Advice-only financial planners provide a conflict-free second opinion that may be more detailed and comprehensive.
Financial planning involves six primary areas:
1. Financial management
2. Investment planning
3. Insurance and risk management
4. Tax planning
5. Retirement planning
6. Estate planning and legal aspects
Most financial planning advice in Canada is provided by investment and insurance salespeople or by people who work for investment or insurance companies. Their compensation is largely or exclusively tied to the commissions or fees paid from the sale or management of those products. This can lead to conflicts of interest.
Less than one-quarter of 1% of the financial planning advice provided in Canada comes from advice-only financial planners. Advice-only financial planning is a unique and objective financial planning model that involves only advice and no products.
Advice-only financial planning was often referred to as fee-only financial planning or fee-for-service financial planning in the past. However, as the good reputation for fee-only financial planning grew, the term started to be used by investment advisors who used a fee-based billing model. Investment advisors who charge a fee as a percentage of their assets instead of a commission to buy or sell products have continued to increase in Canada.
Advice-only financial planners are professional financial planners who sell their time, much like an accountant or lawyer. That time may be by the hour, by the engagement, or be based on an annual fee. It bears mentioning that financial planning provided for “free” is not without a cost. The cost is generally covered from the investment and insurance fees being paid each year.
Advice-only financial planners provide a conflict-free second opinion that may be more detailed and comprehensive.
According to the FP Canada Standards Council, a holistic financial plan includes:
1. Financial Management
Focuses on the client’s current and future financial position, including the use of cash flow and the development of a cash flow statement, the establishment and use of savings, as well as the use of credit and debt repayment.
The client’s financial position is characterized by current and projected cash flow and net worth, and reflects the client’s inclination to spend, save and borrow.
2. Investment Planning
Focuses on the client’s assets and how best to manage them according to the client’s investment risk tolerance and objectives.
3. Insurance and Risk Management
Focuses on strategies designed to manage the client’s exposure to an unexpected financial loss due to death, disability, health issues, property damage and other risks. FP Canada Certificants compare the client’s risk exposure to current insurance coverage and other available assets to help determine and prioritize risk management needs.
4. Tax Planning
Focuses on the client’s current and future income tax obligations and the use of available strategies to minimize or defer taxation. Tax planning strategies are designed to help strengthen the client’s financial position, allowing the client a better opportunity to meet financial goals.
5. Retirement Planning
Focuses on the client’s financial well-being after regular employment has stopped. It involves a comparison of the client’s expected lifestyle in retirement to projected retirement income streams and assets. Retirement savings must be regularly monitored, as circumstances change over time.
6. Estate Planning and Legal Aspects
Focuses on the distribution of assets on death. FP Canada Certificants discuss estate planning objectives with the client, project the client’s net worth at death, determine any constraints or opportunities to achieve the client’s objectives and develop strategies and recommendations to help meet them. Legal aspects impact the client’s financial planning. Financial planners must be aware of the client’s legal situation to help determine the level of exposure and evaluate protective measures.
To learn more about advice-only financial planning and if it is a good fit for you, please contact us to see if and how we can help.
