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Wealth Professional | 11 Feb 2015, 10:16 AM Agree 0
Recent discussions on the WP website revolving around the pros and cons of embedded compensation have gotten quite heated. A British Columbia advisor presents an interesting hypothesis.
  • Mark | 11 Feb 2015, 11:52 AM Agree 0
    As usual, we throw out the baby with the bathwater instead of examining and getting rid of the sharks swimming in the water. How about offering the consumer choices, disclosing all fees including the taxes charged by the government and actually enforcing rules against "rogue" advisors.
  • Frank Gerry | 11 Feb 2015, 11:53 AM Agree 0
    I came from a retail enviroment where if you were not paid you sent the customer to a collection agency. In a fee based envrioment what do you do in a bad year where the client refuses to pay because you lost them money?? Send them to collection?? Also what do you do with the 'small' investor who only has $50.00/ month to put into an account? You know the ones this idea is supposed to protect! How do you bill them for a normail service fee? These smaller investors are the people who will be without advice and lose out in the end
  • Mark Matsumoto | 11 Feb 2015, 12:06 PM Agree 0
    I give the directors of the regulators an F-.
    In my opinion, they have lost sight of their purpose. The banks are the big beneficiaries of more regulation which shouldn't be the objective of regulation.
    Bank's "commissions" are so far embedded that they are part of the MER's and don't show as commissions. Their business model will be undisturbed.

    Compliance costs have made average clients non-profitable. Therefore the average client has already lost access to independent advice and these additional laws will make access to advice even more difficult or much more expensive for them.
    Starting in the business will be even more difficult, so there will be a bigger shortage of independent advisors as the already old workforce of advisors get out of the business.

    I think that regulators have lost sight of why they are here and are causing real, significant damages to the people who they are supposed to be helping. Protecting average people from financial advisors by eliminating the current and future advisors isn't really helping anyone other than the banks who will gain monopoly power over the average, general public.
  • Murray Schultz | 11 Feb 2015, 12:12 PM Agree 0
    At first clients like the idea that their financial adviser is not on commission. Then they realize that paying as they go is for the top 5%. In reality, clients (and regulators) should be concerned about how much the client is making by investing VS stashing their money in a bank GIC, rather than how much the group of people looking after their investments is splitting up. I'm highly skeptical and see that another good reason to diminish commission is that funds and fund managers are having trouble staying afloat in a low-return environment while also servicing massive compliance overhead. It would seem to be a classic opportunity to shed unwanted cost while pointing the finger at those too small to protect themselves. Some better-performing funds can still attract walk-in business but, for the rest, having no ability to attract business will most certainly backfire.
  • Howard Kitchen | 11 Feb 2015, 12:29 PM Agree 0
    Don't tell me there will be no abuse if there are changes. There are many people who switch lawyers because they pay a fee and never hear from them. Do they get their money's worth after paying 10's of thousands of dollars?
    There will be many elderly people with money that will be having needless appointments to charge fees. There will be many people left out in the cold because they will not pay a direct fee. The bottom line is if you give great service and advice you will do it regardless of how you get paid. For advisors that give poor service and advice now, they will continue to do so. They will still figure out a way to get paid and abuse any system. The great advisors will still get paid very well. It is the way business works. Good luck to the regulators trying to play with the system and find out there are as many problems as before. If not more!
  • Harley Lockhart CLU CHFC | 11 Feb 2015, 02:14 PM Agree 0
    A brief clarification on my opinions in this article: In a vacuum of evidence in support of a ban on investment commissions, the only alternative is to examine the known facts. From the facts, I have questions about what unknowns lurk behind the move to ban commissions. After all, transparency appears to be a key requirement for investment clients. Is it not equally important for regulation?
    1. Fact--commissions have been banned on investment products in several international jurisdictions. What pressure does this generate for Canadian regulators to follow suit?
    2. Fact--the major force behind a similar move in Canada is the OSC, the largest and arguably the most powerful regulator we have. Who or what is driving the OSC?
    3. Fact--Howard Wetston is the Chair AND CEO of the OSC contrary to common Canadian corporate governance model of separation of the two roles. To whom is he accountable? Is he the driving force behind the position of OSC? Is he conflicted between the potential to leave a legacy and the best interest of Canadian investors? (Note of correction: The article presents this question as my unsupported personal suspicion.)
    4. Fact--Mr. Wetston is Vice-Chair of the International Association of Security Regulators. Does the fact that the Chair is from Australia, where embedded commissions have been banned, influence Mr. Wetston's position?
    5. Fact--Mr. Wetston has been quoted in the press that Canadians with less than $250,000 investable assets have no need for advice. All they need is a good computer program to generate a well balanced portfolio. This in spite of actual industry studies that show Canadians across all economic strata achieve significantly better results with advice than without. Does Mr. Wetston understand the process between advisor and client?
    6. Fact--Mr. Wetston has also been quoted in the press to the effect that all advisors are crooks. The only reason they're not all in jail is that they have not been caught yet. With this biased paradigm, is it wise that he exercise such unaccountable power in Canadian regulation?
    7. Fact--The CSA has invested significant resources to study this issue in Canada. Is their investment significant enough to outweigh the best choice for Canadian Investors? Are they forced to follow through with a ban to avoid embarrassment at wasting investor contributed funds?
    8. Fact--Cost of regulation has been skyrocketing compared to virtually every other cost of living in Canada. The OSC has given $1,000,000 to the lobby group FAIR which supports the banning of embedded commissions. Why would a regulator fund a partisan group to lobby them? Is this a justifiable use of investor contributed resources? Could those resources not be better used to search for actual evidence (until now missing) that commission based advisors provide less robust, more conflicted advice than advisors paid by fees?

    I am amazed that we live in a country where the Supreme Court has ruled Canadians competent to CHOOSE physician assisted death but Securities Regulators believe these very same Canadians are not competent to CHOOSE the method of compensation for their financial advisors. Let's stop this foolishness and refocus regulation on actually providing effective protection in the Canadian investment marketplace.

    Let's not lose sight of the potential negative impact of banning commissions on all (not just the upper economic strata) Canadians and their access to advice.

    The article notes that I am Past Chair of Advocis. The attitude, question and opinions in this article and comment are my own, and are not intended in any way to represent the position of the association. In fact we differ on several specific issues.
  • MBF | 11 Feb 2015, 06:57 PM Agree 0
    The over-zealous regulators may be well-meaning, but their meddling is hugely counter-productive. Full disclosure at all times, including fund fact sheets, are absolutely justified. But patronizing Cdn investors by pretending to know what's best for them, rather than letting free market dynamics and competition work, is pompous. If a consumer wants a car (s)he may consider Honda, Nissan or Toyota - or Acura, Infiniti or Lexus for the extra bucks. But no regulator cautions the buyer about the embedded compensation for manufacturer, distributor, sales reps, etc. Securities regulators: find something useful and valuable to do with your time, rather than turning the screws on independent financial planners working hard to deliver value to their clients. Fund facts? A sound requirement. Beating the drum about embedded comp, while seemingly not giving a damn about the 3.25% annual fee for a seg fund versus 2.25%for equivalent mutual fund? Nonsensical. Oh, and our clients are already irate about MFDA-imposed quarterly dealer statements, when billion-dollar mutual fund companies already provide sound semi-annuals, and 24/7 on-line access. Dumb ideas keep being implemented.
  • Laura Thompson | 11 Feb 2015, 10:57 PM Agree 0
    When clients don't know about what commission their advisor makes and learns about it second hand, this lowers the standard of ethics this profession should exude. One of the single largest contributors to this is what's known as the back end, or Deferred Sales Charge (DSC) commission structure. How about eliminating that, and maybe even the shorter 2-4yr low load commission structure? In that way if any commissions are charged they are all up front, no surprises down the road.
    I have a hard time understanding why other options other than banning commissions aren't presented, or at least attempted. As a financial planner in this business now for 16yrs we are now revamping our clients and who we will take on. Often we'd work probono for referrals and family members (our own and clients family) to get them set up and learning about compounding, budgeting, insurance coverage options and debt repayment strategies. Sorry, I just can't take on the small client as my fee is going to be out of their reach, and spending more time and energy to bill them and get paid isn't worth while. We are now looking at ways to increase the revenue from the smaller clients so we can lower the overall fee for the larger ones. It's a dollars and cents business decision, which at the centre of why I love what I do, shouldn't be put into this position. I don't feel good about it, but that's how we're evolving. For all small investors or students or the young...find an independent advisor who will take you on ASAP! The banks will take the rest of you on and find a way to make money, just don't expect much sound advice, esp when they are in a conflict to give you more and more debt to hit their high pressure sales targets!
  • Laura Thompson | 11 Feb 2015, 10:58 PM Agree 0
    When clients don't know about what commission their advisor makes and learns about it second hand, this lowers the standard of ethics this profession should exude. One of the single largest contributors to this is what's known as the back end, or Deferred Sales Charge (DSC) commission structure. How about eliminating that, and maybe even the shorter 2-4yr low load commission structure? In that way if any commissions are charged they are all up front, no surprises down the road.
    I have a hard time understanding why other options other than banning commissions aren't presented, or at least attempted. As a financial planner in this business now for 16yrs we are now revamping our clients and who we will take on. Often we'd work probono for referrals and family members (our own and clients family) to get them set up and learning about compounding, budgeting, insurance coverage options and debt repayment strategies. Sorry, I just can't take on the small client as my fee is going to be out of their reach, and spending more time and energy to bill them and get paid isn't worth while. We are now looking at ways to increase the revenue from the smaller clients so we can lower the overall fee for the larger ones. It's a dollars and cents business decision, which at the centre of why I love what I do, shouldn't be put into this position. I don't feel good about it, but that's how we're evolving. For all small investors or students or the young...find an independent advisor who will take you on ASAP! The banks will take the rest of you on and find a way to make money, just don't expect much sound advice, esp when they are in a conflict to give you more and more debt to hit their high pressure sales targets!
  • TLD | 12 Feb 2015, 10:21 AM Agree 0
    I find it fascinating and enlightening to hear the varied opinions expressed in this forum. Whether or not embedded commissions are eliminated it would appear that the advisor-client fee discussion will be front and center with the implementation of the CRM2 requirements which will be rolled out in July 2016. My question to you all is about the definition of "fee-based" advisory services. My understanding of most of the comments posted is that a fee based practice requires a flat fee charge for services rendered. I think the other option is to charge an asset based fee that is transparent and charged monthly or quarterly based on assets. This aligns the advisor compensation with the clients portfolio performance and in effect, depending on what products you choose to implement the portfolio strategy, can result in a lower "all-in" cost to the client and a higher asset based fee for the advisor. Over and above that you can charge a "flat-fee" for special services (ie. an in-depth financial plan). This is the model that the Registered Investment Adviser's use in the US and allows the advisor to move from assessing product suitability for the client to acting as a fiduciary. Clients do not want to cut cheques, I agree, and they do not want to feel that every time they need to engage their advisor that they will be sent a bill. They do value the advice they receive but they want to know how and why they are paying fees so they can make an informed choice. Truth is that clients with a mutual fund portfolio today are already receiving "fee-based" advisory services if an advisor is receiving a trailer on those funds. This just moves that fee to the forefront.
  • WealthAdviser | 12 Feb 2015, 12:50 PM Agree 0
    @TLD "Truth is that clients with a mutual fund portfolio today are already receiving "fee-based" advisory services if an advisor is receiving a trailer on those funds."

    True. A trailer is a AUM fee and is one and the same. As they are the same as fees, then why rename them "fees". Embedded and disclosed is no better (or worse) than unembedded and disclosed. Why spend hundreds of millions of dollars to rebrand the names? Who will in the end, pay for those costs? The consumer of course.

    @TLD Although I can charge a flat dollar amount fees (subject to a minimum >$1250) or alternatively, I can also charge a negotiated percentage AUM.

    @TLD. Investors can and will be able to distinguish between an embedded and disclosed commission and a discrete fee. They certainly will be able to make a fully informed decision in either model.

    The sensible thing is not to eliminate one of the two existing models so we can win some semantical argument and rename trailers to become fees. Asset based fees have been around for a long time and we tend to use them for our HNW clients. The currently used embedded and disclosed commission model is used for the average to smaller clients.

    I see lots of complaining but no solutions presented.

    CRM2 requirements are clear. Even though advisor remuneration has been already disclosed for decades, we'll have to disclose it again and again until the investor is clear that advisors do earn remuneration when I sell them a 0% commission front-end fund.

    Fees will of course, increase all advisors’ remuneration even if you start at 1% AUM and go down from there. Charging a flat 1% AUM on a bond fund is a great deal for me ( I am doing the same amount of work but I get paid 4 times as much) but not so great for the investor.

    Fees are and will be a disaster for the small investor. Certainly the marketplace will adjust, (because it has too), but there will be more damage to the investor than good. DSC funds are a dying bred as advisors are all waiving their front-end loads. Needless to say, I am not getting any thanks from the advisor bashers out there. DSC will die a death of neglect soon enough.

    My solution: cap trailers to 1% max. Rename trailers to “AUM fees”. Put a pie chart in Fund Facts with the breakdown of the MER. Keep the current embedded and disclosed model and keep the existing fee-based structure for scaleability. Save a billion Aussie dollars.
    In other words; Stand there. Don't do anything.
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