Types of financial advice
There are a variety of types of financial advice available to Canadians. This article attempts to list them and offer a brief description of what they can offer.
Basic personal finance
Money coaches
If you carry significant consumer debt, enjoy shopping a bit too much, never open your bank statements, are always worried about money, carry a credit card balance month to month, are living paycheque to paycheque, or struggle to save money, you may need assistance with basic personal finance issues.[1] In a consumeristic society with abundant easy credit, it can be psychologically difficult to resist over-spending. Just like people hire coaches to help them design a physical fitness program and motivate them at the gym, you could perhaps benefit from the services of some sort of "money coach" or "personal finance coach".[2][3] Such services are not regulated[3], so "the experience and knowledge of coaches can vary dramatically – and so can their rates".[2]
Services offered by money coaches may include help with cutting living costs, budgeting, saving strategies including automated transfers, paying back debt as efficiently and quickly as possible, etc. Remember the TV shows Til Debt Do Us Part or Money Moron? A bit like that, but with a lot less drama and you won't be on TV. In general, money coaches are paid by the hour or charge a predetermined fee, so they should not be trying to sell you anything other than advice. Money coaches may have backgrounds in accounting, finance, psychology, or other fields.
Similar advice might be obtained from financial planners, but "their bread and butter is longer-term planning".[4] Another option, if your particular problem is debt, might be a credit counselor.[4] Some non-profit community groups offer free seminars or consultations on debt and budgeting, for example ACEF de l'est de Montréal. Various initiatives exist in Canada to help working class families obtain basic personal finance coaching.[5]
Life insurance agents
Life insurance also falls under basic personal finance. If you have dependents, you probably need life insurance, which unless you have enough coverage through work, will mean dealing with a life insurance agent. Make sure you do throughout research on your needs and the different types of life insurance before you meet a life agent, since they are paid from commissions, so your interests may not be perfectly aligned. The commissions on permanent insurance are higher than those on term insurance, which is the type that most young people need.
Life insurance agents can also sell disability insurance, which protects at least a portion of your employment income if you become disabled. Individual disability insurance policies are a must if you don't have group coverage, and you have dependents. They can also complement group policies. Again, do your research before contacting an agent.
Financial planning
When your current financial situation is stable, and you are spending less than you earn, you are ready to engage in longer-term financial planning.
Why use them?
This is where consulting a competent financial planner to discuss your goals and create a personalized plan could be helpful. What are the required savings rates and investment returns required to reach your goals? What may be a reasonable asset allocation for your portfolio? Are you ready to retire? How much can you withdraw from your portfolio every year? When should you take CPP/QPP and OAS? These are all questions that a planner can help you answer.
Regulations and credentials
In Quebec, only professionals recognized by the Institut québécois de planification financière are authorized to use the title of Financial Planner (F.Pl.) ("planificateur financier"). In Ontario, Financial Planner (FP) became a protected title in 2022,[6] but there are several approved credentialing bodies so the title does not have a uniform meaning. In other provinces, unfortunately, anyone can call themselves a financial planner:
"Suppose you want to become a financial planner. You can start charging for your services without taking courses, passing exams or getting a licence. (...) While provincial governments require training and registration for people who want to sell products such as stocks, bonds, mutual funds and insurance, they have no such requirements for those who simply plan to give financial advice and charge clients for their time."[7]
Because of this issue, it is especially important to investigate a planner's training, credentials, reputation, experience, etc. before hiring him or her. Credentials and designations are discussed in detail in the Financial advisor article. Some planners belong to voluntary associations, such as FP Canada (formerly the Financial Planners Standards Council) and the Institute of Advanced Financial Planners.
Compensation
Fee-only planners (a.k.a. "fee-for-service" planners) charge by the hour, or offer financial plans for a fixed total cost. They should not be selling you financial products, both because they may not be licensed to do so and more importantly, because this is not what you've hired them for.[8] Fees are often in the $150 to $300 per hour range.[9] Fee-only planners are still rare in Canada because low-income or low-assets clients may not be able to afford the service; because clients who can afford it are not yet used to paying directly and transparently for advice; and because there may be less profit to be made using this compensation model.[10] However the model is proving increasingly popular.[11]
You can also get financial planning services from advisors and planners working on a commission-based model, or a percentage of assets model (a.k.a. "fee-based"). However, this brings on potential conflicts of interest, especially with the commission model.
Portfolio managers
Portfolio managers typically manage your portfolios on a discretionary basis, typically following a written personalized Investment policy statement.[12] The services should also include financial planning advice. The typical compensation model is a percentage of assets under management (AUM).[13] Because of the "full service" nature of the business, and the %-AUM compensation model, each advisory team can only work with a limited number of clients, which means a relatively high minimum portfolio size.
Why use them?
DIY investors are obviously mortal or may become disabled. Would your spouse be able to take over the portfolio management and financial planning duties? If you have enough assets, you could research local portfolio managers who share your investment philosophy and charge reasonable fees, for possible recommendation in your Letter of final instructions and "What to do if I become incompetent" documents.
Another reason to use a portfolio manager is if you are not satisfied with your investment returns as a DIY investor (relative to a suitable benchmark), perhaps due to behavioral issues.
Regulation
The term "portfolio manager" can have two subtly different meanings in Canada, depending on how such firms and advisors are regulated. The first meaning of portfolio manager, set out in the CSA's National Instrument 31-103[14], is a firm registered as such with provincial regulators; their advisors are registered as "advising representative" or "associate advising representative". Being licensed this way requires specific education and experience.[15][14] One path is the CFA program and the other is the Canadian Investment Manager designation. This first meaning is also used by the Portfolio Management Association of Canada (PMAC).
The second meaning is that employed by IIROC (now "New SRO"), where the advisors are registered as "dealing representative" with provincial regulators, work for as firm registered as an Investment Dealer, but have a "portfolio manager" or "associate portfolio manager" approval category from IIROC because they manage accounts on a discretionary basis and have met certain proficiency requirements.[16] For "portfolio managers" this involves either the Canadian Investment Manager designation, the Chartered Investment Manager designation, or the CFA Charter, and a certain number of years of relevant work experience.
Robo-advisors
Online wealth managers, more commonly known as robo-advisors, are a more accessible alternative to traditional full service portfolio managers. The investment minimums are very low. However, you will get a lot less human contact and financial planning advice. Before investing with a robo-advisor, be sure to also consider asset allocation ETFs, which provide fully passive automatically rebalanced diversified portfolios at a fraction of the cost. General financial planning services could then be obtained from a fee-only planner, as needed.
Estate planning
For estate planning, you may seek the advice of an accountant about tax matters, and that of a lawyer (or notary in Quebec) about wills and Powers of attorney. Other types of financial advisors may also be able to help with estate planning matters.
See also
References
- ^ Naomi Rovnick, Six financial personality types — which one are you?, Financial Times, January 12, 2017, viewed February 18, 2020.
- ^ a b Angela Self, Should I have a money coach?, The Globe and Mail, updated May 8, 2018, viewed February 18, 2020
- ^ a b Anne Bokma, Should you hire a money coach?, Canadian Living, September 4, 2011, viewed February 18, 2020.
- ^ a b Erica Alini, Need help with your finances or debt? How to find the right money expertGlobal News, Updated February 12, 2018, viewed February 18, 2020.
- ^ Ellen Roseman, Coaching poor to build financial safety net, Toronto Star, July 2, 2015, viewed February 19, 2020.
- ^ Financial Services Regulatory Authority of Ontario, Financial Planners and Financial Advisors, viewed January 20, 2023.
- ^ Ellen Roseman, Rules for financial planners may be in sight, Toronto Star, October 22, 2015, viewed February 19, 2020 (Roseman is the co-chair of the Canadian Foundation for Advancement of Investor Rights)
- ^ MoneySense, What does a fee-only financial planner do, exactly?, September 15, 2020, viewed MArch 27, 2021.
- ^ Where to find a fee-only financial planner, MoneySense, first published October 2013, viewed February 19, 2020.
- ^ Preet Banerjee, Find the perfect financial planner -- What fee-only advice really means and how to choose a planner, MoneySense, viewed February 19, 2020.
- ^ Rob Carrick, How to pick the right fee-for-service financial planner, The Globe and Mail, October 25, 2019, viewed February 19, 2020.
- ^ Portfolio Management Association of Canada (PMAC), What is a Portfolio Manager?, viewed February 20, 2020.
- ^ PMAC, How to select a Portfolio Manager, viewed February 20, 2020
- ^ a b Ontario Securities Commission, National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103), effective December 4, 2017, viewed February 19, 2020.
- ^ L'Autorité des Marchés Financiers, Becoming a professional: Portfolio Management, viewed February 19, 2020
- ^ IIROC Rules (effective June 1, 2020), see rule 2602, viewed February 20, 2020.