Why work with a Financial Advisor or Planner

Working with a financial advisor or planner can add real value. It starts with analyzing your information to assess your current situation. Then preparing a cash-flow and net-worth statement to identify any problem areas or opportunities with respect to your:

In the end, your financial advisor or planner helps you develop and prepare a plan with projections and recommendations unique to your goals and objectives, values, and risk tolerance. Most importantly, your financial advisor or planner will work with you to implement your plan and establish an appropriate review cycle to track your progress.

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Choosing a Financial Advisor and Planner

When searching for a financial professional, you need to be able to recognize who you can trust. We offer you the following tips to prepare and help you in your search for the right financial advisor or planner.

Be Prepared

Do some research to familiarize yourself with basic financial planning terms and strategies. While a good financial advisor or planner will explain things to you, understanding the basics will help you to engage more in the process. Remember that financial planning is about you. Take the time to reflect on what’s most important to you for both today and tomorrow.

Ask For Referrals

Speak with friends and family members whom you trust; ask them if they know of or have worked with a financial advisor or planner they would recommend to you. Then look to interview by phone or in person and ask them to outline their qualifications and experience.

Ask About Fees

A financial advisor or planner can be paid in a variety of ways, so ask about compensation.

Get It In Writing

Ask for a Client Relationship Document that outlines the terms of the relationship and any potential conflicts of interest. The document should also clearly disclose the advisor or planner’s method of compensation and business affiliations.

It’s All About Fit

If you don’t feel comfortable discussing personal issues with a financial planner, continue your search. Honesty, trust and two way communication are critical to the success of the planning relationship.

How Your Financial Advisor Is Compensated

Your financial advisor provides valuable financial advice and services to you and your family. At different stages during your ongoing relationship, he or she will work with you to create a personalized financial strategy, help you choose appropriate investments, monitor the progress of your investments and recommend changes to your portfolio as your financial needs evolve.

In return, the same as when you buy any other product or service, you are expected to pay a fair rate of compensation.

Understanding Fees and Commissions

As a client, no matter what financial products you purchase – whether it’s mutual funds, segregated funds, GICs or something else – there are two basic ways that you can pay for your financial advisor’s services: through embedded fees or fee for service.

Embedded Fees

In this model of payment, an annual service fee, sometimes called a “trailer fee,” is included in the overall product cost. For example, if you buy a mutual fund, a trailer fee would be paid to GP Wealth Management and your financial advisor for their ongoing account services and investment advice.

This fee, based on a percentage of your assets, can range from 0.25% for fixed-income funds to 1.25% for equity funds.

The service fee accounts for a portion of the total product cost that the fund manager charges you each year, referred to as the Management Expense Ratio (MER). If you would like to know more about the MER for any mutual fund, check the Fund Facts Document, which provides the key details to make an informed decision and allows you to easily compare similar funds.

In addition to the annual embedded service fee, you may pay a sales commission often referred to as a Load. There are two basic types of loads: front-end loads and back-end loads.

Front End Load

With a front-end load, you pay a sales commission (generally from 0% to 5% of the amount invested) at the time of purchase. This commission is deducted from your investment capital by the fund manager and used to compensate GP Wealth Management and your financial advisor. You can negotiate the amount of commission with your financial advisor.

Back End Load

With a back-end-load, also known as a deferred sales charge (DSC), you don’t pay an upfront sales commission on the amount invested. Instead, the mutual fund manager pays GP Wealth Management and your financial advisor an upfront fee (generally from 0% to 5% of the amount invested) on your behalf. This way, all of your purchase gets invested and your financial advisor receives a one-time payment.

The only time you may be asked to pay any sales commission is when you sell. But the longer you hold the investment, the less you pay. And, generally, the commission falls to zero after seven years. Below is an example of a typical DSC Schedule.

DSC Schedule

10% Free Option

Most DSC funds allow you to withdraw up to 10% of your investment each calendar year without a redemption charge. This means you can take 10% of the fund value (as of the beginning of the year) and switch it to a non-DSC version of the fund. Or you can just redeem the 10% amount into cash.

Switching Between Funds

In general, DSC fees are not applied to switches between funds at the same fund company if the funds are purchased under the same DSC purchase option. In other words, if you own XYZ equity fund and you want to switch over to XYZ bond fund, then you should be able to make the switch without paying any DSC fees.

Moreover, the original DSC schedule will carry over to the new fund. How do I know which type of load is best for me? It depends on the number of years you have to invest (this is known as your investment horizon) and the flexibility you desire. Speak to your financial advisor about which option is best for you.

Fee for Service

In this model of payment, you never pay a sales commission when buying or selling a financial product. Rather, you pay GP Wealth Management and your financial advisor an agreed-upon annual fee ranging between 0.5% and 1.25% of the amount invested. Your financial advisor will then only recommend financial products that do not have embedded fees or commissions.

The fee-for-service option eliminates the confusion of paying different fees and commissions on different products and can provide greater flexibility for managing your portfolio. As well, for larger accounts, it can result in lower advisory fees because the more assets you have invested, the less you pay in fees as a percentage of the total assets.

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Understanding the Cost of Advice

GP Wealth Management and your financial advisor work together to provide you with a range of ongoing services and advice related to your investments and personal financial plan. The amount of compensation you pay in return depends, in part, on the compensation model you choose.

Embedded

In the traditional model, compensation is embedded as commissions and trailer/service fees in the price of the products you purchase. For instance, if you hold a mutual fund, a management fee is embedded and is often expressed as a percentage of an amount invested. The percentage amount is referred to as the Management Expense Ratio (MER)†, and a portion of the fee is paid to GP Wealth and your financial advisor as a commission or trailer/service fee.

Fee for service

In the fee-for-service model, you pay an annual advisory fee directly to GP Wealth and your financial advisor based on your total assets under administration (AUA).

Let’s Compare

Here’s a comparison of the average cost of advice based on the two compensations models:

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Management and Advisory Services

Many investors may not understand what they get for the cost of advice. The following chart illustrates the core services you receive from GP Wealth and your financial advisor, along the average costs associated with each area of service.

Management Services

(provided by GP Wealth to its advisors and clients)

Administration

• Operations and overhead
• Trade review and supervision
• Account reporting (account statements/client communications)
• Investor tools and research

Regulation

• Registration, regulatory and investor-protection-fund fees
• Legislated continuing education

Advisory Services

(provided by financial advisors to their clients)

Advice

• Personalized financial planning
• Initial and ongoing investor risk assessment
• Development of an investment policy statement
• Investment research and market updates
• Asset allocation, portfolio rebalancing and risk monitoring
• Regular review meetings and reporting

Administration

• Operations and overhead
• Licensing, registration and proficiency fees
• Legislated continuing education

How your Financial Advisor Adds Value

Financial experience

Over time, financial advisors develop a deep base of experience that enables them to guide you through all of life stages and business cycles.

Increased investment discipline

Our emotions inevitably affect our investment decisions. Perhaps the single greatest benefit to using a financial advisor is their independent, impartial advice.

Investment suitability

If you put your money into unsuitable investments, you could take on too much risk or miss out on good opportunities. Your financial advisor adds value by determining the right risk-reward balance for your portfolio.

More free time

Your financial advisor can help you achieve peace of mind, enabling you to focus on your family and career.

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Understanding Embedded Fees Vs. Fee for Service

Paying advisor compensation is an integral part of receiving financial advice. To make informed decisions about your investments, you need to understand how your advisor is compensated and what you receive in return.

Embedded Vs. Fee for Service

As a client, no matter what financial products you purchase – whether it’s mutual funds, segregated funds, GICs or something else – there are two basic ways that you can pay for your financial advisor’s services: through “embedded fees” or “fee for service.”

Here’s an easy-to-understand breakdown of how the two compensation models work and the type of clients they best serve:

Embedded Fees

A service fee, sometimes called a “trailer fee,” is included in the overall product cost. For example, if you buy a mutual fund, a trailer fee would be paid to GP Wealth Management and your financial advisor for their ongoing account services and investment advice.

The service fee represents a portion of the total product cost, referred to as the Management Expense Ratio (MER), that the fund manager charges you.

Fee for service

You pay an advisory fee directly to GP Wealth and your financial advisor based on your assets under administration (AUA).

Cost comparison

Which compensation model is best for you?

Under fee for service, your fee will be reduced as your account grows. This is because the more assets you have invested, the lower your costs as a percentage of total assets. Conversely, the embedded-fee model will generally favour an investor with a modest amount of assets to invest.

Determining which compensation model would suit you best requires a thorough review of your personal circumstances and investment goals.

This document is designed to help you collect and organize the information needed to develop your comprehensive financial plan.

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Learn About the New “Trusted Contact Person” Role

Sadly, elder abuse is a reality for too many Canadian seniors. When the National Initiative for the Care of the Elderly studied this issue in 2015, it found that about one in 12 Canadian residents age 55 and older (8.2 percent) had experienced elder abuse in the previous year.

For 30 percent of those people (or 2.6 percent of all those over 55), the abuse was financial. That translates into 244,176 Canadians fending off demands for their money, fighting to access their money and sometimes losing their money.

Government response

Responding to worrying statistics like this, the Canadian Securities Administrators (the umbrella organization representing all of Canada’s provincial and territorial securities regulators) recently proposed that advisors ask their clients for the name of a “trusted contact person” (TCP) they can get in touch with if they have concerns about a client’s financial exploitation or diminished mental capacity.

To benefit from this additional safety net, consider connecting your advisor to a close friend, family member or caregiver who can act as your trusted contact person to ensure your best interests come first.

Trusted Contact Person Vs Power of Attorney

It’s important to understand that the TCP is not the same as a power of attorney (POA) – another person your advisor should have on record. A POA has the authority to make financial decisions on your behalf under certain circumstances, such as if you become incapacitated.

In contrast, your TCP should have absolutely no interest or involvement in making financial decisions for you. In fact, the TCP is someone an advisor can reach out to if he or she feels a POA isn’t acting appropriately.

The trusted contact person is a new initiative by Canada’s securities regulators, and we are working closely with them towards implementing this additional safeguard for our clients into our practice.

Naming a TCP is a way you can provide an additional safeguard for your money and your well-being. It’s also an important part of good financial planning.

We encourage you to help spread awareness of this new option to your loved ones and others who could also benefit from another layer of protection.

If you have any questions about the new TCP role, send us an email and we would be pleased to help.

Understanding the New Client-Focused Reforms

July 15, 2021

Over the past several years, the Canadian Securities Administrators (CSA) have worked on a broad set of changes to regulation, called Client Focused Reforms (CFRs), that are designed to improve the experience of the investor.

Today, we’ll discuss the new requirements surrounding the Know-Your-Client (KYC) process by which advisors are obligated to get to know their clients and understand their risk profiles. In the next issue of our newsletter, we’ll address other aspects of the reforms.

Updates to the Know your Client requirements

The KYC process is a fundamental regulatory obligation of mine, as your advisor, and of GP Wealth Management. It is also one of the most important elements of protection for you as an investor because it involves gathering information about you that is critical to the assessment and recommendations made regarding your investments.

In a nutshell, the strengthened regulations require that KYC information gathering be enhanced by using a methodology that is more fulsome. This information is collected when you open an account or update your existing KYC information.

What is changing is the process around collecting and interpreting the information. Under the updated rules, I’m required to have documented knowledge of not only your financial circumstances but also your personal circumstances (for example, the nature of your business if you have one, the source of your wealth, etc.).

Although it may seem invasive, this information adds additional context to determining your investor profile

From an investment perspective, the updated regulations stipulate that your risk tolerance must be documented by taking into account both your attitude towards risk and your risk capacity.

Your risk attitude alludes to your psychological characteristics as an investor. For example, how would you react to your portfolio suddenly dropping in value? Your risk capacity refers to your financial situation and whether a worst-case scenario in the investments chosen would prevent you from reaching your financial goals based on your current level of assets and income.

Additionally, other factors such as your investment knowledge, investment objectives and time horizon must be aligned with your risk tolerance and documented. Collectively, this information makes up your investor profile.

Lastly, this information must be continuously updated whenever there is a significant change in your circumstance, or at minimum once every 36 months for most investors.

What Is CRM2 and How Does It Affect Me?

As an investor in Canada, you may be aware that the Canadian Securities Administrators (CSA) has been gradually introducing a comprehensive reform package aimed at enhancing transparency, increasing investor protection and raising industry standards. As part of this regulatory effort, a new set of requirements was launched in 2013 under an initiative known as Client Relationship Model, Phase 2, or CRM2.

The purpose of CRM2, which is being phased in over a three-year period, is to enable investors to assess more objectively the value of the relationship they have with their financial advisors and to better gauge how the advisor’s advice is helping them.

Key CRM2 Dates and Requirements

Beginning July 15, 2014

Your financial advisor or GP Wealth Management must:

• Provide pre-trade disclosure of all charges you will be required to pay when you purchase or sell an investment
• Provide trade confirmation disclosure of compensation received from debt security transactions

Beginning December 31, 2015

Expanded account statement reporting was introduced to include the requirements to:

• Provide the market value for each security using a prescribed methodology
• Provide specified information about the cost of each position (either book value or original cost)

Beginning July 15, 2016

All registered firms are required to provide their investors with enhanced accounts statements that include two new annual reports:

• Performance Report – an annual investment performance report explaining how your investments have performed over specific periods of time
• Charges and Compensation Report – an annual report on charges and other compensation, showing in dollars how much the dealer or adviser was paid for the products and services supplied

Ongoing

Our first enhanced account statements created under the new CRM2 regulatory initiative were delivered to our investors in early January 2017.

We fully support the financial industry’s CRM2 regulatory reforms and believe our investors will benefit significantly from the advances in transparency and client communications.

For more information on what CRM2 means for you, contact your Financial Advisor or Investor Services.

Using the Investor Profile Questionnaire with the New Client-Focused Reforms

January 2022

In the context of an advisory relationship, a financial advisor has an obligation to ensure that essential steps have been taken to know a client.

This is referred to as the Know Your Client (KYC) rule, and it has recently been enhanced with the introduction of additional regulations known as the Client-Focused Reforms.

In broad terms, KYC incorporates a set of standards to be used by an advisor when assessing a client in developing an investor profile.

Documenting the “Know-Your-Client” information must include a process for assessing the risk profile of a client that includes:

• The understanding of the financial circumstances, including liquidity needs, debts, assets, and income
• Appropriately interpreting responses to questions and not attributing inappropriate weight to certain answers
• Assessing the willingness to accept risk (Risk Attitude) and an ability to endure potential financial loss (Risk Capacity) when determining the risk tolerance for you

Using the responses from an Investor Profile Questionnaire can be an important piece in documenting an investor’s profile.

New KYC requirements provide enhanced client protection

As a client, you are protected by having an advisor who is required to know what investments suit your personal situation. An advisor benefits by knowing what can and cannot be recommended when managing an investment portfolio. KYC is also an ethical requirement with rules to ensure a client’s interests are always put first in each decision or recommendation.

Further, KYC doesn’t stop at the account-opening stage, as there is also a requirement to keep records up to date. For example, as soon as an advisor becomes aware of a material change in a client’s circumstances, such as a job or address change, an advisor must work with the client to update their KYC.

Investor Profile Questionnaire (IPQ)

One of the best tools for learning and documenting the essential KYC facts about a client is the Investor Profile Questionnaire (IPQ), which comprises a series of questions that help an advisor better understand the investment experience, investment time horizon, risk capacity and risk attitude of a client.

As a client, the responses you provide will allow for meaningful discussion about your investment objectives, and this will help your advisor make recommendations that are suitable for you.

Getting Started

Are you interested in what an Investment Profile Questionnaire could tell you about your own risk tolerance and investment options? Get started by completing IPQ below. Then you can decide on the type of investments that are best for you.

investor profile questionnaire