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Explaining the Differences Among Financial Service Providers

A couple of decades ago there were four separate pillars of the financial industry – banking, trusts, Insurance and securities. Then the barriers came down. Long memories remember consumer finance companies objecting to banks being allowed to make consumer loans or mortgage lenders objecting to banks providing residential mortgages. Since banks were permitted into the securities business in 1987, mutual funds and discount brokerages have become commonplace. Today’s technology has spawned “robo advisors”, yet another choice for DYI investors. Services available among the participants overlap and are redundant. Even the words banks, trusts, insurance and securities have become close to meaningless to describe what a company does. The result of this homogenization is that most laymen cannot tell the difference among financial service providers. The result is that investors are not properly served, miss opportunities to succeed and take on unnecessary risk.

Insurance Companies

Beyond insurance contracts which are meant to cover off risks of various kinds, insurance companies also offer investment products which are sometimes included in whole life policies.  These products are essentially mutual funds;  called “segregated funds” when they are sold by an insurance company.  They have various ‘bells & whistles’ attached to them, are expensive to own and the benefits can easily be duplicated at less cost by an experienced Portfolio Manager.

Banks

Banks are deposit taking and lending institutions and mortgage originators which have entered the investment business by purchasing pure investment firms.  Most of the large investment firms are now owned by the large Canadian banks.  In addition, most front line bank employees are required to take a short course on the sale of their own bank owned mutual funds.

Mutual Fund Dealers

These funds are sold by dealers who earn commissions on their sales and are regulated by the Mutual Fund Dealers Association.  They are most suitable for smaller accounts not yet large enough for proper diversification.   Many investors pool their money with others and share in a professionally managed large portfolio of securities.  Mutual funds are sold under a prospectus which describes the fund’s objectives and the fees and expenses to be paid by the fund holders.  This is referred to as the management expense ratio which usually runs between 1¾  and 3%.  The fee is deducted from the fund holder’s account before any returns are distributed and is not tax-deductible.

Financial Planners

This is a broadly used term by many financial services professionals and can be used without any genuine designations or verifiable training.  There are only two registered and governed financial planner titles in Canada and they are the “Professional Financial Planner” (PFP) and the “Certified Financial Planner” CFP).   There are three ways planners can be compensated for their services.   1.  Fee for Service.  2.  Fee for Service plus commission.  A fee for the development of the plan plus a commission if the client buys the products suggested by the planner.   3.  Commission Only.  The planner will be compensated by commission generated from the purchase of products to fulfil the objectives of the plan.

Brokers, Investment Dealers and Securities Dealers

Investment Advisors,(IA) previously called Stockbrokers, trade in securities as agent or principal and earn transaction commissions.  Some IA’s are moving toward a fee structure model to minimize conflicts of interest.

Trades cannot be done without the client’s prior approval.

Portfolio Managers & Investment Counsel

Portfolio Managers are registered and governed by the Ontario Securities Commission and must meet the highest conditions of registration in the industry.  These firms manage money not only for high net worth individuals but also for corporations, pensions funds, charitable foundations, trusts and endowment funds.   Fees are based on a small percentage of the assets under management, normally about ½ to 1.5%, are shown clearly on client statements and are a tax deductible expense for non-registered accounts.   Most managers working in these firms hold the Chartered Financial Analyst (CFA) designation requiring the highest rigorous educational and ethical standards. Portfolio Managers also have a fiduciary duty to act in the client’s best interest, not just recommending ‘appropriate’ actions.

Fees

What does it cost to hire Enriched Investing to manage your money?  Portfolio Managers charge a fee based on the dollar value of the assets that are managed for you and the Custodian where your assets are held normally charges a small commission for purchases and sales in your account. We do not charge anything extra.  For example, if you have an investment account, an RRSP and a TFSA with us, your fee would be based the total value of those accounts.  Our fees generally start at 1.5% annually and are smaller for larger account sizes.  The normal minimum needed to hire us is $200,000 in assets which would be the total of all the account types opened.  There are always exceptions of course and the minimum for the Canadian Dividend Strategy is currently only $100,000.  Compensation for non-registered accounts managed by a Portfolio Manager has historically been treated by the CRA as a tax deductible investment expense.  Our compensation is structured so that we do better only when you do better and the fees are transparent and are reported on every monthly statement.

Know What You Own

Where is your money, really?  We make it easy for you to follow exactly what positions you own in your portfolio.  You can see online what you own including any changes right up until the close of business the day before.

You are assured that you will never be responsible for any embedded tax liability that could happen to you with mutual funds.  Mutual Funds must pay out all capital gains and income each year.  If a fund had capital gains all year through November, an investor buying units of the fund in December would not realize any benefits from those gains but would inherit the tax liability because the gains are embedded in the fund.

Learn About Who Actually Directs the Destination of Your Funds

With our White Paper titled “How Well Do You Know Your Advisor?” you will discover how to research the background of the person responsible for choosing the investments for your various accounts.  You will learn which regulatory body your advisor’s company reports to and whether your advisor has ever run afoul of the law.  How do this person’s qualifications stack up against the most stringent in the industry?  Does your advisor have a Fiduciary Responsibility to you?  How important is that?  To receive your “How Well Do You Know Your Advisor?” White Paper by Special Request, please fill out the accompanying form on the Library Page.