Canadian financial advisors provide their skills and expertise to serve our financial planning needs by recommending and providing solutions for our specific situation. How financial advisors are paid has become more transparent over the years. This helps us, as consumers, understand how the professionals providing their financial expertise will be compensated.
According to the Canadian government, a financial advisor is: “anybody who helps you manage your money. This could include an employee of your financial institution, a stock broker or an insurance agent.”
In Canada, there are four main ways financial advisors are paid: client fees, commissions, salary and bonuses. In most cases, advisors are compensated in combination of these ways. Let’s take a closer look at each of these in turn:
Client fees – This method of payment is when the client pays the advisor for their services either directly (fee-only) or indirectly (fee-based). Fee-only is usually for financial planners like a Certified Financial Planer (CFP). A CFP may charge a flat fee or a one-time fee to create a financial plan or provide a second opinion about an existing financial plan, for example. These individuals are transparent about what their fees are for, how you will be invoiced and what you will receive in return – advice, recommendations, time and so on.
Most Canadian financial advisors, who collect client fees, fall more in the fee-based category. This means they are paid with a small amount of your investment, usually referred to as a management expense ratio (MER). An MER is contained within the total built in cost of owning a mutual fund. It is important to note you do not pay the MER directly; rather it is paid by the fund itself, which reduces the value of your investment accordingly. The MER is taken out of the fund before the performance is calculated and usually ranges from 1 to 2.5%.
Alternatively, advisors can also use F-class mutual funds that don’t charge MERs, or they can purchase stocks and bonds directly and not charge a commission. In these situations, advisors can charge their own management fee, which they set after a conversation with a client. This fee is also a percentage of assets under management (i.e., 1.2% for F-class and 1.5%-2% for a stock/bond portfolio) and, like an MER, is paid directly by the fund.
Commissions – This type of compensation makes up the largest portion of how a financial advisor is paid. Financial advisors are paid commissions based on the solutions provided to their clients. The commissions take on a few different forms: upfront fees and transaction commissions. Upfront fees are commonly found in mutual funds where a percentage is paid to the advisor for each investment made into a mutual fund. Transaction commissions are more common for stock-based investments and are usually a flat fee rather than a percentage. Example of a transaction requiring a fee is selling or buying stock on your behalf.
Salary – Financial advisors may work at a financial institution, like a bank, and be paid a fixed salary for the work they do. This is especially true for newer financial advisors who are still building their client base. Typically, even if an advisor is paid a salary, they still may also earn client fees, commissions and bonuses. For many financial advisors they may have a ‘base’ salary and the bulk of their income is derived from a combination of the three other sources of income covered in this blog.
Bonuses – Being a financial advisor is a performance-based profession. As with many performance-based professions, financial advisors have the opportunity to earn additional income, like a bonus, if certain criteria are met. Criteria are specific to each organization. Some examples of financial advisor bonus criteria are hitting sales targets for new investments; adding new clients to their business; achieving team goals and recruiting new team members.
Financial advisors provide a great service to their clients and should be fairly compensated for the work they do and clients have a right to know and understand how this happens. Transparency around compensation fosters trust and open communication, both of which are must haves in any successful client/advisor relationship. Intent Planning advisors are paid based on a combination of the above methods, depending on the solution best suited to each client.
If you would like to talk to your advisor about how they are paid, in connection with your portfolio, please connect with us.