As jurisdictions around the world consider banning embedded compensation, many Canadian financial planners point out that this long-standing arrangement benefits many clients.
To ban trailer fees—for insurance compensation is seldom addressed—would be to remove flexibility of advisors to choose the business model that suits them—and their clients—best.
The topic was top of mind at Financial Planning Week’s Vision 2020 symposium on Wednesday, and frequently arose during panel discussions on other subjects. By the time the compensation panel took the stage at the end of the day, it was joked that compensation had been adequately discussed and that it might be time for cocktails.
As commissioner of the Financial Consumer Agency of Canada, moderator Ursula Menke pointed out that her role as a regulator is to enforce disclosure requirements upon federally regulated financial institutions. While she has no say over compensation, she does enforce the disclosure of costs to the consumer.
Admitting that she had no jurisdiction over financial planning, she pointed out that in any other profession, payment by a third party is on its face a conflict of interest, a theme she returned to repeatedly throughout the panel discussion.
For an industry striving to be recognized as a profession, financial planning must mitigate the conflicts inherent in its compensation structure.
“As a lawyer, I must say I consider this third party model of yours to be the cause of very real conflict of interest. In my eye, he who pays the piper calls the tune,” she said. “The question today is ‘What is an appropriate model for a professional?'”
Whether there is the appearance of conflict or not, most Canadian mutual fund investors (59%) prefer to pay their planner through embedded compensation, according to a Pollara survey conducted for the Investment Funds Institute of Canada.
The same survey found roughly the same percentage of investors had less than $25,000 in assets when they engaged their financial planner. For these investors, an upfront fee for a financial plan would probably have pushed them into the arms of a discount brokerage that provides no advice or planning.
“If we think that we can provide the depth of financial planning support for individuals with under $25,000, paying a flat-fee…that ain’t going to happen,” said John Novachis, executive vice-president, corporate affairs, Investment Planning Council. “As an industry we continue to poke at ourselves for no reason.”
Perhaps then, the best model is for the dealer to allow flexibility of compensation, he suggested. His firm allows advisors to choose whether they receive their compensation through embedded mutual fund and insurance commissions, or through a fee-for-service model.
“We all understand that choice has served us very well in this industry,” he said. “If we try to put all our eggs into one basket around a single compensation model, there are significant disadvantages to many segments of clients out there.”
The flexibility of pricing benefits clients at the high end of the economic spectrum too.
“For an account with $2 million, if you’re selling on a DSC, you should be put in jail,” said Novachis.
Oddly missing from the discussion was the argument that advisors’ interests are aligned with clients in that growth of assets increases compensation. The temptation to increase compensation through higher risk-taking is mitigated by the knowledge that a complete loss would not only wipe out compensation altogether, but more than likely result in regulatory and legal action.