What you don’t need to see a Financial Advisor: money
What you do need: the motivation and desire to save and grow your wealth over time
I think there is a very big misconception that there is no point in seeing a Financial Advisor if you don’t have a large amount of excess cash kicking around, or have come into an inheritance or windfall of some sort. A number of people may believe it will cost them money up-front to see a Financial Advisor or receive advice. Many people just don’t fully understand how advisors are paid. In this post I will attempt to explain how Advisors are paid and the importance of meeting with someone early on, regardless of whether you have cash “on hand” to invest. At the end of this post, I will discuss how you can turn a small weekly contribution of $25 into over $75,000 using patience, discipline and the guidance of a Financial Advisor.
How Advisors are paid
There are several different ways in which an Advisor can be compensated for their services.
Some Advisors are fee-based only. They charge you an up-front fee which can be hourly (similar to a lawyer), a flat one-time fee, or an amount based on the percentage of your assets, typically 1-2% (ie: If they are managing $50,000.00 of your money they charge you $500-$1000 annually to do so).
Others are paid via commissions by their Mutual Fund Distributors. Meaning of the assets that they manage, a percentage of those assets are used to pay the Investment Dealer, Regulatory Fees and Branch Expenses as well as the Advisor themselves through trailing and sales commissions.
There are both positives and negatives to every form of compensation
With Fee-based Advisors the Investor knows exactly what their fees will be up-front. Advisors may charge a one-time fee of $2,500 for a comprehensive one-time financial plan, or $250 hourly (every one-hour meeting costs the Investor $250). These are simply examples – there is a wide-range of Fee-based options. A negative to a fee-based option is that it presents a potential barrier to new investors just starting out. If you don’t have $250-$2,500 up front to pay the Advisor (with no guaranteed investment return) you may be discouraged from starting an investment account. Also – if a new investor has no assets to begin with and is planning on paying their Advisor 1-2% of their assets (of which, amount to $0) there will be very few Advisors willing to work for 1% of $0.
In working with a commission-based Advisor you are not required to pay any fees or sales-charges up-front (unless this is negotiated with your advisor prior to the purchase of an investment).
A commission is paid to the Advisor’s firm at rates of anywhere from 1-5% for the sale of the fund and a trailing commission is also paid to your Advisor’s firm (typically 0.5-1%) for the entire duration that you hold the investment.
When investing in any Mutual Fund (with either a fee-based or commission based Advisor) there is a Management Expense Ratio (MER) which can include the trailing commission, but also fixed administration fees and other operating expenses, as well as the Fund’s trading cost.
Is advice worth the cost?
Financial Advising is a service, like everything else, and unfortunately not free. However, when you are starting out and cannot afford to pay an up-front fee you should not be discouraged from reaching out to an Advisor and inquiring about their services and fees. You can set up an investment with as little as a $25/month per-authorized contribution.
According to a study done for the Investment Funds Institute of Canada (IFIC) by the Center for Inter-university Research and Analysis on Organizations (CIRANO) “an advised household that has worked with a financial advisor for four to six years has 58% (or 1.58 times) more assets than passive non-advised households that are identical in all other respects” According to the study, the positive correlation is amplified the longer the relationship lasts. (Source: TD Asset Management Inc)
How very little can grow into quite a lot
How can a measly $25 grow into anything??? If you start with $25 and contribute $25 weekly (you may have to skip one supper out a week), factoring in rate of return of 6% (this is strictly an example, not guaranteed), you can accumulate $75,330.20 in 25 years. You will have contributed only $32,525.00 over those 25 years, and earned $42,805.20 in interest!
If you know you need a financial plan, but are not sure where to begin, please get in touch. I would love to help you grow your wealth.
Brooklyn Scott is a Financial Advisor/Mutual Funds Representative for Lewis & Jones Group/Desjardins Financial Group/Desjardins Financial Security Investments Inc. in Killarney, Manitoba.
Mutual funds are distributed through Desjardins Financial Security Investments Inc. For insurance products, Desjardins Financial Security Investments Inc. acts as a national insurance brokerage agency.