The panelists

David Bluteau and Darren Caseley

David Bluteau and Darren Caseley

National Bank Financial, Halifax (fee practice with insurance)

Martine Cunliffe

Martine Cunliffe

Macquarie Private Wealth, Vancouver (fee practice, with commission on certain products)

Jason Pereira

Jason Pereira

Bennett March, Toronto (fee practice with insurance)

Which compensation model is best for a client, fee or commission, isn’t cut and dried.

And, says a panel of three advisors we assembled, deciding to work with someone depends on more than whether she’s better suited to fee or commission—the prospect’s service expectations, investment philosophy and earning potential are all equally important.

Nevertheless, there are guidelines: Most advisors say a percent-of-assets fee only becomes viable after $100,000, and a 1% fee is only viable after $250,000.

Halifax advisor David Bluteau says in order to help clients with less than $100,000 to invest, “there could be an opportunity to dispense [non-specific] advice in a larger setting, like a seminar format, to bring down the cost.”

Or, the National Bank advisor suggests, the industry could evolve to a point where small clients could take a battery of tests online for a small fee, and receive generalized advice based on those results.

The clients*

David YamashitaDavid Yamashita

39, owns a thriving cupcakery in Vancouver’s Gastown district. He and his partner recently purchased a downtown condo, and the mortgage eats just more than half of the $6,000 he takes home each month.

David pumps most profits into new equipment and is setting aside cash to open a second, and possibly third, location. His company’s six employees also get supplemental health and dental benefits.

His life partner Suzette Finkle is a 43-year-old mergers and acquisitions lawyer who works primarily with import-export businesses. She pulls in $175,000 annually and should make partner this year. Due to medical issues, the couple has no children. Now that the pair has bought a home, they want to get going on both registered and non-registered investments.

DB & DC: Fee. “David needs more than just investment help. We’d want to learn more about his situation. One issue we’d want to know more about is whether or not he has a group pension plan.”

MC: Commission and salary. “David should build up his asset value in the most fee-sensitive way possible. Banks have some good no-fee RRSP options, and he can also invest in no-load index strategies with low MERs. On the fee-based side, clients don’t see advantages unless they’re above $100,000 in investable assets. If he’s concerned about alignment of interest, he can work with someone who’s paid on salary.”

JP: Hourly fee. “He’s used to paying his lawyers and accountants on a fee basis. Another bill may not be welcomed, but an advisor can provide value with proper corporate structure and health benefits issues. Our value proposition is to keep an eye on how these things interrelate.”

The client would need at least $250,000 to do a percent-of-assets fee arrangement.”

– Jason Pereira

Jill YvonovichJill Yvonovich

inherited millions from her estranged industrial magnate father, but it came at a cost. He’d originally planned to disinherit her over disapproval of her decision to establish a horse breeding and boarding ranch outside Red Deer, Alta.

Jill persuaded him to provide the $400,000 in seed funding as an outright gift, in exchange for an agreement to split his $450-million estate between her and three charities. She got $115 million when he passed away.

The 51-year-old’s venture is a success, and she makes between $510,000 and $1.5 million yearly, depending on the quality of foals born. She manages her finances impeccably and can easily live on those earnings; she describes her inheritance as a cushion for bad years. She and her partner Libby have four daughters, ages eight to 21. The couple wants all four to have enough in trust to fund their dreams.

DB & DC: Fee. “She’s got a lot on her plate, and if she’s looking to delegate financial management, we’d like to take on that responsibility. She has estate concerns and providing for the children is important to her. We’d find out how much she needs to live on and consider setting up a foundation for the rest. But if all she wants is a stock picker, I’d refer her out.”

MC: Fee, with some commission. “I’d take a core-and-explore approach. Her situation has more tax, philanthropic and estate planning issues [than David’s], and she has a greater need for diversification. An advisor fee gives her access to that kind of advice. There could be some commission-based investments because she could look at alternative investments.

“For instance, investing in real estate is seldom available on a fee-only basis. Aside from that, if she’s looking at using a balanced strategy because she doesn’t need the income for daily expenses, her all-in fee could be between 50 and 75 basis points.”

JP: Percentage-of-assets fee. “She’s going to have complex tax, charitable and estate issues. She needs someone who provides the high level of oversight that’s possible with fees.

Besides, if $1 million goes into a DSC fund, I’d get $50,000 comp on one sale. That’s more than 150 hours of labour, and there’s no way I’m going to do enough planning to justify that fee.”

Albert RosenthallAlbert Rosenthall

is a public relations associate for a Halifax marketing firm. It’s a startup, so he only earns $51,000. But there is a generous whole-contribution group RRSP that’s funded through profit sharing in the firm. With five years of service, he’s accumulated a bit more than he makes in a year—he’s single and his two nephews are beneficiaries. His rent eats nearly a third of his take-home pay and he’s servicing $12,000 in student loans; he plans to eliminate that debt in five years. Albert’s happy with his company’s group RRSP, but also figures at 26 he’s ready for risk and should do some non-registered investing.

DB & DC: DIY plus fee. “If he were one of my clients’ children, I would find out what he wants and try to direct him generally. Either way, he could work with a discount broker. Some advisors might do an hourly consult to start him off and then he could be self-directed. He could even create his own IPS to follow, and go back for an hourly consult once a year as a checkup. For instance, a firm in the U.S. charges $250/hour.”

MC: Commission or salary. “He should look at the banks, rather than a broker. An IA isn’t incented to a great job on this account. He can get a diversified portfolio through a mutual fund wrap program. Albert’s interests may be better served by an investment professional paid a base and a bonus, not straight commission.”

JP: Commission. “He doesn’t have enough to pay on a percentage-of-assets basis. So if you do take this client, use a mutual fund with DSC, set his expectations and give appropriate disclosures. Does he understand you’ll get $2,500 up front and that he’ll be locked into this fund company for seven years? At his size, there will be tradeoffs.

“Our practice isn’t designed to take on clients like Albert, but at the same time, people in his situation don’t require the same level of advice as a Jill or David.”

Selena JuarezSelena Juarez

put everything into medical school and it paid off. The 35-year-old family practitioner in suburban Saskatoon is clear of student debt and earns $115,000 yearly. She could make more in larger cities, and her husband has received job offers in Toronto and Calgary, but she likes her prairie patients. She and her husband keep separate finances, aside from evenly splitting the $1,000 monthly mortgage and other household costs, mostly because he disapproves of her sending $1,000 a month to her parents in El Salvador. They have one child, eight-year-old Hector, and no plans for more. To date, she has focused on debt repayment and has no investments, registered or otherwise, outside of an RESP for Hector. She’s now ready to start investing.

DB & DC: Fee and commission. “Our pipeline is young professionals. In five to 10 years, they’re going to be millionaires. We’d like to invest in the relationship. We’d do insurance initially to make the relationship viable, because if she only invests a small amount per year, it would be a long time before she becomes a core client. She would need incorporation advice, wills, PoA, medical directives, disability insurance and life insurance to provide for Hector.”

MC: Transaction-based. “Like David, she should minimize costs and MERs. Once she and her husband accumulate more capital, they can look at a fee-based, managed approach.

“She may be trying to keep assets separate, but using the income from those assets to benefit the matrimonial home can complicate matters. If you inherit money, manage it separately, and ensure the capital isn’t used for the matrimonial home, you may avoid having it classified as joint assets. But in this case, I doubt she can avoid his ability to make a claim on the assets [if they split up]. She could see if he would agree to a post-nup, but if he’s deemed to be better suited to look after their child, she might have to pay child support.”

JP: Hourly fee. “Many doctors focus on paying debt, but don’t consider the tax implications of their high incomes. If she contributed $30,000 to her RRSP instead, she’d be in a lower tax bracket. She’d get back $13,000, which she could then use to pay debt. Such concerns point to a fee arrangement.”

We may meet with her one-on-one, even though normally we talk to the couple.”

– David Bluteau & Darren Caseley

* Resemblance to real people is coincidental. Profiles by Philip Porado, executive editor.

Melissa Shin is the managing editor of Advisor Group.