In this series, I (Jin Choi) publish interviews of interesting financial professionals. The following is a transcription of my interview of John Kalos, who runs Merit Financial Planning. Please note that the transcription has been lightly edited to improve clarity.
Jin: Hi, John. Could you please introduce yourself?
John: Yes, of course. So, my name is John Kalos, and I run an independent fee-based financial planning firm here in Montreal called Merit Financial Planning. I’ve been in the industry for close to twenty-five years. For the past twenty years, I’ve been a certified Financial Planner working mainly with two of the big five major banks here in Canada, and always in the role of a Financial Planner.
That’s been my history as far as work is concerned, and it’s given me a lot of experience on how the industry works, and, let’s say, the good and the bad side of what the industry is all about. Basically, I went on my own because I developed a passion to help people that aren’t being helped by the industry these days because of how things are structured in the industry, to see if I could do my part to help people who are not really receiving the best type of help that’s available.
Jin: Could you speak more about your twenty years’ experience at the banks? What exactly did you do?
John: As a financial planner, the basic role is to help people and the clients of the bank, to establish a financial plan – let’s say a guideline as to how people can meet their financial goals. Most of the time, the biggest goal people have when it comes to their money is retirement planning, tax planning. There is also estate planning that I was involved in – basically, all the big life issues, that people usually save their money for. So, guidance as to how people should invest their money -- based on what their goals are; based on how much risk they can tolerate.
I continue to do this with my clients – we go through a process of first identifying the cash flow needs and net worth of clients – and then figuring out what their goals are, and then developing a plan to meet those goals. It’s not rocket science to develop a financial plan to meet people’s goals. Then, more importantly, after that to follow up and make sure the plan is on track on a regular basis, and to make adjustments as need be.
So, clients who had this need for organization and financial planning, I was called in by the various banks and the branches that I was dealing with to help our clients with their wealth management. Again, most of the time, it was all about retirement planning, and there is more to financial planning but most people always had questions regarding fund management -- how much they needed to save every year, what rate of return they needed to earn, and a whole bunch of other variables that go into retirement planning.
Jin: Okay. So, what are the significant differences between what you did then and what you are doing now?
John: The biggest difference, I believe, in the way I’m doing financial planning now versus what I was doing when I was dealing with the banks is that I’m using what’s called a fee-based model -- which basically means that I’m not compensated, and the other planners that are working with me are not compensated based on the product that we sell. This is extremely important because when you’re dealing with I’d say ninety or ninety-five percent of financial planners who basically work at banks or their subsidiaries – you know, the other divisions of a bank -- are paid based on the products that they sell. As you probably know, Jin, the industry is sales oriented, so there was a lot of pressure to sell the bank’s product, which basically led to biased advice.
The goal that we had, unfortunately, and the goal that the managers had was, ‘sell, sell’ and get to your targets as quickly as possible, and get to the selling, you know, in the straightest line possible. So we didn’t have too much flexibility to offer unbiased advice. I was able to get around it a little bit in the past because I was using some products that the banks had on their menu, which were index funds, because I truly believe in indexed and exchange traded fund type investing or those types of products. I was using those funds to sell my advice or, at least, to implement the advice that I was giving, until I was told not to because they weren’t very profitable.
At that point, the first bank that I was dealing with mentioned this to me and, at that point, I decided to leave that bank, and then went to another bank that didn’t have that hard rule. I was able to do that for a very long time until they changed their rules which led me, again – let’s just say I had feelings of guilt because I didn’t feel I was able to offer advice with a clear conscience. I was told to sell: that’s what I had to do. So that’s the big difference between working at a bank and working on my own: I’m not paid on the product that I sell, I’m paid on the advice that I give you.
Jin: Ok. So, I know that there are some tough compliance requirements when someone like you tries to strike out on their own.
Jin: Yeah. So, from what I understand you actually no longer touch the investment portion, right?
John: I don’t actually invest clients’ money, but I guide them as to how to go about investing their money and what sources to use, and, much like yourself, Jin, where you’re giving advice on the types of investments that are best suited for your fellows, and, for that matter, most Canadians, I’m sort of guiding people to do things on their own when it comes to implementing a financial plan or retirement plan, and I’m guiding them towards the types of investment that are out there.
So I’m not pulling the trigger and actually investing clients’ money, but, as you probably know, there’re so many tools that are available out there now for Canadians to actually implement a retirement plan and to use the types of investments that are out there, so I take the initial step with the clients and I show them what they need to do before they actually start investing their money, because there’s lots of stuff that you need to take before you actually start using the tools. The analogy that I use is the actual investments are, let’s say, the pills that someone needs for their health. What they need to do before they take the pills is to get a diagnosis from a doctor. So, I am basically giving the diagnosis and showing them what they need to do as far as creating a retirement plan. Then implementing the plan is used with the tools that are available like ETFs and index type funds.
Jin: I see. So, you’re the family doctor and the investment manager is like the pharmacy. Is that a good analogy?
John: That’s correct, and I was speaking about this with my wife, yesterday, who’s in the medical field. I told her the investments are like the pills which are being held in a pharmacy. But, you can’t go to a doctor, and this is how banks usually do it. You go to the bank and it’s like you’re meeting the doctor and you tell the doctor that, “my back is hurting”, and the doctor will prescribe the pills right away. That’s how banks are focused. They want to sell you the product right away, whereas I consider myself right now as someone who is able to diagnose the problems, see what the issues are, see what you can tolerate as far as medicine is concerned, to use the analogy again, and then guide you towards where to get the pills and what type of pills to take.
Jin: From your business perspective, that’s a big paradigm shift because from what I understand you used to generate revenue by selling investment products, right, when you were at the bank? And now you are independent and now you are charging a fixed fee, and you are charging people not for the specific investment, not for the pill, so to speak, but for the financial planning. Is that a big paradigm shift for you?
John: You know what: It hasn’t been and I’ll tell you why. As I mentioned before, my idea was always to give advice, to give quality advice, when I first entered the industry twenty years ago. When I did enter the industry, I didn’t have any role models. I didn’t know anybody who was doing this job, and I always thought I would get training on how to advise properly, and the training that I got, when I first started off in the industry was how to sell, and I wasn’t very keen on that. Again, I felt guilty in a sense, but I was able to use products which were not necessarily, um, the bottom line. They were not the typical mutual funds which charge lots of fees. I was selling, as I mentioned earlier, index funds, which are the equivalent of ETFs today.
That made me feel good, and, I guess, I was being compensated on the products that I was selling. My pay was based on the product I was selling, but I felt it was unbiased advice because I wasn’t selling the banks mutual funds, I was selling the type of funds where the bank was saying let the do-it-yourselfers use these funds, at least up until I was able to.
So, back to your question: it wasn’t a big shift in the sense that I’m giving advice, and I’m getting paid on advice and I’m going to get well compensated if I’m giving the best advice to people. And so the change wasn’t very dramatic on my part, and it was always in my mind to get paid based on advice I was giving, and, I guess, this was the best way to do it right now.
Jin: There have been some regulatory changes that I think have been favourable for a fee-based model. As you know, the CRM 2 significantly increased the disclosure requirements of all the mutual fund dealers, and, well, investment managers in general. Has that helped you at all so far?
John: Well, it has helped me because it has raised questions, because this is something, – as far as fee disclosure – something that I’ve been talking about for a long time now. I have a podcast called Confessions of an Ex-Banker which, basically – well, it’s been over a year that I’ve been saying how the fees are hidden, and how the industry is pretty much not being transparent. So my followers who have been listening to this all of a sudden get their statements which in some cases, I would say, is still not clear, but they’re getting an idea of how much fees have been charged, and they didn’t notice in the past. And, yes, I’m getting a lot more questions as to what these statements are talking about. And so, yes, obviously, I’m happy to explain.
So, yes, it has raised awareness. On the other hand, I’ve checked some mutual funds that I had with the bank just so I can keep a tab on the industry, and I tell you something: the statements are still not clear because the first line I saw in my statement was “fees paid directly by you” and it was zero dollars; then, the second line was “fees indirectly charged to the fund that’s managing your account” and so on and so forth, and there was a certain sum of money. But it still wasn’t a hundred percent clear, but, at least, it raised questions, and people are starting to understand right now that the industry is not transparent and I still get clients that have been telling me that they haven’t been paying anything in fees for their investment advice, and that’s just not the case.
It’s incredible that this field goes on, and all the information is out there, but, let’s face it, the average Canadian is not in tune with everything. They have their own lives to live, and they ‘ve based their trust on the institutions which really haven’t delivered, unfortunately, in the past.
Jin: Now, could you talk about your course? What motivated you to make a video course about financial planning?
John: So, I’ll tell you -- and this is something that’s very dear, very important to me too. The course is targeted more towards millennials, and I’ll explain why. As you probably know, Jin, there is no incentive for financial planners to help millennials when it comes to retirement planning, and the reason being that it’s a commission-based industry. Most millennials are starting off and they’re not high-net-income families or individuals, and so they don’t have a lot of money. The bottom line is most financial planners make their money based on the worth of their clients, and so they’re not interested.
If you’ve ever gone into a bank, or when you first started out -- and I’m sure your listeners or subscribers are aware of this -- you walk into a bank, and if they don’t see a lot of money in your bank account and they don’t see that you have a lot of money elsewhere, you’re not even going to meet a financial planner. You’re probably going to meet a junior banker who’s going to tell you buy this mutual fund or that mutual fund and that’s pretty much it. I’ve had several of my clients that are millennials tell me this, and they were so angry that they weren’t even able to meet a financial planner. So the bottom line is there isn’t the huge majority, if not all millennials are not getting the proper retirement planning that they need, and I feel like I want to contribute in some way. I figured that this is a segment that’s not getting any advice, so I decided to create this course to give people comprehensive planning that are not getting it right now.
So, this is a way that I feel that I can contribute. So, the course, basically, outlines all the steps that are necessary to create a retirement plan. But here’s where it gets interesting because, in the middle of the course, I actually take all the information that is needed from the clients to create a retirement plan, a personalized retirement plan, which takes into account their situation, their goals, their tolerance for the ups and downs of investment, and I create a personal financial or retirement plan for them. Once that’s done, further in the course, I tell them how to read the plan, because that’s very important, and then how to implement the plan.
Jin: So, hang on. So, are you saying that the course is not a purely do-it-yourself…
John: No, no it’s not. It’s interactive. I mean, I have to play a huge role in the middle of the course by actually creating a comprehensive retirement plan. On top of that, there’s more. When people subscribe to my course, they’re hiring me as their financial planner. So, they get financial planning services for life, and the advice is delivered through all channels of communication that millennials like to use right now --which is through Skype; which is through live facebook group which they’re a member of--its an exclusive group, obviously; through emails; through phone calls.
So, basically, they’re able to use my services not only for retirement planning, because there’s a lot more to financial planning--like mortgage planning; education planning for their children; tax planning strategies that enable them to provide for them. So, yes, retirement planning is important, but there is so much more. Cash flow analysis. There’s many, many aspects to financial planning--and these services are just not available to millennials right now. And, I’m thinking, “what a way to get people that are interested in this to have real services at a nominal fee”. Let’s face it: the best place that people can get advice, and I think that you can agree with this, is through fee-based financial planning, people that are not biased towards products. They’re getting paid on advice.
But, the truth is that they’re expensive as well, and there are very few fee-based financial planners across Canada. And they are also expensive. At this stage of a millennial’s life, they can’t fund these services. So we’re charging a nominal fee on a monthly basis that will give them all the services that are required, or all the tools that are required, not only to create a retirement plan, but to have that plan followed up and to have financial planning as well.
Definitely not a course that you subscribe to the course, and you do it, and, that’s it, you don’t hear anything from the Course Creator. It’s interactive, it’s a lot of work, but that’s what a financial planner does. I’ve found a way to deliver this service at a nominal fee that is not available right now for millennials.
Jin: Yeah. I think it’s worth clarifying for the readers that the course we are talking about is a video course hosted on a web site. It’s not an in-person course.
John: That’s correct. Exactly. And, as I mention throughout the course, it’s interactive where at the end of certain videos, I ask our students, and, I’ll call it our clients, to fill out a cash flow statement, for example, so we can figure out how much money they can save to fill out a net worth statement, and I provide these documents to them—and, so, they fill them out and they send them back to me. I analyze all the information.
Another step of the course is to fill out a risk tolerance document, which I take the answers, and I input them into my financial planning software, and it gives us a very good idea of the kind of portfolio clients need to have and, at that point, I take all the information that I’ve gathered from clients and I create a retirement plan for them. The plan is based on, at what age do people want to retire at and how much money do they need--if they take into account inflation; if they take into account any significant assets that may be added into their net worth later, like inheritance, like downsizing a home, for example. Every detail that is needed in creating a financial plan is taken into account.
Jin: Dealing with that kind of stuff can be tricky, since there’re always risks involved with investments, so, how do you deal with that investment risk?
John: That’s a good question, and that’s something that a lot of people don’t understand. What I’d like to do is educate and show clients–let’s say clients fill out the questionnaire which analyzes their tolerance for risk and I like--we call it risk, I like to call it volatility. I like to show people--once we set a certain type of portfolio, you know, 50 percent equity and 50 percent--I like to show people what’s the best-case scenario for such a portfolio, and what’s the worst-case scenario, over different periods of time.
So, I like to tell a client, the best case scenario for this type of portfolio is 15 percent over one year; but the worst case scenario, could be minus 20 percent. Are you able to sleep at night, knowing that your ten thousand dollars, or your fifty thousand dollars, might go down to forty thousand dollars over a period of one year? If they’re comfortable with that, and they understand that this could happen, then, we say go ahead. But, I also like to show them, what’s the risk of such a portfolio over a three-year period, and over a five-year period. For example, over five years, a balanced portfolio that’s had fifty percent in safety and fifty percent in stocks let’s say, or ETFs, which I like to use, there’s never been a five-year period where, if you’re well diversified, there’s been a negative return.
So. I like to educate on all aspects of risk, and then find out if the client is comfortable with that. And, also, through the course, this is something that clients get, is the ongoing follow up, because there will be time when the markets go down, and no matter what you tell people at the beginning, once you see your money going down in value, you start to worry. So, you need that ongoing support to be able to tough out those periods, and that’s something that I’ve seen is not being offered anywhere, in any kind of course available when it comes to investing. When it comes to that, the risk needs to be explained properly. We need to educate our clients on all the facts, the positives and the negatives, and then go with that.
Jin: Yeah. And you’re based in Quebec, so does that limit you in any way in terms of taking on clients?
John: As far as financial planning is concerned, or retirement planning, no, it doesn’t because I’m licenced in Quebec. If I was selling securities, and if I was actually “pulling the trigger”, and telling people what to buy, and doing it for them, then I would be limited because every province is regulated and you can only do business in your province. But when it comes to doing retirement planning without recommending specific investments, and actually making transactions for the client--we’re not limited. So, financial planning in Quebec, retirement planning in Quebec, is the same as for every other part of the country. There are some different tax rules, but that doesn’t really affect a long-term retirement plan.
Jin: And what about ex-pats? One of the most common questions I actually get is, are from people living in either The States or somewhere in Europe. They’re Canadians and they would like to come back to Canada someday. They would like to have their investments in Canada and manage it, have it managed, but they are outside the country. Do you know if you can actually take on clients who are outside of Canada?
John: I haven’t run into a situation like that yet. There are certain restrictions on what people can do if their assets are in Canada when they are living overseas. So, I wouldn’t be ready to do something like that, I think, because there are certain trading restrictions that people have when they are living overseas, and that’s getting into tax laws and what have you, so…
Jin: Yeah, I know that those laws can be very complicated. From what I understand, the American definition of what makes a Professional Financial Advisor is very different from the definition that Canadians have.
John: That’s correct. And the truth is also every situation, every individual client situation, is different, and so, depending on circumstances, has different laws. So, I wouldn’t necessarily recommend it to someone who’s overseas, and if they’re planning on staying there for some time, like maybe four or five years and then coming back. I think that this is best suited to people that are based in Canada right now, and as I mentioned, it is more targeted towards millennials, and only because, as I mentioned before, they’re not getting this type of advice anywhere. It’s available to anybody– the concepts are pretty much the same for everyone, but I thought it would be best targeted to people who are not getting this type of advice right now.
Jin: Last question. So, how can someone subscribe to your course?
John: If they want more information on how to subscribe they can always contact me. If you want, I can give you my email right now, which is john.kalos @ meritfinancialplanning.ca. I would say, either contact me through my email, or contact you and then we can take it from there.
Jin: Yeah. I would actually encourage my readers to go to you directly, no need to go through me. I like to be independent with regard to these things.
John: Very good.
Jin: Okay, So, thank you so much for your time, John.
John: Thank you, Jin.
I would like to thank John Kalos for taking the time to give the interview, and wish him all the best with his financial planning business.