5 Keys

Five Keys to Financial Comfort

Gregor McDonald, CFP®

It’s not enough for you to be well educated on your money or financial matters and yet not enjoy the money you have.

Since financial comfort is an emotional issue, based on how you view your money rather than on your calculation of what you have, the keys to success have less to do with financial planning and more to do with your perception of what your money is supposed to do for you.

Your financial comfort is not going to be based on how much you have, or how well you’ve invested it, financial comfort is an emotional concept. Your comfort assumes that whatever your financial situation is:

  • It doesn’t cause you undue stress on a daily basis
  • You can do the things you want to do given the lifestyle you’re used to
  • You can handle the unexpected challenges to your financial situation
  • You can use your money to reflect the values that guide you through the next phase of your life

Key Number One: Education

Everyone should have a general idea of what investment options are open to them, the tax considerations on their retirement nest egg and understand the basics of investment and interest rate markets.

Your knowledge in financial areas should protect you from irrational fears or stress if possible, by arming you with enough knowledge to view your financial situation without emotion.

Key Number Two: Emotion

For many, money is an emotional catalyst that can act as a stimulant or a depressant depending on the day and the individual. Some become so focused on their financial situation that it overshadows everything else in their lives. They live in fear the money will not be there when they need it or that it will disappear leaving them destitute, others use money as a drug, spending it freely to make them feel better.

Understanding how your emotions can cause money to become a stressful issue in your life is important in maintaining financial comfort for the next phase of your life.

Key Number Three: Efficiency

Financial efficiency is having the knowledge of where your money is going and you’ve worked out a spending plan that allows you to manage your resources and take away much of the uncertainty as to whether you have ‘enough’. If you’re aware of how you spend your money and where you allocate your resources, you can maximize its use to serve your purposes.

Keeping close tabs on revenues and expenditures is important in the business world. It’s also important in your personal life as a way of managing uncertainty.

Key Number Four: Efficacy

Efficacy is your ability to use your money and other assets in a way that’s in keeping with the values you hold. It represents how effective you are using your money to benefit the causes, charities and people you really care deeply about. Is there a part of your next phase of life nest egg you can use in ways that will make you feel good about who you are as a person?

Part of financial comfort is the knowledge you’re using your capital in a way that goes beyond simply looking after your normal living expenses.

Key Number Five: Equilibrium

The last element of financial comfort is really your personal assessment of the first four elements, education, efficiency, emotion and efficacy. It’s not enough for you to be well educated on you money or financial matters and yet not enjoy the money you have. Some people become so caught up in understanding the nuances of markets, investment and tax strategies and asset allocation the forget Bill Bachrach’s advice that “It’s not what money is but what money does”.

Equilibrium simply means you’ve combined all four elements in your financial planning in a way that makes your money and other financial assets a positive or a comfort in your next phase of life and not a stressor or an aggravation.

Gregor McDonald is a Certified Financial Planner Professional operating Vision Financial Planning in the Niagara Region as a Fee-Only financial services provider and can be reached at gm@gregormcdonald.com. www.gregormcdonald.com

The LifeFirst Approach to Financial Planning, 2005 by Barry LaValley with Kirk Lowe.

FEE-ONLY Investing Explained

FEE-ONLY Investing Explained

 What are the benefits of a FEE-ONLY relationship?

  •  A flat fee is charged for asset management rather than a percent of portfolio value … I don’t get paid more just because you have more money.
  •  Fees are transparent and reported on an on-going basis … you see how much you pay me for my services.
  •  No commissions, loads or hidden charges.
  •  Access to lower cost products such as F-Class mutual funds and Index Funds.

 What are F-Class and Index Funds?

 F-Class mutual funds units (the F stands for FEE) are sold without commissions or service fees, and stripping out that cost offers investors a much lower management expense ratio (MER).  They are designed to allow me (a fee-based advisor) the ability to offer funds to clients without imbedded compensation.  This leads to the advice being completely unaffected by the products you choose because I am not motivated by trying to earn a commission.

Index funds are a portfolio of investments that are weighted the same as a stock exchange index in order to mirror its performance.  Indexing is a form of passive investing.  The primary advantage to such a strategy is the lower expense ratio since there is no active manager to pay.

 How am I compensated for on-going investment advice?

 I am paid a flat fee for each of the portfolios that I manage for you regardless of how much money you have invested.    Under this compensation method I have no financial incentive to recommend trades unless those trades will add value to you. The fee is deducted from your portfolio by the trustee and remitted to me through my dealership much the same way as it is under the commission model but the fee is shown separately on your statement.

 What are your fees?

My fees are calculated based on my assessment of your portfolios such that the first, and largest, portfolio would be charged $100.00 per month and the second and subsequent portfolios are charged $50.00 per month.  RESP’s and smaller portfolios may not incur a charge at all as long as there are larger ones that are under the FEE-ONLY platform.

Why now?

 I have been thinking about this for quite some time because I have been frustrated with the deferred sales structure that is still common in the industry.  This system requires the constant search for the next sale resulting in (hopefully) a large pay cheque.  A sale of a mutual fund under this system would pay me 5% of the amount invested plus an on-going service fee, so an investor with $100,000 would pay me $5,000 to draw up the paperwork while an investor with $10,000 would only pay me $500.  I consider this to be unfair since I am essentially doing the same work in preparing a portfolio or simply adding to an existing one.

  •  F-class mutual funds were first introduced in 1999 but most fund companies were slow to add them to their roster.  As of June 2007 there were over 1100 funds available in F-class and companies were getting even more aggressive in their price reductions with some reducing MER’s by 1.5%.   For example; Fidelity Monthly Income Fund series A has a MER of 2.35% while the series F version (same fund) has a MER of .95% and as you would expect the returns are also 1.4% higher for the series F version.
  •  Many mutual fund dealers would not approve Fee-based advisors since the lack of a commission would greatly reduce the amount of income to the firm.  This would eventually be offset by the amount of on-going fees earned over time by the Fee-Based advisor but only after the complete transition of a substantial number of clients.
  •  Many clients did not understand the way their advisor was paid since the compensation was embedded in the fund fees and they had the perception that they were not paying for advice … the fund company was.  The regulators fought to have this perception cleared up but it was an uphill battle and now, with more media scrutiny, investors are asking better questions of their advisors and are more aware of what it costs to invest.


Need a Financial Advisor?

What do you want your advisor to do for you?

 Do you want an objective financial plan without sales pressure or do you want to seek out the top stock or fund pick to boost your portfolio returns, choose a provider that will meet your need.  I have identified five main service platforms to help you determine the best service provider for you.

 Product Specialist – No Planning

On one side of the financial services spectrum you have product sales with no planning included.  These advisors are compensated by way of commission when they sell you a product and they may also receive on-going service fees that are paid directly out of the investment you purchased.  These people are product specialists and they work to keep on top of product development and should know detailed information about any recommendation they make and how it is best suited to your situation.  They may hire the services of Financial Planners or may even have one ‘in-house’ that will complete a financial plan for you and they may either charge you or your salesperson for their time.

 Product Specialist – Planning Included

 As you move toward the middle there are advisors who are product specialists and are compensated by way of commission and service fee but will provide a plan as well.  These plans are usually single issue plans specifically designed to support the product recommendation and while the plans are very often well designed they are too often forgotten in favour of the product results.  Advisors generally prefer to be thought of as product specialists and the planning service is designed to provide the client with a plan for achieving their desired results as they relate to the product.  Review meeting are most often focussed on investment returns and may result in changes to portfolio composition either as a result of performance or in anticipation of prospective performance.

 Fee Based – Product Included

 The middle ground service platform advocates charging for a financial plan because it will be taken more seriously and if the client doesn’t act on recommendations the advisor still gets paid.  The advisor prepares a financial plan which can be a comprehensive plan or a single issue plan but may not necessarily merely support a product recommendation.  If the investment or insurance purchase is placed with the advisor they are compensated for the purchase as well but rarely in the form of an up-front commission preferring instead to charge for investment advice in terms of a percentage of assets held.  These advisors consider their planning expertise and investment management expertise to be equally worth the fees they earn and contend that they are providing objective planning service with superior investment return potential.

 Fee Based Planner – Product Included

 Next you have a Fee Based Planner who provides planning services that range from single issue to comprehensive and are generally considered experts in the planning area but will also have access to investment and segregated funds without any upfront commission.  Investments that are supplied for the client are from a separate class of funds that separates the advisor fee from the Management Expense Ratio (MER) resulting in lower cost holdings providing better returns.  Segregated funds can be purchased on a front load basis with a zero percent commission paid to the advisor, however, the on-going service fee cannot be separated from the product and is paid.  Compensation paid to these advisors is based on the service provided and is disclosed in writing so you see how much you are paying for advice, if you choose to pay through the investment placed then your statement with show this fee payment in dollar and cents terms.  Portfolios tend to be designed for downside risk protection suitable to the client’s investment style and detailed in a policy statement dictated by the client.  These advisors consider themselves to be planners first and they suggest that their clients are less stressed about investing because the focus and the review process is centred on the direction that the plan is taking.

Fee Only – No Product

On the other side of the spectrum you will have Fee Only Financial Planners who do not offer specific products directly but will refer you to someone who does.  These people generally complete comprehensive plans that include all areas of your financial circumstances for a total picture complete with recommendations and an action plan.  They discuss the need for investing and tend to be more conservative in their forecasts because they don’t need to impress anyone with return expectations. They recommend insurance of the proper type and amount and may suggest two or three agents for you to see for placement.

The financial services industry tends to have a bad rap for people taking clients money and making a commission while the client continues to experience mediocre results but, there are good and bad advisors on every end of this spectrum and we can lessen the frustration if there is care taken by both clients and advisors to make sure the fit is right. 

 In order to complete your search for a financial advisor please consider the following:

 Decide what you are looking for.

 Do you want a financial plan, Investment selection or something in between.

 Understand how the advisor is paid.

 Make sure that the advisor is paid to do what you want them to do.  If they only make money from the sale of a product you hold them accountable for the product and if they only charge for a service you hold them accountable for the service.

 Get organized.

 You should not need tax returns and investment statements for the first meeting but be prepared in case you decide to move forward.

 Be realistic

 Don’t expect immediate answers, the advisor needs to know more about you in order to provide accurate recommendations.

 Listen to your gut.

 You should feel comfortable with the advisor because you will be sharing a lot of very personal information with them.

 Be aware that they are assessing you.

 Unless they are simply chasing a commission an advisor should make sure that the service they are providing is appropriate for you.

 Be patient.

At the first meeting you are kicking tires to determine if what the advisor does is what you are looking for. You will probably need another meeting or two to get things going.