Putting the client first
Fee-only financial planners more objective than commission-based salesmen

The hit play that Steve Galluccio's wrote, Mambo Italiano, is touring Quebec. A movie, version has just finished shooting. He is also working on a new television series. So it's not surprising that Galluccio doesn't have a lot of time to talk to financial planners.

"After being literally broke for a long, long time, I'm finally making some money," Galluccio said. "There's a lot of things that I want to do, and I need to sort it all out."

Galluccio, who is 42 years old, is not yet well known to the general public. But in Quebec's creative circles he is a hot property and everyone wants a piece of him. So he badly needs independent financial advice.

He's not the only one. Investors, burned by years of listening to financial planners who sold them mutual funds at the top of the market, are increasingly concerned about the advice they've been getting. Today many are wondering if the commissions and kickback fees financial planners earned, influenced their recommendations.

To help him navigate the financial consequences of his new found affluence, Galluccio turned to Claude Attard, a fee-only financial planner at Groupe Financier NILA. Attard produces detailed financial plans for his clients that include a cash flow budget, tax and estate planning advice.

His service typically includes a detailed consultation, a written report, and follow-ups every six months. More important, although Attard works for a company that specializes in insurance products, he is paid a salary and bonus based on his chargeable hours, and does not accept and commissions for products he recommends.

According to Attard, nouveau riche clients have a unique set of financial challenges. "People that come from old money families have often had a chance to observe how wealth works, and can avoid its temptations," Attard said. "But a lot of those exotic sports cars belong to people who have made money fast, who think they can buy anything they want."

Galluccio is one of those nouveau riche clients. Although he has written numerous plays, many of them were presented at fringe festivals, and were not especially lucrative. With Mambo Italiano he hit the jackpot for the first time, and almost overnight jumped from a four-figure to a six-figure salary.

But apart from basic moves such as incorporating for tax purposes, Galluccio is starting his financial planning literally from scratch.

"With the projects that I have in the works, I know that I am going to be making good money for at least four or five years," Galluccio said. "But I want to take advantage of the good times to get my finances in order."

According Abraham Brodt, a portfolio management professor at Concordia University, the way a financial advisor is paid is crucial to determining his outlook. "If somebody is working for a fee, he should be more objective," Brodt said.

Deanne Gage, managing editor of Advisor's Edge, a publication targeted at financial professionals, agreed. "Most financial advisors are still paid on commission," Gage said. "But paying someone a fee is a good way of aligning the interests of the advisor and his client."

But according to Gage, fee-only advisors form than 10 per cent of the total. A far more common method of assuring advisor independence is the so-called WRAP accounts, that are marketed by the big brokerage firms.

These accounts have all the charges wrapped into a single fee that is calculated as a percentage of client assets under management. In theory this makes a stockbroker indifferent as to whether he puts his client into day stocks or bonds.

Probably the biggest reason that fee-only financial planners are still rare is their relatively high cost. For example Attard's fees start at $750 for a basic financial plan, but can run as high as $3,000, if the particularities are complex.

But according to Attard, his fees compare well. "If you buy $100,000 worth of mutual funds, unless you hang onto the fund for a very long time, it will cost you about $5,000 in commissions," Attard said. "And that doesn't include the trailer fees that are paid to the salesman each year."

Attard's pricing structure doesn't seem to bother Galluccio. "I have a bit of a fear of commitment, and I didn't want to sign up with someone who is trying to sell me a product," Galluccio said. "Dealing with someone independent is a more like freelance, which is what I am used to."

 

Photo caption: Steve Galluccio wanted unbiased financial advice, so he signed on with Claude Attard, a fee-based financial planner

Sidebar: Some of Attard's financial planning tips

o Make a detailed financial plan that includes a cash-flow budget
o Identify your risk tolerance before choosing your investments
o Choose your investments based on their merits, and not just for tax minimization. For example don't ignore bonds just because they are taxed at a higher rate than equities.
o If you have kids think about a registered education savings plan to pay for their college expenses. The federal government kicks in 20 per cent (to a maximum of $400) of what you invest, and earnings accumulate on a tax-deferred basis.
o Forget about "Freedom 55." Longer life expectancy and better health means that people will need much larger nest eggs than they think, and will thus have to work longer. Try and plan to do part-time work after you retire.
o Protect your family by adequately insuring yourself.

peter@peterdiekmeyer.com

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