to document everything. That ‘everything’ is then checked and confirmed by their supervisor, and their supervisor’s supervisor, all of whom must justify and agree with any recommendations. Advisors must also meet a minimum standard of education and take continuing education. Fee based financial planners are unregulated, unmonitored and work very hard to stay that way. And that means you have no protection when dealing with them for your finances.
  4. No practical experience. If someone is advising on life insurance, but doesn’t work in the industry, how up to date can they be on principles and practices? Do they know what product types are available? Do they know the one time in a 100 where the general rules don’t apply? Do the know how much life insurance someone needs? What company to pick? How to take a medical exam? How to cancel your old policy? What about the small print in the contract? Are there differences in the policies? And so on – for all the various financial vehicles that the industry offers. If the only life insurance policy you’ve ever actually put in place is your own, are consumers better advised getting their advice from someone like that? Or dealing with someone on commission who’s done it thousands of times?

I’ll disclose my bias – I work with a number of fee based financial planners. I believe they’re expert in their field, and do excellent work for their clients. In most cases I would be happy to suggest a fee based planner. I would suggest however that we appreciate that not all investment advisors are as bad as the fee based financial planning industry makes out. And deal with fee based financial planners with the same rigour and critical thinking that they suggest you deal with the investment industry.

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