In Spring 2013, the research division of Rogers Publishing Ltd. polled advisors and investors on how advisors are paid, preferred compensation models and fee transparency. These surveys were made possible by Vanguard.
Investor: n=999. Margin of error +/- 3.1%, 19 times out of 20. Advisor: n=813. Margin of error +/- 3.4%, 19 times out of 20.
The vast majority of Canadian financial advisory clients think you’re worth what they pay you.
So says Advisor Group’s 2013 Salary Survey, which checked in with a sampling of both clients and advisors from coast-to-coast. Yet, while clients appear comfortable parting with cash for services rendered, other portions of the survey reveal they may not realize how much they shell out.
In fact, more clients believe you’re paid a salary by your institution or firm than may actually be the case.
While 13% of the 999 client respondents say their advisors are compensated exclusively by commissions based on the dollar amount of a transaction, 12% report their advisors make only a straight salary. An additional 11% report their advisors earn a combination of salary and commission. In total, 43% of the client survey group said they believe salary makes up some of what’s in advisors’ weekly envelopes.
That total shows where impression deviates from reality. It’s too high. While 20% of the advisors we surveyed report receiving a salary as a component of compensation, only 2% report it as the sole source of what they take home.
“Ninety percent of the working population in Canada is used to a salary of some sort,” says Jolene Laing, branch manager at Scotia-McLeod in White Rock, B.C. “And it’s pretty unusual for them to believe that people doing what we’re doing are doing it without a salary.”
Laing, along with several other advisors from across Canada, participated in a roundtable discussion of the Salary Survey data, providing perspective on what it reveals about industry compensation structures and client perceptions thereof.
To help you right that misconception, we’ve provided sample scripts to explain to clients where their money goes (see “Explain compensation”).
We’ve also created a guide you can give to your clients (see “How much is that investment?”). It explains how advisors are compensated.
How would you describe the value that your primary financial advisor brings to you as an investor?
How clients want to pay
Surveyed investors placed the most stock in having their advisors make either salary and bonus (24%) or salary only (18%). Together (42%), that’s much more than any other option we gave respondents.
When we asked clients about various fee payment options (a percentage of AUM, a fee plus a base salary, or a cheque written for services rendered) 23% say they’d prefer to pay that way.
Only 9% voiced preference for straight commission. Another 9% say their choice was salary, plus commission.
Craig Senyk, director of portfolio management at Mawer Investment Management in Calgary, told the roundtable, “If clients are desiring that we’re paid through a form of salary and bonus, we should try to align to that need.”
But another roundtable participant, Nicholas Miazek, vice president at Fiera Capital Corp. in Calgary, says, “most clients recognize the need for a motivational mechanism built into advisor compensation.”
All participating advisors, though, agree that the data showing client confusion merits action.
Another finding that should concern advisors: many clients, especially those on the lower end of the asset spectrum, don’t know how much they pay you. On average, they presume they shell out $363.40 a year to have their money managed.
More well-heeled clients, though, appear to get it. Almost one in five of all clients (18%) say they pay more than $5,000 annually to have their assets managed and another 21% think they pay between $1,000 and $4,999.
Make costs transparent
Almost all advisors—97%—indicate they’re comfortable telling clients how they’re compensated. Further, they claim 94% of their clients understand the explanation.
Data from the investor survey, however, reveals discrepancies regarding who gets credit for starting the compensation conversation.
Only 61% of clients remember discussing compensation with an advisor. This number led some advisory board members to speculate the pro forma, compliance-oriented nature of the discussion left it unmemorable.
While 83% of advisors say they initiate the conversation, clients who remember the chat put that figure at 55%. Whether or not that’s actually the case, it’s clear clients need an occasional refresher. To help you interpret what they may not say, we reveal what body language to look for (see “Deal with confusion”).
Of course some accountability rests with clients, who seldom ask to review how advisor are paid once working relationships get underway. In response to findings showing 41% of advisors are never asked further compensation questions and only 4% report annual discussions, we offer advice on how often to raise the subject (see “Explain compensation”).
By Philip Porado is the executive editor of Advisor Group.