Author: Mike Holman

Here are some of the main types of financial advisors you might run into. It’s important to note that these are general categorizations and there can be overlap between groups.  There are a number of different factors to consider when choosing who to deal with for investing advice.  Some people want convenience, some investors want education, others just want someone to talk to.

Here is a list of Canadian fee-only financial planners.

 

Please check out How Canadian financial advisors get paid, for more information on advisor compensation methods.

Don’t forget to visit the list of Canadian financial advice resources at the bottom of the post.

Bank financial advisors

This is the person who will help you if you want to set up a mutual fund account at your local bank.  They will have their IFIC course and might even have their CFP.  It’s hard to beat banks for their convenience, but don’t assume the person you are dealing with knows what they are talking about.

Compensation – Salary plus small commission.

Pros – Convenient.

Cons – Will likely be biased to selling bank products.

Mutual fund salespersons

This person will typically work for a mutual fund company or a financial planning company and will only be licensed to sell mutual funds.  Often they will only be able to sell the funds from one company which is very limiting.  It’s a sure bet that all the funds they sell will have high management fees, since that is how the salesperson gets paid.

Compensation – Commission.

Pros – Convenient.  They will often do house calls.

Cons – Investment knowledge will likely be minimal.  Will only sell high-fee products.

Financial planners

A financial planner is an advisor who will look at your overall financial situation and make recommendations.  Retirement planning, asset allocation, and taxes are some of the areas a financial planner should cover.

Compensation – Commission or fee-only

Pros – Usually good investment knowledge if they have their CFP.  Ask for it.

Cons – Won’t take on small clients.  If commissioned based, will only sell high-fee products.  Fee-only advisors are usually too expensive for small portfolios.

Stock brokers

Stock brokers typically work for larger financial firms and traditionally deal with individual stocks. Depending on their qualifications, they might also offer mutual funds and financial planning advice as well.

Compensation – Commission.

Pros – Good knowledge of markets.  Can provide information on companies.

Cons – Very expensive.  No financial planning provided.

Insurance brokers

Insurance brokers are primarily concerned with insurance, however they are sometimes licensed to sell other investment products such as mutual funds and seg funds. They will also offer products that are combination investment products and life insurance products.

Compensation – Commission.

Pros – Convenient, if you are already buying insurance from them.

Cons – Typically only sell high-fee products.

Managed investment advisors

Most investment companies offer a managed portfolio service for high-net worth clients.  Fees are usually percentage based on asset size.

Compensation – Commission based on portfolio size.  Ie 1% of portfolio value per year.

Pros – Good investment knowledge.

Cons – Fees are usually pretty high for services offered.  Need a large portfolio – likely north of $500,000.

Financial coaches

Financial coaches are a new type of financial advisor who can help you with a wide variety of financial issues.

Most of these services seem to lean towards helping people manage their basic finances and paying off debt. Having a financial coach can provide some accountability and motivation for someone who is trying to get their finances in order.

This type of service is not regulated, so be very careful what you sign up for.

Compensation – Fee based.  Charge by the hour.

Pros – Less intimidating than dealing with a financial advisor for the first time.  Coaches will deal with non-investment issues such as debt reduction, which most other financial professionals avoid.

Cons – Non-regulated.  Might not have much knowledge.

More financial advice resources

• How to run a background check on your Canadian financial advisor at Money Smarts Blog.
• How Canadian financial advisors get paid at Money Smarts Blog.
• How to find a Canadian financial advisor at Canadian Capitalist.
• Canadian financial advisor qualifications and courses at Money Smarts Blog.
• Here is a list of Canadian fee-only investment advisors at Canadian Couch Potato.
• A money coach may be the answer at the Globe & Mail (written by Preet Banerjee).
• Why don’t most financial advisors plan finances? at Million Dollar Journey.
• In defence of mutual fund DSC fees for smaller investors at Money Smarts Blog.  Contains tips on how to reduce your DSC fees.
• Should financial advisors disclose their commissions? at Money Smarts Blog.

And if you want to do it yourself

Canadian online discount brokerage comparison at Money Smarts Blog.  Comprehensive comparison of discount brokerage fees and services.

I recently had the pleasure of talking with Derek Foster who is busy promoting his new book – The Idiot Millionaire.  I really enjoyed our conversation – Derek is a super nice guy.

I’m well aware of the controversy around the numbers in his first book and the fact that he sold all his equities at the bottom of the market.  I liked his first book and still think it stands up today – especially the frugal living section.  I don’t think that there is anything wrong with someone writing a book and then changing their methods later on.  Mr. Cheap came to visit last weekend and he told me a quote which I thought was funny and appropriate:

Consistency is the hobgoblin of little minds – Ralph Waldo Emerson

My opinion of dividend investing

I’m not doing any dividend investing at the moment, but I think it’s a reasonable method of investing.  It doesn’t matter which kind of investing you favour – if you believe in what you are doing, that belief will help motivate you to:

• Save more – This is key factor in investing.
• Hold the course – When the markets crash and dividends get cut – your beliefs will help you stay strong and stick to the investing method you have chosen.

Adopting a reasonable investing method and sticking to it, is good enough.  You can’t necessarily predict which investing method will be the best over the next 20 years – just like you can’t predict the best mutual funds over time.

On with the interview

This interview is not transcribed exactly – we talked for about an hour and my kids were running around a bit, and Derek was looking after his five kids – needless to say there was the occasional interruption.   I took notes as best I could – I hope I don’t misrepresent anything Derek said.

Where is it available for purchase?

The book is available at stopworking.ca or at any Chapters/Indigo store.

What is the Idiot Millionaire about?

This book is mainly about dividend investing.  His original plan was to have higher dividend securities in order to live off the income.  His books were more successful than expected, so he has changed his focus to lower yielding dividends which will grow over the long term.

Here are some of the new items in the book:

• Approved list of stocks.
• A few new stock selection criteria.
• Moats are important – Companies like Visa and Coke have amazing brand names.
• More focus on investors who are accumulating during a high income period (ie they are working).

What’s with the book title?

The point of the title is that you can be an idiot investor and still do pretty well.  Investors can save a lot of money doing it themselves, kind of like a do-it-yourself renovation.  Even if they aren’t perfect, they are generally pretty far ahead financially by doing it themselves.

Why did you choose this topic?

Wanted to update the investing method outlined in previous book.  As time goes on, I learned more and have new approaches to investing.

What is different about this book compared to your other books ie if someone who has already read your other books or at least the first one – what would they gain from reading this one?

The main differences are:

• Portfolio selection has less income for tax reasons.
• Stock selection method uses more stringent criteria.

Have you changed your US$/Cdn$ split?

Yes, bulk of portfolio was Canadian, now it’s greater than 50% American.  The US companies are international – so they aren’t just American – they do a lot of trade outside the US.

In terms of investment strategy/lifestyle choices/earnings – how important is the investment style to success?  In your case you’ve done well with dividend investing and to a lesser extent – writing options etc.  Is it critical to invest in dividend stocks for early retirement or would other options (ie couch potato) also suffice?

The most important factors for investing success are:

1. Savings rate is the most important thing.
2. Investing in quality companies is next.
3. Low investing costs – Buying individual stocks is very low cost.

You’ve been retired for over 5 years now – is retirement anything like you thought it would be?

I’m not sure if “retired” is the right word.  I really just started doing something else (writing books).  Getting some financial independence allowed me to do what I want.  Writing books is hard work – but no commute and no bosses.

 

 

There is a lot of retirement angst going around.

How much money do I need to retire?  How do I manage my investments so I don’t screw up my retirement?  Can you increase CPP so I don’t have to worry about it?

Don’t worry about achieving the perfect retirement scenario

Too many people (helped by industry advertising) think of retirement planning as all-or-none.  Either they retire with a “million” (or whatever amount) and have a great retirement or they will be living in a cardboard box.

In reality, there are probably several levels of retirement income which could result in reasonable, although not always ideal retirements.  People are adaptable – Just because you aren’t rich in retirement, doesn’t mean you are poor.

There is more than one “number”

Retirement planning normally involves an iterative process where the investor or advisor figures out how much retirement income they would like and then tries to determine if they can achieve that income.  By changing various factors such as retirement age, savings rate, retirement income – eventually they come up with a number,  which represents the amount of saved money they need to retire.

There is nothing wrong with that process, but investors have to remember that there are many different retirement outcomes – not all of which are bad.

For example, a couple living on $100,000 per year (let’s assume the kids are independent) might consider the following possibilities:

All figures are gross income in today’s dollars (ie adjusted for inflation)

• Retirement income – $30,000. This would entail scraping by and maybe working part-time.  Not ideal, but certainly doable.  This could be the result of either not saving at all or perhaps retiring very early.
• Retirement income – $50,000. Comfortable, but not extravagant living.  In terms of savings – this path would involve working a longer and/or saving more than in the first scenario.
• Retirement income – $75,000. Very comfortable – they will likely have more disposable income than when they were working.  This income level would imply a later retirement and/or very high saving rates.

Of course, the third option sounds great – I’d love to make $75,000 per year in retirement.  The problem is that it requires a high savings rate and likely a late retirement.  Personally I’d rather live my life, retire at a decent age and “settle” for the second option of $50,000 retirement income.

It’s all a guess

The other big factor in retirement planning, is that unless you are retiring in the very near future – any kind of retirement planning requires assumptions which are just guesses.  If you are 30 years old and wondering how much to save for retirement – you need some very general retirement planning to get a rough idea of how much to save.  Anything more detailed than that is a waste of time.