How You Pay Your Advisor Matters: Understanding Investment Costs

If you’re investing with the help of an advisor, one of the basic questions you need to ask is “How is my advisor being paid?”

Over the past few years, Canadian regulators have been working on implementing new rules to spell out, in plain language, the fees that investors pay and the compensation that investment firms collect.

These new rules will provide more clarity around how much your investments cost you, but they do not require that the advisor’s earnings—or how the advisor is paid—be disclosed.

Advisors typically earn their income in one of three ways:

  1. Commissioned advisors are paid a commission when you buy or sell an investment. If you own a mutual fund, these advisors are also paid a trailing commission for as long as you hold the fund. The trailing commission pays for researching and recommending the fund, as well as the ongoing service, advice and reporting.

  2. Salaried advisors are paid a salary by their firm for providing initial and ongoing advice. Their firm may also offer incentives, like bonuses tied to business performance objectives (e.g., bringing new business to the firm).

  3. Fee-for-service advisors are paid by you directly for the service they provide. This could be a flat fee for creating your financial plan, or a fee charged as a percentage of your assets for managing your portfolio.

Once you understand how your financial advisor is paid, you might wonder which type of pay structure aligns best with your interests. How can you tell if your advisor is recommending something because it is what you need?

Compared with most Canadians, Canadian physicians and their families have an advantage: they have access to a service model that is not focused on maximizing corporate profits.

More than 45 years ago, the Canadian Medical Association (CMA)—a national, voluntary association of physicians—created a financial services firm for its members, MD Financial Management (MD), to serve them exclusively.

The primary objective of MD is to ensure that Canadian physicians—who are generally self-employed with no pension plans—have the advice and solutions they need to meet their financial goals.

MD’s advisors are salaried employees. Their compensation is not tied to specific products and they do not get paid on revenue or profit generated.

That means that a CMA member—whether a medical student with debt, a resident with limited assets, an incorporated physician building wealth or a retired one—will always be served by an advisor whose mandate is to help them achieve their financial goals.

This is not only through investments but also through full financial planning, which includes budgeting, insurance, tax planning, retirement planning and estate planning.   

As an investor, it’s essential to know how your advisor is paid, how your investment returns are affected by advisor compensation—and whether the advice you receive is worth it.

Contact an MD Advisor to discuss your financial planning and investment needs.

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