Show me the money: Compensation in focus

It’s the topic that just won’t go away. No one expects you to work for free, but the issue of how you get paid remains a hot topic.

Never mind that there are business models to satisfy every niche, the push against embedded compensation continues to build steam. The argument against commissions says the practice creates a conflict of interest.

But a recent survey suggests clients are fine with that; and those with low asset bases probably can’t afford to pay you any other way.

Read: Advisors need compensation flexibility

As jurisdictions around the world consider banning embedded compensation, many Canadian financial planners point out that this long-standing arrangement benefits many clients.

Read: Compensation debate rages on

There are two opposing camps with respect to the compensation debate: Those who believe a fully transparent, fee-only model is the only path to professional respectability; and those who see the current variety of compensation models as sufficient for the Canadian marketplace.

Read: Fee vs. commission not clear cut

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.

Read: Virtual roundtable: Best practice model

While some clients like the familiarity of commission-based practices, others are demanding the transparency inherent in a fee-based or fee-only practice.

Read: Justifying your annual fee

Our clients see exactly how much we earn on their investments. For our average client, that’s well over $3,000 a year, which can sometimes lead to sticker shock.

Read: Preparing for fee transparency

I’ve noticed that every 3 to 5 years our industry goes through a fee debate but in the end nothing changes.

Read: The professional way to get paid

Let’s face it: the ongoing discussion about the relative merits of differing compensation models is one of the defining issues of our generation for our industry.

Read: Rethinking remuneration

Offering bonuses may not be an effective way to boost productivity. A 2010 University of Guelph study revealed that offering employee bonuses instead of other incentives has a high probability of encouraging workers to lie about their productivity.

Read: The lowdown on paying for referrals

Whether a dealer or registered representative can receive or pay compensation for referrals of clients and prospective clients has, for many years, been subject to debate. Some have argued the receipt of compensation is indicative of “acting in furtherance of a trade” and registration obligations apply. Well, at long last, the debate has been settled.

Read: Discounting your way to higher profits

Fewer clients. More productive assets. Following those two principles usually means you’ll be successful. Yet there’s a third principle many advisors don’t talk about openly: discounting fees to attract and keep wealthy clients.

But…

Read: Don’t be too quick to discount

Emotions and advisory business are strange bedfellows and should sleep in separate rooms. A study from PriceMetrix found that financial advisors who cut their fees during market downturns, a practice dubbed ‘sympathy pricing,’ are hurting their businesses over the long run.