What are the different kinds of Financial Advisors out there?

Unfortunately there is not much clarity on the different types of financial advisors out there along with the pros and cons of each. So let me shed some light on the major types, since I believe most investors are completely in the dark in this respect.

In-Branch Financial Advisors: You will find these at bank branches. Generally speaking you need only be a client of the bank and whenever you have a question about starting to invest, a teller will refer you to one of these in-house financial advisors. They are normally restricted to selling mutual funds and GIC’s and that’s about it. In most cases they can only sell you their own bank’s brand of mutual funds, but these days the product shelf is opening up to third-party mutual funds (which basically just means mutual funds offered by other banks and dedicated mutual fund companies). These advisors are paid a salary plus bonus based on the volume of business they generate. The mutual funds they offer are all “no-load” which means there are no out of pocket costs for buying or selling the mutual funds – only the ongoing MER’s (Management Expense Ratios).  There is not much latitude afforded to them from the banks to create custom portfolios – rather they will have you fill out a short questionnaire which will dictate the packaged portfolio option of mutual funds for you to invest in. They are normally only required to be licensed by the MFDA (which is the Mutual Funds Dealers Association).  This means they are not licensed to speak to you about individual securities like stocks and bonds. They do not create complex financial plans, but can help you make certain financial projections for individual goals.  They do not offer estate planning, insurance planning, advanced tax planning, etc. like a full blown financial planner might.

Mutual Fund Sales Representatives: Very similar to an in-branch financial advisor but commission-based for the most part. They can work for mutual fund companies directly (a tell-tale sign is if they only sell a certain line of mutual funds), or they can work for a financial services company that only deals with mutual funds and GIC’s. There are two main differences between the Bank Mutual Fund Sales Reps and non-Bank Mutual Fund Sales Reps: The non-bank advisors earn their keep through commissions. Predominantly this is through the selling of back-end loaded mutual funds, also known as DSC funds in the industry which stand for “Deferred Sales Charge”. Almost throughout the industry if a mutual fund is sold as a DSC fund, the advisor makes a 5% up front commission and a 0.25% trailer fee every year. Investors will pay a redemption fee (deferred sales charge) if they sell units in these funds within a certain time frame (normally 7 years).  The deferred sales charge also decreases every year until it eventually reaches 0% after the 7th year. Mutual Fund Sales Reps also have the option of selling Front-End load funds where a sales charge is charged right up front and payable by the investor immediately – this can range from 0% to 5%, but normally advisors will not charge more than 2%. The trailer fee is higher with Front End funds and No-Load funds, usually around 1 – 1.25% for equity funds per year. Mutual Fund Sales Reps can also be Life Insurance Licensed, which means they can also sell insurance and segregated funds (the Life Insurance industry’s version of mutual funds). They can provide more personalized advice than a bank in-branch financial advisor since they have to bring more value to the table and are comissioned-based. A salaried advisor at a bank has no real “fire” lit under them to perform at a higher level. More senior Mutual Fund Sales Reps will have a CFP (Certified Financial Planner designation) and will argue that mutual funds are the best investment available because it downloads the actual investment management to a fund manager so the Mutual Fund Sales Rep will have more time to create detailed financial plans.

Stockbrokers: Stockbrokers are licensed to sell anything. Instead of being limited to mutual funds and GIC’s they can provide access to individual securities like stocks and bonds, alternative investments like hedge funds, options and other derivatives and tend to be more in tune with the markets. They can help investors employ complex investment strategies and basically have no limits on the investment products available. Stockbrokers can also be Life Insurance Licensed. They are commission based and can earn a commission on mutual funds just like a commissioned mutual fund sales rep and can earn transactional commissions on stock and bond trades. They can also charge their clients a flat fee instead of using a transactional fee structure. For example when investment portfolios get larger, they might instead charge a flat 1% fee to manage the client’s portfolio which could include mutual fund trades, stock and bond orders, option writing, etc. and the fee doesn’t change, nor does the broker earn the mutual fund trailers or up-front commissions.  A client making few trades per year might be better off with a transactional fee platform and an investor making 4 trades a month might be better with a flat fee.  More active traders generally do not use a full service stock broker and will trade their own portfolios using a discount on-line brokerage. Generally, a stockbroker will require that their clients have a minimum level of assets to invest (starting at $50,000 for some firms, but $100,000 is the norm for most). One criticism of stockbrokers is that they are more investment focused and not so much interested in full financial planning, but more and more stockbrokers are earning their CFP designations (Certified Financial Planner) or otherwise engaging in full financial planning for their clients. They will tell you if they engage in financial planning or not and the fees may vary depending on that.

How do you know which one to use? First and foremost picking a financial advisor is a very hard thing to do.  Assuming that there is a financial advisor at every level who is knowledgeable, service oriented and professional then the choice of which one to use at different times might look something like the following description. When you are a student in high-school, no-one is going to give you the time of day, let’s be honest. You will have a bank account and if you actually decide to start saving money for the long term you would use an in-branch bank financial advisor. You might continue on with using the bank branch advisors (who might be different every couple of years) until you are done school. Money hasn’t really been much of a focus in your life up to this point so you might not have much to invest. A commissioned mutual funds sales rep might be knocking on your door at this point to offer a more personalized service – i.e. a regular advisor that you meet with who will develop your first real encounter with investing and some basic planning. You may continue on with this type of advisor until you reach the $50,000 – $100,000 mark.

At this point, investing in mutual funds may not be the most cost effective method of investing.  If you are still at your bank, they will start to refer you up to their “Wealth Management” departments (which is where the Stockbrokers work). If you are with a non-bank mutual fund sales rep, then you might stay because you don’t know any better or you might leave when your comfort and knowledge increases to the level where you realize the fees you are paying for mutual funds might be excessive.

Once you get to the $250,000 mark you may switch to a flat-fee account with your stockbroker, or “wrap account” in order to further reduce your investing fees.  If you are more of a buy and hold type of investor with your individual stock and bond positions, you might stay with a transactional fee structure. You may stay at this “level” until the day you die.

But, in some cases you may take another step.  Another option becomes available which is known as a “discretionary” account in which you sit down with your stockbroker and outline a disciplined investment philosophy for your portfolio and you allow your stockbroker to make trades in your account based on your guidelines and without having him call you every time for your blessing to enact the trade. If your account is large enough and you hold many different individual securities this option may save time and hassle.

The End

Well, sort of. I got the idea for this post from a reader who had asked for some advice on picking their asset allocation for their Group RRSP – so I suppose I should mention that many investors only have Group RRSP accounts (or pensions) for their retirement savings. The advisors for these Group RRSPs for the most part (if they are with large companies) are 1-800 numbers with licensed advisors on the other end who have no real connection to your financial situation. They will answer your questions, but will not assist in creating complex financial plans or developing as deep a relationship as you could find with a personal financial advisor.

This post really only covers the three broad areas of financial advisors. I didn’t write on the Insurance Agents out there who can sell segregated funds – one might say that while they are more knowledgeable on insurance matters, they might be best left out of the investing end of things… etc. If anyone has questions, fire away.  I’ve seen all sorts of advisors out there and of course many of the advisors I started my career with have diverged into countless different financial advisory roles – all of which I have to know if I am better able to compete with them. :)

I also didn’t speak about the fee-only planners who write up financial plans and provide basic asset allocation recommendations for more knowledgeable investors to implement on their own. They may charge an hourly rate for the financial planning and leave the investing up to you.

Preet Banerjee
Preet Banerjee
...is an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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Showing 12 comments
  • Leslie

    Referencing your observation that as a young person (student or new grad): it’s unfortunate there’s little interest by investment advisors in the initial pittances they have to invest. It’s even more important when you have little money, to invest it wisely. While you have a critical element of the wealth growth equation in your favour (time!), you don’t want to see returns chewed up by fees. You work too hard for your money not to make the effort to learn about how to manage it properly so hit the personal finance books at the library or bookstore. Start with the Dummies series or David Bach’s books. Learn what questions to ask before you give an advisor your money. Another option is to piggyback on the advisor your parents are using; a smart advisor will fall all over themselves to help you if they have any long term perspective on servicing their clients’ inevitable estate planning.

  • Traciatim

    Thanks for the post, it was very informative. Here is my main question about a financial advisor. At what point should someone move from managing their own funds to moving to paying someone to assist?

    I took a browse through the sample financial plan, but haven’t read it yet. It seems to me the financial planner should be used after you get to a certain point. Kind of like the banks system of moving you up to the wealth management. I’ve always thought that I would be taking care of my own finances rather than letting someone else do it, but I guess it sometimes helps to get an objective set of eyes on things.

  • Preet

    Hi Traciatim – normally I’ve found that it goes the other way in that most people start with some sort of advisor and then they might switch to managing their own investments after they have been soured by their client-advisor relationship. Not many people manage their own investments from the get go, but there are those who do – and can do quite well for themselves with respect to their investments.

    They do however, lack a good grasp of all the other important aspects of finances – like long term tax planning, estate planning, insurance planning, etc.

    If I were you, I would start looking for a financial advisor to write up a financial plan for you NOW. Is there someone your friends or colleagues use and recommend?

    When I started in the business, many of my clients were young, straight out of university looking for advice on how to save for their first house and start saving for retirement. Most, if not all, moved with me to my new firm which is more upscale, but they had saved and while they don’t meet the firm’s soft minimum level of assets yet, they have great potential and I treat them like my bigger clients. It’s all about building a long-term relationship, so it is totally possible to find a planner who will work with you NOW. The clients that started out with me will probably be my best clients 10 years down the road in terms of assets and referrals – and the loyaltly (both ways) will be unbreakable.

    So, if you can find yourself an advisor who is candid, intelligent and willing to work with you even though the pay off to them is years down the road – great. If you aren’t sure about the advice you are getting, I’d be happy to give any financial recommendations a second look through for you – as a reader of my blog! :) (no charge)

    Preet

  • Traciatim

    I actually did ask a few people at work who they used a while back. Most people just went to their bank and I found one person who talked up the company ‘Money Concepts’ and their contact there. I visited their website and was very un-impressed. Their brochures aren’t even available in PDF. The Money Concepts site was also very lacking in details of what they do. At that point is when I figured I would just learn myself and figure it out as I went along.

    That was a long time ago now, I hadn’t even planned to buy a house at that point and was just saving for a down payment in the RRSP through work. Then my spouse decided to go back to school, then we decided to buy a house, now she’s starting a business rather than getting a normal job so she won’t have a huge income until she gets things up and running.

    So as it stands we just RRSP for me, Individual RESPs for each of the kids (one through CST [YUCK!], and one using TD E-Funds), and trying to keep up with everything else while we basically have one income. That’s probably the way we’ll stay until next summer and we’ll see if her business is taking off. If at that point her income is up then we will be opening an RRSP for her and starting investing in non-registered accounts, but I’ll probably just do that through Questrade, or the at the time best discount broker for our situation.

    As for the other things since she isn’t going back to work we have to set up some disability insurance for her and set up a joint term life insurance for the two of us in case something happens to her or I to cover the cost of raising the kids. Once we have that all squared away I would be willing to bet we’re much farther ahead than most of the population.

  • Preet

    Yes I think you are correct in your assertion that you would be further ahead than most of the population. :)

    Re: the life insurance. You just inspired me as to what my next post can be on. You mention a joint-life policy for the two of you. Manulife has a family term product that is basically two separate policies instead of a joint-first-to-die (which is what you would normally use for your reason) and the cost is only 2 or 3 dollars extra per month than having a joint policy.

    There are a couple of benefits:

    1) If you and your spouse were to die in the same incident – then there is twice as much insurance available to the guardians.
    2) If one of you dies first, the remaining person still has life insurance. With the joint-first policy when the first person dies the policy pays and is then complete – no more insurance in effect – perhaps the remaining spouse has become sick and uninsurable, but the kids are still not self-sufficient.
    3) You can have different levels of insurance on each life – from what you mention right now, you would need more coverage on your life since you are the main bread-winner for the time being. If the low income earner right now were to pass, you may not need as much insurance to be able to carry on.

    Morbid to think about, but you have to really examine your options.

    Depending on the differing levels of insurance required on each life, the cost may actually work out to be the same as a joint policy, but with all the above-mentioned benefits.

    Look into it, and look soon. If you want some quotes I have some insurance companies’ quoting software installed on my laptop – I can give you a ballpark estimate, and then you can look on Kanetix.com to see what the going rates are for other carriers.

    You shouldn’t be without adequate coverage for a day when you have kids.

    If you are so inclined, please look at the 12 part series I wrote on life insurance if you haven’t already – it’s a long read, but very worthwhile. I think part 12 is when I look at how YOU can determine how much coverage you need yourself, and use that in discussions with an insurance agent.

    Disclosure: (although I’m sure you are aware) I’m a stockbroker and I am life-insurance licensed – so I would recommend taking everything I say with the knowledge that no matter how hard I try, or how gosh-doggone nice I am, a conflict of interest exists! :)

    Nonetheless, I try my best to act only in others’ best interests and I hope this answer was helpful.

    Preet

  • Traciatim

    That’s an interesting product from Manulife. The problem is that my existing coverage through work is with them. I would kind of prefer to use a separate company for an external policy. Though I would find it hard to believe that an insurance company would be bothered but a couple hundred grand, what happens if we have a train crash all going to a Manulife customer appreciation event . . . who knows, stranger things have happened ;)

    I’ve always thought that the best way to determine my insurance coverage is to make sure all debts are paid, and allow enough for 2 years living expenses plus 2 years of schooling. That way the surviving spouse can go back to school, pick up some more skills, make themselves more marketable and move on. If you can’t live on one salary with no debt and no worry about the roof over your head there are probably other problems that need resolving anyway. Plus, my kids RESPs are included in our expenses, and we are planning only to pay for about half of a 4 year university program. I know I may sound cold hearted, but if they don’t work themselves through I think it will just go to waste because they won’t appreciate where they are as much.

  • Preet

    Couple of notes:

    1) Work provided insurance is not as robust as private coverage. My former boss had a friend who had both private insurance and group insurance. He died in a snowmobiling accident and had trace amounts of alcohol in his system. The alcohol content voided his group coverage as the underwriting is done at time of death. The private insurance paid out immediately. With private insurance, since you have underwriting at time of application once the policy is approved you are paid out almost no matter what (your beneficiaries could get paid out even if you commit suicide after the policy has been in effect for 2 years). The payout to claim ratio might be (just for example) 80% for group insurance and 99% for private. Check the fine print.

    2) Consider that most people do not remain with a company their entire careers – most people who leave their employer do not transfer over their insurance coverage and all the premiums that went to the insurance company is just gravy. They make tonnes of money on group insurance.

    3) Insurance companies have insurance too. In some cases they re-insure themselves through other carriers – just another way to spread the risk out between them.

    4) Your formula for calculating life insurance is fine, so long as you are sure that is what would happen – a death of a big part of the family may require more than 2 years to get back on track no matter what you see on Desperate Housewives… :) (tongue firmly planted in cheek) :P

  • Traciatim

    They actually are just hiking our rates on our disability coverage. You can now switch between two plans, one to save fees and one to actually have disability coverage from what I understand. I think our rate is going to 3.14/$100 of coverage for a plan that will cover you up to age 65 for long term disability and another plan that will go for 1.42/$100 for coverage for a 5 year period after the disability. I’m not too familiar with rates on group coverage, but is this pretty standard? (Or current rate is $2.43 for the 5 year plan, and they are hiking it, which is why the offer of the 5 year, since the general populous would flip out if they were forced in to the rate hike).

    I realize that I won’t be at the company forever, however I can get coverage for myself when I leave the company and/or my next employer will probably have a coverage as well.

    I didn’t realize that the insurance company could have insurance too. It doensn’t seem to make much sense. Do the insurance companies that provide the insurance for other insurance companies also have insurance on their own polices that cover the other insurance companies?

    My calculation for the life insurance doesn’t have to be used for school. I mean, my spouse just actually got out of school and is trying to start her own business. She could take the money, have very little expenses (save taxes, food, bills, and maintenance on the house) and start up her own place rather than renting space from someone else in her line of work. I could go back to school and get some certifications on what I want to do. We’d just have the couple of years to figure out how to move on and get our bearings. It’s not like I meant that things would be ‘normal’ after 2 years. Just because you’re on the track doesn’t mean the track doesn’t go through a mountain range :)

    I just think that if the most that the survivor would need is food (say 400/month), maintenance on the house (Say 150/month), property tax ($200/month), Random bills (400/month), and childcare (500/month, 2 kids), RESP’s (250/month), that’s around 1900/month or 22800 / year. So if you plan on having all the debt paid at your demise and maybe 100K to live for 2 years I think that’s plenty to get by. In my own family that would be done on about 250K of insurance. 150K for debt (including the mortgage) and final expenses and 100K to live for the next while. That would last a few years if you wanted it to and should get things pointing back in the right direction.

  • Preet

    Sounds like a good game plan on the life insurance calculation – I think you are on the right track in that regards. Everyone’s different, so by sitting down and actually thinking about what would happen and what you would WANT to happen is the key thing – which you have clearly done. Good on ‘ya! :)

    WRT your disability at work: you said it was $2.43 for the 5 year plan now, but did you mean it was $2.43 for the "to age 65" plan right now?

    In any case, if you are forced into picking one or the other, know that you can always get your own private insurance with a 5 year waiting period that would kick in after your 5-year work coverage expired – with a 5 year wait period, it would reduce the coverage premium for the private insurance the average disability lasts about 2.9 years or so.

    Let me know about those rates – it didn’t read right.

    Re: insurance companies insuring each-other. Some of the largest insurance companies are "re-insurers". It helps avoid the insolvency of any one company if they happen to get hit with many claims (i.e. hurricane insurers years ago) and they can’t afford to pay the claims all at once. It helps spread out the risk between all the insurance players – and they are all about reducing risk.

    I think it only goes the one extra level – i.e. no re-re-insurers. :)

    In fact one re-insurer is called General Re (do a google search on them and click on about us –> Gen Re.

    You will note they are owned by Berkshire Hathaway – Warren Buffett’s holding company! :)

  • michel swieca

    Preet, love your site…tons of great, useful info and well written…just came across this post and wanted to advise you of a small error. In the Mutual Fund Sales Representatives part, you mentioned, “…: if a mutual fund is sold as a DSC fund, the advisor makes a 5% up front commission and a 0.25% trailer fee every year.” The numbers are correct but it’s the dealer that the advisor works for that will get the 5% commish and then give a part of it to the rep depending on their arrangement. Of course if the rep has his/her own dealership then they keep it all. If this has since been corrected by you or another reader in another post, apologies then. Mike

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