Do your clients know your value?

By Dan Bortolotti | July 23, 2013 | Last updated on July 23, 2013
2 min read

At a June 7 roundtable held by the Ontario Securities Commission, investor advocates took aim at embedded compensation on financial products. There’s a growing recognition that commissions create a conflict of interest; a charge many advisors refute.

Whatever side of that debate you’re on, it’s worth asking how you would address the issue if one of your clients brings it up at your next review. During the roundtable, one of the commissioners noted that industry reps were “ducking and weaving” when asked what exactly trailing commissions were paying for. If you react to your clients’ questions in the same way, it doesn’t bode well for your relationship.

So how would you make your value proposition? If you’re compensated by commissions and had to move to a transparent fee-based model, would your clients be willing to pay explicitly for your advice?

If you believe Advocis, which claims 11,000 members, most investors would not. In an op-ed in the Financial Post, the president and CEO argued that if commissions were banned and advisors were compelled to disclose their fees, financial advice would quickly become “inaccessible for the average Canadian.” The article invokes the recent ban on commissions in the U.K.: “One industry observer has stated that as much as 80% of U.K. consumers will no longer be able to access financial advice.”

An opportunity to make your case

But a survey conducted last fall by BestInvest, a U.K. wealth management firm, flies in the face of that claim. Only 12% of the 2,000-plus investors surveyed said they would “definitely” not use an advisor if they would have to pay an explicit fee, while another 20% were “less likely” to do so. Meanwhile, 15% said explicit fees would make them more likely to use an advisor, and more than a third said the compensation model would make no difference to them. There’s no reason to suspect the situation in Canada is any different.

The challenge for advisors, then, is being able to clearly explain their value. Charging 1% or more to simply offer access to products isn’t going to cut it, and those who promise market-beating performance will have a difficult time backing that up over any meaningful period. But advisors working with clients who are at or near retirement should have little trouble making the case. They should be providing tax planning, cash-flow management, performance reporting, risk management, estate planning and the like. Unfortunately, many advisors are not providing any of these services.

If Canada eventually does ban commissions on financial products, professional advisors should see it not as a threat but as an opportunity to demonstrate their worth.

Dan Bortolotti