What fees should you pay a financial adviser?

Dear Money Lady,

I received a large severance from my employer after my job of 38 years was eliminated. I plan to find an adviser, but because I have never had one before I am wondering what I should be paying.

Ed

Ed, you are not the only one looking around for a new investment adviser. With the volatile stock market environment, many people have asked about how to move their portfolios to a new adviser. I would caution those investors on making any quick changes and selling stock at this time. Remember, the key is to maintain a well-diversified portfolio which includes bonds, cash, and high-quality stocks.

In your case, when you are looking for an investment ‘partner,’ try to pick an adviser who really has your best interests at heart; someone you will definitely need when weathering future market uncertainties. Please make sure to do your homework and find out what the firm and the new adviser’s value-proposition is. It goes without saying that you should interview more than one and make sure you find a good fit with not only the adviser but also the brokerage firm.

Now, let’s talk about fees. What should you pay? There are two types of fee structures – transactional or fee-based.

Transactional fees are charged with every investment transaction. This is often the case when you buy fixed income investments such as bonds. A fee is charged when you purchase the bond and then again when you sell it. There are not many advisers that still offer transactional fee structures when buying securities. They seem to have left the industry with the vintage, old-school stockbrokers who had to do multiple trades every month to make any money – a method we used to call “pump and dump” back in the day. Now we have investment advisers who want to put you in fee-based plans, designed to offer more protection for clients along with a consistent revenue stream for the advisers and brokerage firms.

At the retail level, many financial planners are paid a base salary with a commission matrix based on how they grow their book of business and bring on new clients. Typically, fees are preset and based on the mutual fund you choose – ranging from one to 2.95 per cent. Investment advisers at an IIROC brokerage firm (a member of the Investment Industry Regulatory Organization of Canada) are usually on straight commission, making them much more motivated to ensure you make a profit, which they, in turn, will be compensated on. Fee-based services range from 0.75 per cent all the way up to 3 per cent. Some advisers act as personal bankers for ultra-rich clients, doing everything for them, and hence may be able to justify the higher fee structure. But most of us do not need someone to pay our bills and handle our budgets, so if you are paying more than 1.5 per cent for a fee-based portfolio, you may be paying too much. If you have different SMA products (separately managed Accounts), advisers may increase their fees up to a max of 1.75 per cent.

The bottom line is that fees are all over the map and vary from one adviser to another. The cost you pay for professional financial advice should be based on your own personal comfort zone. Is your adviser a valued partner that you are willing to pay for and, most importantly, are you satisfied with their services? It is always a good idea to periodically check out the competition, talk to your friends and see what they pay.

Remember, as you age and move investments into secure, fixed-income products with lower risk and smaller gains, your No. 1 problem will be fees and expenses. Fees, inflation, and future market volatility always eat away at your retirement capital, decrease your purchasing power, and eventually force you to lower your lifestyle as you age.