Mutual funds

1. Sales charges
one of:

  1. Front-end sales charge
  2. Deferred sales charge
  3. Low-load sales charge
  4. None

For a, b and c, the fund provider pays the dealer a percentage of what you invest (in scenario a, you and your advisor determine the rate; in b, it’s usually 5%; and 2.5% in c).

2. Fund expenses*

  1. X% management expense ratio
  2. X% trading expense ratio
  3. Part of the MER goes toward a trailing commission for your advisor. If you own F-class funds, that trailer is eliminated and the advisor negotiates a fee directly with you, which may be tax deductible
3. Other fees

  1. Short-term trading fee (if you redeem or switch within 30 days of purchase)
  2. Switch fee

Stocks & bonds

Option A
flat fee on total assets
Option B
asset-class fee (usually equities cost more to trade than fixed income)
Option C
transaction fee per trade
(the larger the trade, often the lower the fee)

ETFs

1. Fund expenses*

  1. X% management expense ratio
  2. If you own advisor-class ETFs (denoted with .A after ticker), part of that fee goes toward a trailing commission for your advisor.
2. Other fees

  1. Trading and a small bid-ask spread
  2. If you sell one ETF to buy another from the same family, trading costs may apply. For large orders, some providers will do in-kind transfers at reduced costs.

*These are not paid directly. They reduce the fund’s return.

Other ways advisors get paid

  • National Instrument 81–105 prevents IIROC and MFDA advisors from receiving sales incentives from fund wholesalers.
  • Advisors may receive incentives for attracting higher levels of assets under management.

Life, term and living-benefits insurance

Advisor compensation

Commission

For Whole or Universal Life, an advisor typically gets 50% commission on the first-year premium (see “Typical first-year rates,” below), plus a bonus (usually 150% of commission), for a total rate of 125% on the first-year premium.

Commissions typically drop off dramatically to just 5% in years two and three, and 2% thereafter (some policies pay no commission after year 5 or 10). This drop is common across all types of insurance. (Note: CI policies tend to bump up commissions in renewal years.)

The chart illustrates the relationship between commission percentage and policy length, based on the example above:

Commission

Those percentages are higher than mutual fund MERs, but service requirements are higher. You’ll get:

  • Beneficiary changes
  • Rider changes
  • Coverage changes
  • Claim delivery

Non-cash compensation may include:

  • Sales conferences, if agents write a certain amount of business. “Usually this only motivates a small band of agents,” says Newlink Group director Byren Innes. “If I already write more business than the qualifying threshold, I’ve got the trip anyway. If I don’t usually write that amount of business, I won’t get the trip anyway.” They are nice conferences, though: “They’re all in five-star resorts,” he says.
  • Discounted or free office space, based on production levels.
  • Semi-annual retreats for education purposes.

Further fee details

After the first year, some companies pay periodic service fees to active agents. If the agent isn’t doing any work, he may forfeit.

Some companies have contracts with agents so they receive commissions for life. If agents decide not to serve clients, the MGA may have to take on the service burden.

Typical first-year insurance commission rates

Typical first-year insurance commission rates

More for advisors

Newlink Group director Byren Innes has prepared a dynamic spreadsheet where you can enter your actual commission schedule and premiums so clients can see how much they pay you in dollars.

Melissa Shin is the managing editor of Advisor Group.

Originally published in Advisor's Edge

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ZIGZEWEL

Great article! Well done!

Monday, Oct 7, 2013 at 1:33 pm Reply