The Problems with the Financial Advice industry – From the Inside.

Hey all,​Just one of your resident anonymous financial advisors here. I wanted to lay out some information that many of you may find helpful.For reference, I run a wealth management firm & personal income tax firm. I am IIROC licensed, life licensed, have a BBA degree and hold the CFA designation & a litany of other useless titles. This account is anonymous and is not being used to find clients, I simply ignore any DM requests related to this.I know there is a massive hate for financial advisors here, and frankly its well deserved.I wanted to talk about the problems with the industry, why they exist, and why most people have a bad experience with a financial advisor.Let me start by prefacing this and saying that I fundamentally believe 90% advisors are salespeople, 5% are scammers and 5% are actually doing a good job for their clients.Now, let’s talk about why 90% of the advisor are salespeople. Well, 90% of the clients who work with advisors have small accounts & as such pay very little.Let’s consider a median account size, of say $20,000 in a banks investment products. You might think that’s low but seriously what do you think the average Canadian has in investments? It’s likely this is in a bank’s product charging a 2.3% MER. But for this example, lets assume the advisor is independent and makes nothing on the banks end of things. Out of this 2.3% the advisor is likely paid a 1% trailer fee. On $20,000 that would pay a gross commission to the advisor of $200. Now, the advisors firm is going to take a cut of that, and it’s likely around 40% (More successful advisors pay a lower rate, we pay 20% but average is probably 40%). Meaning the advisor gets $120 per year in revenue to manage this account.Now this $120 is before they pay their staff, their rent, software costs, phone bill, internet etc etc etc. Meaning that the actual gross profit an advisor might make on this could easily be less than $50. Their team may spend anywhere from 3-10 hours per year on this account. Meaning at the high end they make $16.67 an hour and on the low end $5 per hour.This is what causes such a problem in the industry. In the first place, the vast majority of Canadians are not willing to pay for financial advice. Even if they desperately needed it. If the advisor tried to charge an hourly fee or anything along those lines, it is likely the % fee would be substantially higher for the client at the end of the day.So what does an advisor do? Well most advisors forgo spending a ton of time promoting good advice and rather collect as many accounts as they can. Since they are making next to nothing per hour of work on the smaller accounts, they have to offset this by making more on larger accounts.This is fundamentally why the majority of financial institutions do not bother fully training their financial advisor staff as it is nearly impossible to be profitable for them providing proper financial planning and advice to the majority of the population. They train them to sell profitable products instead, as the products can be profitable while the advice industry is not outside of the High Net Worth segment.​This leads to the population that most needs proper financial advice, being unable to receive it and receiving crappy advice and expensive investment products instead. As it is the only method that major financial institutions have found to make this demographic profitable.Since the majority can not afford proper advice, they receive crappy advice. Since the majority receive crappy advice, the industry as a whole provides crappy advice. The industry receives a bad reputation, which it deserves.​To give you perspective, this is what I do with a $100,000 client:We meet for 30 minutes to interview for the first time. They book a second meeting of an hour to go over the details, what we charge etc. They call us to confirm they want to move their accounts over. We send them a list of questions we need answered so we can prepare the paperwork.We spend 1 to 3 hours preparing the paperwork depending on the complexity. We then sit down and meet with the client for another hour to go over and sign off on the paperwork. We then arrange a phone call or meeting to go over the clients financial goals and objectives. This is usually an hour.Then we spend 3 or 4 hours preparing a financial plan for the client to reach their goals and objectives. Then we spend an hour going over the financial plan with our client. It likely requires some revisions, so we spend an hour making alterations to it. We then spent 30 minutes reviewing the amended plan with the client.If the client approves, we then design an investment portfolio to meet the return & risk objections from the financial plan. Average of 3 hours, some take 15 minutes, some take 20 hours+ depending on complexity.From there we sell off their existing portfolio, and buy their new portfolio. Which takes 2 hours on average. Once that is all complete we spend up to 2 hours reviewing the accounts to ensure all the money has arrived properly, the portfolio was purchased accordingly and no errors or omissions have taken place. Then we prepare the compliance paperwork for the portfolio which can take an hour.So far, 19.5 hours spent. $100,000 pays us 1%, and our dealer takes 20%, leaving us with $800 or $41 per hour. Now remember, this $41 per hour is simply my revenue. I have full time staff, rent, software costs, standard office overhead (heat, phone, internet). My share of business expenses run at about $48 per hour. My rent is only $600 a month as my business partner owns the building. Most advisors likely have a higher overhead than I do.So for this client, it has cost me $7 per hour to provide them with proper financial advice. Now, it is likely that the number of hours required yearly after this drops down to 10 hours a year. The only reason I even take on an account of this size is if they are saving regularly and I can see their account being worth $500,000 in the future as that would allow me to be profitable for managing their account.This is the entire problem with the financial advice industry. The regulatory, compliance, administrative overhead costs are so high that I can only provide proper advice to those that already have enough money. The result of all the excess costs designed to protect consumers, is worse and worse advice being given to those that need it most.​This is why the majority of financial institutions provide crappy advice, & use high fee products. It is why if you can learn to manage your financial affairs you should. However many people should note that simply because your situation is easy to learn does not mean it is easy to learn how to manage every single persons financial situation.Even with that being said, every single piece of research I have ever read has shown that investors behavioural biases detract from performance more than high fees do. Every investor assumes this is not them. Most investors are stuck between a rock and a hard place. Spend the time learning how to invest properly, do it yourself and the majority will suffer behavioural pitfalls detracting from performance. Or get lumped in with an advisor who may charge you too high a fee, receive low quality advice, but potentially eliminate some of your behavioural pitfalls. Roboadvisors can work for some people, but I still see people making behavioural mistakes with roboadvisors. Waiting to put money in until the markets at a “good point”, or changing their risk tolerance at terrible times.​This is not to say that I am complaining as an advisor, or that you can’t find a good advisor. These are all generalities and are not applicable to every situation. I can only speak in broad strokes as your situation is likely unique. I make a good income for my level of qualification and have no complaints. However I see the average advice provided by my industry and it appalls me. Its why I understand the hate for my industry in the general community.​Let me know if you have any questions, I would love to discuss potential solutions to these issues. via /r/PersonalFinanceCanada https://ift.tt/3cgmlGz