Establishing the compensation model for services rendered amounts to one of the most difficult decisions for members of any profession and normally flows from client preferences, the professional’s needs and his or her perceptions of the market. The professional needs adequate compensation while the client may or may not grasp the value of services rendered.
For the independent financial advisor, the principal options are commission-based, fee-based, or a combination of the two.
Influencing their decision is the fact that regulators in the United Kingdom and Australia have banned the commission model, and a view – currently unsupported by any clear indication – that Canadian regulators will take similar action. Add to the mix the effects of the market crisis which reduced revenues for fee-based advisors.
Most Canadians have made a de facto choice for the commission-based model, in the estimation of Advocis president Greg Pollock, pointing to an apparent lack of interest in the fee-based model.
“I have no empirical evidence, but I believe that it’s a myth that most Canadians would happily pay for financial advice separately from financial products,” Pollock says, stressing that the commission-based model does not represent an official position of the organization. Advocis does not hear any desire to separate cost of the product from compensation from either advisors or their clients, he explains.
“I think a lot of Canadians would be hesitant with respect to that approach,” he says, adding that he does not deny that there is room in the market for the fee-based model.
Pollock suggests that Canadians did not suffer the same financial damage to their portfolios as investors in other jurisdictions, and that the Canadian financial sector has not experienced the extent of systemic scandals that occurred elsewhere – two factors that led foreign regulators to ban sales commissions.
“They’ve had to come up with ways and means of dealing with the concerns (that) these consumers have raised. Often it’s the compensation system that the regulators have focussed on,” he says, adding that the net impact in those jurisdictions remains to be seen.
The choice is a philosophical decision, according to Marc Lamontagne, a fee-based advisor, partner at Ottawa-based Ryan Lamontagne Inc., founder of To Fee Or Not To Fee, an advisor training company and 20 year veteran of financial planning.
“I think it’s primarily a philosophical decision to say do I want to work under a transparent model that is very clear exactly what I make and it’s very clear that I work for the client,” he says. The commission-based model leaves the advisor in a sales role and open to bias, he believes.
“I’m not saying that makes you unethical; it just creates a bit of a bias,” he says. “A commission advisor does have a bias and no matter how ethical I am as a commission advisor if I’m sitting in front of a client and one mutual fund pays me a commission and the other one doesn’t – well, in the back of my mind it’s always going to be there,” he says.
Another client choice occurs with the individual who resists paying an transparent fee, even though that choice means they will pay a commission embedded in the investment “They’re happier that way,” Lamontagne says. “They don’t want to see it.”
The choice that an advisor makes now will also have an impact on the value of their practice, should they choose to sell their book of business, according to Sandra Foster, president of Toronto-based Headspring Consulting Inc.
Trailer fees tend to be “sticky”, meaning that an advisor buying the book continues receiving them, potentially raising the value of the book. That simplifies matters for the advisor.
“You wouldn’t have to justify what you were doing for the client because the fees are already being paid,” she says. “If fees are being paid upfront, the advisor really does have to justify value.”
In the end, says Lamontagne, many fee-based advisors have some commission business and many commission-based advisors have some fee business.
He estimates that between 30%-40% of advisors on the IIROC platform and 10% of advisors on the MFDA platform derive all or part of their income from fee-based services.
“There’s that myth out there that you’re either in the one camp or the other and that’s not the reality.”
De Goey
While I agree that the choice between fees and commissinos rests primarily with clients (I offer cleints both choices in my own practice), I think there are a few comments that could be ‘tightened’ in the column…
Al Emid refers to trailers as “fees”. Pleaase stop that. They are commissions. IIROC, the MFDA, CRA and every ad and disclaimer used by the industry refers to them as commissions. Referring to them as “fees” does not make them fees any more than referring to an apple as an orange makes an apple into an orange. Self-serving revisionism is unseemly.
Second, the reason most Canadians have made a “de facto choice” (according to Greg Pollock) is because most advisors have given Canadian a de fato ultimatum… use commissions with me or find another advisor. I have seen no evidence that most advisors consistently offer clients a “choice”. Portratying the course of action as a choice when there was no actual choice offered is disingenuous to say the least. IMO, it is Canadian ADVISORS who have CHOSEN the commission based model – not Canadian clients. The clients simply play the hand they’ve been dealt.
Greg Pollock also mentions that he’s doubtful that Canadians would “happily” pay separately for advice. What, pray tell, does their mindset have to do with it? If Canadians were given an ultimatum to use a fee-based model, they would use it. Just as most are using commission based model now. Whether they are happy about it or not seems immaterial to me. They would pay and life would go on. Clients in those parts of the world that have made the transition to a mandatory fee based model have come to terms with their new reality and the world has not ended.
Finally, I still haven’t seen Advocis (or CIFPs or any other membership organization) come out in opposition to trailing commissions in non-advised (i.e. discount brokerage) accounts. Surely, even people who favour embedded compensation can see that consumers being forced to pay for advice that is neither requested nor received is simply wrong. I would hope that the proponents of trailing commissions would join me in saying that these are inappropriate for do it yourself investors.
John J. De Goey, CFP
Wednesday, January 26 @ 10:59 am //////