There are two opposing camps with respect to the compensation debate: Those who believe a fully transparent, fee-only model is the only path to professional respectability; and Those who see the current variety of compensation models as sufficient for the Canadian marketplace.
In my last column, I gave my two cents on this subject. My practice is a mix of both models, with some clients selecting a transparent and fee-based solution and others preferring a more traditional, commission-and-trailer-fee structure.
For me, there’s no conflict. I run a business where I sell professional financial planning advice and investment management. Clients can choose how they wish to pay for my services. While my preference is for the fee-based model — and this is the relationship my office encourages — we also see a place for transactional commissions and low-load mutual funds.
Frankly, I’m getting very tired of hearing from those who argue for a fee-only model as if this is the only way forward. I’d argue the Canadian investing public disagrees with them. The vast majority of Canadians engage in almost no financial planning, and the number who will pay $2,500 or more for a written financial plan is very small indeed.
And ask your favourite mutual fund company about their sales of F-Class mutual funds. Uptake here has been on the slow side.
At a recent debate hosted by the Financial Planning Standards Council, participants were told that Britain and Australia have banned embedded commissions.
And some argued the Canadian regulators should consider following their lead.
But before they get to trailer fees, may I propose they deal with other issues first?
After about 20 years in this business, I’ve seen several other practices that should be put to the fire, as they cause considerably more damage to Canadians’ financial well-being than embedded commissions.
The following are some examples of bad behaviour we should really be talking about.
Leveraging
Before anyone sends me a free copy of The Smith Manoeuvre, let me say at the outset: I get the math. On paper, leveraging looks great. Yet in practice, it’s one of the greatest wealth destroyers I’ve ever encountered. It’s not the math — it’s the application that’s the problem.
This strategy may make sense for a sophisticated, high-income and high-net-worth client with no debt who’s looking to maximize return and tax-deductible expenses.
But this is rarely the case.
Show me a leveraged portfolio, and I’ll nearly always show you an investment account filled with DSC mutual funds, sold by a novice financial planner to a couple who are already fighting mortgage, car and line-of-credit payments. The clients may have decided they can save a few hundred dollars a month, and rather than being advised to accelerate debt repayment or build a cash reserve, they’re shown how their monthly savings can support a much larger portfolio and have the magic of compounding work for them right away.
To make matters worse, they often pledge the mutual fund certificates as collateral with the bank, creating a portfolio that’s nearly impossible to administer.
The only rationale, in my opinion, for encouraging leverage is to maximize the commission cheques. So if you’ve built your practice around leveraged investing, quit it. You’re giving bad advice, damaging the financial health of your clients and only doing so to enrich yourself.
In my experience, most proponents of leverage represent the bottom of the barrel in the financial business.
