If you wanted a financial or retirement plan done, who would you go see?
- Advisor 1 offered a “FREE CONSULTATION”
- Advisor 2 was a fee only planner that charged $250 per hour with a estimated total cost of $1500.
There are plenty of advisors who work like Advisor 1. How do they make their money if they are doing this for FREE? It’s simple – they sell products and earn commissions when they sell products whether it’s a mutual fund, GIC or insurance product.
A “FREE” consultation for Josephine
Josephine was widowed and went to one of these “free consultations” offered by the insurance agent who was delivering a death benefit and wanted to provide some recommendations on what she should do with the money.
Here’s a small section of the introduction letter he wrote to Josephine:
“We are a full service financial services company that can custom tailor solutions based on your personal needs. To provide customized recommendations, we are offering you a FREE personal consultation along with a comprehensive financial plan using our 6 step Financial Security Approach. You will get a full report without any cost or obligation.”
Josephine’s son came to me with Josephine to ask me my opinions about the report because Josephine did not want to pay a fee for something this advisor was offering for free.
Was FREE worth the money?
To be objective, there was some good charts, graphs and information in the report. Despite the good in there there was one big problem with this FREE REPORT: The solutions were all product oriented. Let me give you 2 examples:
- The final recommendations called for a life insurance policy to pay for the tax liability on her death so that her beneficiaries would get more of her estate. One of the big factors creating this potential tax liability was the fact that the RRSPs would be taxed at death and the best way to deal with it was the tax free insurance policy. Would you have guessed that an insurance agent calling himself a financial advisor would recommend an insurance policy?
- The advisor wanted her to invest her current RRSPs and some of the new money into a Guaranteed Income Segregated Fund product with 3.2% MERs (Management Expense Ratio) every year.
The real cost to her free advice
The biggest problem with the ‘financial plan’ is it was clearly product oriented and because of that it missed out on some really important aspects of planning
- Nowhere in the report was the option to start streaming out some of the RRSPs while Josephine was in a 25% marginal tax rate to spend more and supplement her current lifestyle while she can enjoy it. Not only would this reduce the tax liability from dying with too much RRSPs at death but it would also help her with her current lifestyle, reduce the possibility of future OAS clawback and save money on the cost of an insurance policy.
- The report failed to address the issues around Canada Pension Plan. The report assumed she would get the maximum CPP at age 65 which was not the correct assumption. The plan did not help her deal with the dilemma of whether she should take CPP early at 60 for a reduced amount and most urgently it did not reflect CPP survivors benefit.
- Oddly, the report did not recommend that Josephine maximize her TFSA contribution room of $15,000. The report focused on the investment product but not the account. The good news is the report did recommend that she does not put any more money into the RRSPs but instead of investing all the excess money into a life insurance contract, she should maximize the TFSA.
- The report recommended that she was in a financial position to take higher risks because of the inherent guarantees in the with the seg fund product. At 60 and widowed, the report failed to address the fact that she did not NEED to take any risks. With CPP, OAS and a residual pension from her late husband, she had a decent income. Add in an income stream from the RRSPs and she also had an income cushion or surplus. If she took the entire $400,000 and put it in a sock drawer earning no interest, she would still be fine. If she put it in a GIC, despite the inefficient taxation, she might have the added bonus of just keep up with inflation. She really appreciated this perspective because the risk of the market was a big concern.
- The report did not properly address the impact of an annual 3.2% fee. If you do the math, 3.2% on a $400,000 portfolio equates to $12,800 per year in fees being charged against the account. That’s a heck of a lot more than the fee she paid me to review her plan.
In the end, despite paying a fee for our meeting, she saved more money by not implementing all the recommendations in the FREE plan.
This article is based on the experience of one person. Not all financial advisors will act in this manner. My point is simple … be careful of FREE consultations and FREE financial and retirement plans. Ask why they are free and how the advisor is going to make money. Watch the final recommendations and see if they are mostly product oriented. A good plan takes me an average of 5 hours to do it right. A good plan will focus on good planning advice over good product recommendations.
Just because you are paying a fee for a plan does not always mean it will be a good plan. That’s one of the things that can make this whole business and industry frustrating. Ask for a sample report before you pay. Ask to talk to a client that has paid a fee to see if they were happy with what they got.