How do financial advisors make their money?

They make their money managing money for others. For financial planners and advisors, especially for families, they make a certain percentage point off the sale, or charge for their service and take a lesser percentage point. We are a far cry from hedge fund managers as well as investment specialists that directly manage the money. A planner will invest into funds, segregated funds and bonds which are managed by professional companies. An update every year is recommended. Most successful financial planners work 3-4 days a week, have a secretary that takes care of all the office business and have between 1000-5000 clients.

Why do the planners continue working? Well, everything boils down to the sales volume of the client base that you have. For example, let's say my block of 1000 clients generates 20000$ in renewals every year. So every year, I would receive these renewals, plus the commissions on any new business that I've generated that year. Having a financial planning practice is like having any other practice. The quality and quantity of the clients make up your salary. Most planners try to get to the point where most of their salary comes from renewals and investments, since renewals on investments are the rest of the life of the investment where as the renewals from insurances lasts between 10-20 years. Some american companies still allow lifelong renewals.

On the other hand, investment specialists are people who have a stock broking license and would directly invest your money into some stocks. There are always minimus to invest this way, between a 150000$ to 500000$ total. Also, they can ask that these investments are out of RRSP or the 401(k) plans. This type of specialist would get a management fee on the investment, normally between 1% and 4% on the total volume that you invested.

Just to give you an idea, for a planner to make 100000$, he or she would have to sell for around 60000$ worth of insurance premiums and investment commissions. when you calculate that the average premium per policy is, let's say 800$, that's about 75 policies, which is about 1.5 per week. The downside of this is that your revenue is directly tied to your sales. If you have a few weeks without sales, well there is no money coming your way. Its a delicate balance. Some people prefer the security of a regular paycheck, others prefer to be paid for what they work for.


The difference between active and passive managed funds

There always will be a debate whether an active managed fund is better than a passive or non managed fund. A non managed fund, like Barclays iUnits exchange traded funds, are funds in which the stocks and titles which constitute it are not sold on under performance. ETF's follow the indices of the stock market. An active managed fund, like Jarislowsky's funds generally perform above the indicies and actively sell and buy stocks and titles which are included in the fund.

In these questions, the main thing is to do better than the current inflation rate, which is at 3%. If the tsx index did 12 % last year, inflation was 3%, and the Management Expense Ratio was 0.45%, the net gain was 8.75%. If the fund is actively managed, MER are a lot more, between 2.4%-2.8%. The important thing is to do consistently better than the index. And remember past gains are not a guarantee of future gains.

I think the important thing to remember is to always think about diversification in your portfolio. This way, you can always reap the benefits of both strategies.

Financial Security Advisors and Financial Planners

Everyone should have a financial advisor, someone who counsels on financial matters, assesses the needs and comes up with solutions. It is best to centralize all mutual funds, segregated funds, insurances, RRSPs, investments with the same advisor. However, not all advisors are equal. Since all advisors, except some financial planners and some higher-end investment specialist, work on commission, it is important to know if your advisor is biased towards a certain product or a certain company.

For example, captive agents from companies such as Industrial Alliance, Manulife, Sun Life, Clarica, ING and the banks have incentives to sell products from the companies that employ them. Their bonuses and commissions are higher for those products. They can offer others, but generally wont, since they would be loosing money.

The best advisors are either accredited financial planners or independent financial security advisors. Financial planners work partly on commission, and partly on pay. A financial planner can bill you for all his advice, whether you take it or don't, make you sign an exclusivity agreement with him, so that you don't implement his planning advice with someone else.

Some speciality brokers that manage solely investments for clients take off a trailer fee for themselves, an additional 1-3% every year as their pay. To work these brokers there always is a minimum investment, varying from 100000$ to 500000$.

Independent financial security advisors are like unaccredited financial planners. They can not bill you for advice, nor can they make you sign an exclusivity agreement. however, they are mostly unbiased.They have agreements with a multitude of insurance and investment companies. Most commission from these companies is standard, so there is no incentive to sell one product more than another. Which is good for the client, since he gets the best of both worlds. independent unbiased advice, that wont cost money each time new advice is given.

The Smith Manoeuvre

The Smith manoeuvre is simply a financial manoeuvre to make your mortgage tax deductible in canada. This is not a problem in the US where you can already deduct the interest on a mortgage. In canada, this is not possible. a portion of the interest can be deducted if you work from home or are self employed. Most of us end up paying our house or condo 2-3 times its actual worth. The way to do this is to use the equity built up in your home to invest in the markets, in your own business or in real estate. This loan toward an investment is tax deductible in canada. For any money you pay off on your mortgage, your reborrow this money for investment purposes and end up with what we call only good debt. good debt is debt on which the interest is tax deductible. Bad debt is where the interest is not.

The Smith manoeuvre is used to convert bad debt into good debt. For most families, the Smith manoeuvre can substantially reduce the interest payments. And using an all in one product like Manulife One, you can save even further. An all in one product combines a credit line, a mortgage, a savings account, a chequing account and a credit. The main philosophy is to save as much as possible the daily compound interest that you pay on your mortgage.

Though I would not suggest to invest the whole equity directly in the stock market, I do think that as long as the interest gained on the equity is higher than the interest on the loan (minus the deductible interest since this interest is deductible and you will get a refound from the CRA in proportion to your marginal tax rate) you are in good shape.

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Capital protected structured notes

Its been a few years since structured financial products have been on the rise. Structured notes protect the capital that is invested for a number of years, caps the maximum interest each year. A good alternative to bonds, since canadian bonds have not been doing so well due to higher interest rates. Structures notes enable the investor to expose his portfolio to the stockmarket without too much risk. For example, one captial protected structured note from citigroup follows 8 different stock market indicies all over the world. It has compound interest capped out at 10% each year, a 2% MER at the purchase of the note, no other MER later on, and a vibrant secondary market where notes are sold 6 months to a year after purchase at 103% to 127% over stock price.

One of the negative aspects is that if the markets are negative, the interest will be negative, so clients will have to wait until the note matures before cashing in only the guaranteed capital. still, not a lot of investments guarantee capital, so this might be a nice alternative to stocks and bonds.

Welcome to a financial security advice blog

Welcome to a blog on financial security, given by a proven professional in the field. This blog will cover insurance, investments, leverage tools and the markets. This advice is for private and corporate clients.