Flat-Fee Financial Planning vs. a 1% Investment Management Fee

Financial advice can be paid for in several ways. Two common approaches in Canada are a flat fee for financial planning and an investment management fee based on a percentage of your portfolio.

At first glance, the comparison seems straightforward. A 1% annual fee on a $1 million portfolio is $10,000, while a financial plan may cost a few thousand dollars. But those fees often pay for different services, so comparing the numbers alone can lead to the wrong conclusion.

The more useful questions are: What services are you receiving? Which of them do you need? And is the total cost reasonable for the work being done?

How a 1% investment management fee works

Many investment advisors and portfolio managers charge a percentage of the assets they manage. The fee may be higher or lower than 1%, and larger accounts often qualify for a declining fee schedule. But using 1% as a simple example, the annual cost would be:

An investment management fee may or may not include a financial plan. Depending on the firm and the relationship, it may include portfolio construction, investment selection, trading, rebalancing, ongoing monitoring, performance reporting, and access to an advisor. Financial planning may be included.

For someone who does not want responsibility for choosing investments or monitoring a portfolio, delegating investment management can have a value. The relevant comparison is not simply 1% versus a flat fee. It is the total cost of the services provided and whether you value and use them.

How flat-fee financial planning works

With flat-fee financial planning, the client pays an agreed dollar amount for advice. The financial planner may charge for a specific engagement, such as a retirement plan, or an annual fee for ongoing advice. The fee is generally based on the scope and complexity of the work rather than the size of the investment portfolio.

A financial planning engagement might consider retirement readiness, cash flow, pensions, CPP and OAS timing, tax planning, RRSP and RRIF withdrawals, TFSA strategy, corporate assets, insurance needs, estate planning, investment risk, and asset allocation. The financial planner may compare several scenarios before making recommendations.

This type of advice-only financial planning(opens in new tab) can be useful for people who already have an investment advisor or portfolio manager, as well as those who manage their own investments.

Is flat-fee financial planning cheaper than paying 1%?

It can be, especially for someone with a larger portfolio, but it is not necessarily a fair comparison.

Suppose an investor with a $1 million portfolio pays an advisor $10,000 per year and is considering a $5,000 financial planning engagement. It may appear that the financial planner costs half as much. But the advisor may be managing the investments as well as providing advice, while the flat-fee financial planner does not select securities, execute trades, or take responsibility for the portfolio.

If the investor is comfortable managing their own investments, or already has investment management in place, paying separately for planning may make sense. If they want to delegate both investment management and financial planning, an integrated arrangement may be more convenient. Either model can be appropriate. The important point is to compare like with like.

Already have an investment advisor or manage your own portfolio?

Objective Financial Partners provides advice-only financial planning for Canadians who want help with retirement, tax, and other financial decisions without transferring their investments. Learn more about our advice-only financial planning services by booking a complimentary introductory call(opens in new tab).

When a 1% investment management fee becomes expensive

One percent may be reasonable in one situation and expensive in another. It depends on the size and complexity of the portfolio and the services included. The quality and depth of the advice may also be difficult to compare.

The dollar cost also matters. One percent of $250,000 is $2,500 per year, while 1% of $2 million is $20,000. A larger portfolio may involve more accounts, corporations, trusts, tax considerations, and estate planning, although the work involved does not necessarily increase in direct proportion to the assets. This is one reason many firms reduce their percentage fee as a portfolio grows.

Investors should periodically review how much they pay in dollars, not just as a percentage. They should also consider whether financial planning is included and which services they actually use. A relatively low percentage fee can still be a large annual expense, while a higher percentage on a smaller account may be reasonable if the client receives substantial investment management and planning support.

Is financial planning included in a 1% fee?

Sometimes. Some investment advisors and portfolio managers provide financial planning as part of their investment management relationship, but it may not be very detailed. Others focus primarily on investments. The compensation model alone does not tell you how much planning you will receive.

Rather than assuming a service is included, ask what work will actually be done. Will the advisor prepare retirement and tax projections? Compare different retirement dates or CPP and OAS start dates? Review pension options and withdrawal strategies? Identify estate planning issues? Update the plan when your circumstances change?

Two clients paying the same percentage may receive very different levels of financial planning. They may also have different needs. A young investor building savings may require less planning than a business owner preparing to sell a corporation or a retiree deciding how to draw down several types of accounts.

Separating financial planning from investment management

There is no requirement to receive both services from the same firm. In fact, as the advice-only financial planning industry has developed, clients are increasingly working with a portfolio manager and an advice-only Certified Financial Planner.

For example, a portfolio manager might be responsible for investing a client's $2 million portfolio. A separate financial planner could advise on when the client can retire, when to start CPP and OAS, whether to make additional RRSP withdrawals before converting to a RRIF, whether to draw money from corporate or personal accounts first, how much the client can afford to spend, and how different strategies may affect lifetime tax and their estate.

The two professionals have different responsibilities, but their work should complement each other. The financial plan can help establish the return, risk, liquidity, and cash flow requirements for the portfolio, while the portfolio manager can implement and maintain the investment strategy. For clients who are happy with their investment professional, there may be no reason to change that relationship simply because they want more detailed planning.

Flat-fee financial planning for DIY investors

Someone can be comfortable choosing and managing investments but still want help answering questions such as:

• Can I afford to retire next year?
• Should I start CPP at 60, 65, or 70?
• Should I withdraw more from my RRSP now to pay less tax later?
• How much can I afford to give my children?
• Should I sell my rental property before or after I retire?

These are financial planning questions, not decisions about which stock, bond, or exchange-traded fund to buy. An advice-only financial planner can also provide general guidance on risk tolerance and asset allocation, and assess whether an investment strategy is consistent with the financial plan, without taking over management of the investments.

Which fee model is better?

Neither model is best for everyone. The right choice depends primarily on what you want to delegate.

An investor who wants one firm to manage their investments and provide ongoing advice may prefer an investment advisor or portfolio manager who charges based on assets. Someone who already has an investment professional may hire a separate financial planner for retirement, tax, and estate planning. A DIY investor may have no need for professional investment management but still benefit from financial planning advice.

Cost is important, but convenience, accountability, and personal preference matter too.

How Objective Financial Partners charges

Objective Financial Partners provides fee-only, advice-only financial planning. We do not manage investment portfolios, and our fees are not based on how much a client has invested.

Many of our clients already work with investment advisors or portfolio managers and continue those relationships while working with us. Others manage their own investments. Our role is to help with retirement, tax, cash flow, pensions, CPP and OAS, estate planning, and the way investment decisions fit into the broader financial plan.

If a client wants professional investment management and does not have an advisor, we can introduce them, at their request, to portfolio managers we know. We do not receive commissions, referral fees, or other compensation from those managers.

Someone looking for detailed retirement planning(opens in new tab) may benefit from a broader engagement, while someone with a few specific questions may be better suited to a Pay-As-You-Go Consultation(opens in new tab). You can also learn more about our financial planners(opens in new tab) and their backgrounds.