With trailer commissions under siege around the world, Canadian advisors might one day expect this mode of compensation to disappear from our shores as well. When that day comes, there will be two kinds of advisors: Those who scramble to adjust; and those whose practices have already evolved.
Make no mistake, the price of advice offered by an advisor does carry value. Private client firms, which serve high-net-worth and ultra-high-net-worth clients typically charge an up-front fee because they are confident about the value of the services they provide their clientele. These clients are already accustomed to paying fees for other professionals such as accountants and lawyers.
Those affluent clients that remain with commission-based advisors are being actively prospected by fee-based advisors that are more than happy to show an investor what he or she is paying in so-called “hidden” trailer fees.
“We have some very happy high-net-worth clients that are paying between 0.5% and 1% flat fee on equities, and are more than satisfied with that, because when I presented what they were paying in hidden fees on [advisor-class] mutual funds, we were literally saving them tens of thousands of dollars,” says Stephen Verbeek, who is a wealth advisor alongside his father, at The Verbeek Wealth Management Group in Hamilton Ontario, which is affiliated with ScotiaMcLeod.
The Verbeek Wealth Management Group transitioned to a fee-based platform when Stephen joined the firm after finishing university. The move was initially driven by a combination of wanting to reduce the amount their clients paid in commissions and to find a way to include exchange traded funds (ETFs) in their client portfolios.
“We always discounted heavily because many of my father’s clients we’re considered friends and family, and we really couldn’t justify some of these fees. If you look at trades under $25,000, you’re looking at a trading commission well above the 2% range,” Verbeek says. “Or just to buy and sell something, like a preferred share that yields 4%, you’re losing an entire year’s worth of dividends by the time you buy and sell that thing.”
Verbeek says by charging an up-front 1% fee instead, their practice still earns a lucrative income stream — more than covering the trading commissions they incur to run their portfolios — but more importantly, from the clients perspective, it aligns the advisor’s interests with their own.
“It’s a bit of a strange pitch, but I do joke with some of our prospects that I want them to being paying twice as much in fees, because in order to do that I need to make your account double,” Verbeek says. “The client learns that our interests are aligned financially, there is a little bit of greed in there to be sure, but I haven’t had a single negative response to that.”
Guy Lalonde, an investment advisor and portfolio manager with National Bank Financial in Montreal, says once clients start seeing that fee on their client statements, the advisor is expected to deliver results.
“I know that’s an argument the mutual fund industry has been urging advisors to make a lot recently in Canada, as well as the U.S., which is clients do get service beyond investment advice for the trailer fees you pay. Our clients do as well. We offer them comprehensive financial planning, and guide them through insurance and succession planning, in addition to working with the accountant on the yearly tax returns,” Lalonde says.
Lalonde concedes it can be a difficult argument to make with prospects, many of who didn’t realize they were paying fees for advice on their mutual funds. Lalonde says there is an education gap that exists and many clients don’t have any conception of what they pay their advisor. Unfortunately, it can cheapen how clients value the planning work advisors do on their behalf.
Lalonde transitioned his business to a fee-based platform four years ago and says it’s been an uphill battle educating prospects on the fees they already paid for financial advice.
“The challenge with the fees being right there for the client to see every month, it’s something both you and the client have to get used to. The client has to accept the fact they are going to see the fee every month — even if they still paying half of what they would with other advisors. The price you pay for those savings is seeing the fees every month, it’s not always pleasant to see,” he says.
Being fee-based has allowed his practice to move aggressively in competing for high-net-worth clients, who are predisposed to paying fees for top-level professional advice. Competing on price can be an effective way to earn business, when all of the other levels of servicing are relatively equal.
High-net-worth clients have the economy of scale to allow a fee-based advisor to lower their fee. The amount of time servicing a $1 million client and a $3 million client isn’t always that different, but the $3 million client will generate three times the level of fees. A fee-based advisor can slide their fee based on the asset size and time it will take to service the account.
“For us, pricing is actually a competitive advantage. We can have lower fees than the competition and we can control the fees we charge the client. So if we’re in a situation where there are five different private banks vying for the same client with us, we can always low-ball everyone and charge 30 basis points if we want. We’ll make money on that client and it will usually close the deal,” Lalonde says. “Unlike mutual funds, the fees in taxable accounts are deductible off their investment income, so it’s an advantage for the client again. These are mainly high tax bracket clients, so the advantage is even more pronounced.”
Both Lalonde and Verbeek say their referral base from high-net-worth clients is rapidly increasing, particularly in the last year, where wealthier investors became more fee conscious in the wake of the global financial crisis.
More importantly, Lalonde points out that his business is well positioned for what he expects will be a transition to fee-based models by advisors concerned about the stigma associated with trailer-commission businesses.
“If you look at the U.K., Australia and the States, the playing field is changing and it’s going to become much more demanding for an advisor to explain his or her income, where it’s coming from why they are selling or recommending the products they do,” he says. “We’re in a position right now, where we don’t fear that; we’re actually looking forward to the environment changing because we’re ready for it.”
Mark Noble is a former financial services journalist who now works in communications for Horizons Exchange Traded Funds Inc, but from time to time still writes independent articles.
The article was written by Mr. Noble, independent of his role with Horizons Exchange Traded Funds Inc. Any views expressed are those of the author or those interviewed in the article. These views do not reflect or represent the views of Horizons Exchange Traded Funds Inc. or any of its related companies.