Advisor addresses controversial fee practice

Advisor addresses controversial fee practice

Advisor addresses controversial fee practice Fee-based advisors are addressing the negative optics of a two-tiered fee structure where a low rate is applied to larger AUM clients and a higher, less favourable rate to others.

 “I think our (fee) structure is very fair and it’s really a simple formula,” said John DeGoey, a portfolio manager at Burgeonvest Bick Securities Ltd. “I charge 1.2 per cent on the (first) $125,000 and 0.8 per cent for amounts above that. If it was $500,000, it (would make for an effective rate of ) 1.1 per cent and at $1-million, it’d be 0.95 per cent. It’s all based on scalability so I don’t think it’s unfair at all.”

DeGoey’s comments are part of the ongoing debate about whether fee-based compensation should wholly replace embedded commission and if it would penalize some clients. His type of formula, not unlike that of other veterans of the fee-based model, has some advisors concerned it would reward the wealthiest and force more-vulnerable investors – in terms of retirement savings – to pay more.

DeGoey argues his calculations based on AUM are progressive. Ironically, they were, in fact, highlighted in a recent Globe and Mail article weighing the pros and cons of embedded commissions.

The battle lines between supporters of that more-pervasive formula and those on the fee-based side are starting to form.

De Goey is in the latter camp, adding that he discloses the formula to his clients and they are well aware of what they’re paying in fees. That hasn’t historically been the case with those batting for the other team, he said, pointing to commission-based advisors, or salespeople.

“You hear it all the time,” he told WealthProfessional.ca. “Some clients haven’t heard from their advisors in years and have no idea what they’re paying in commissions. 
 
2 Comments
  • Harley Lockhart CLU CHFC 2015-04-13 12:37:53 PM
    1. Will not transparency of fees, while an issue of the past, be resolved by CRM2?
    2. If clients have not heard from their advisors in years, the advisors are breaching an existing MFDA regulation. Why are the current rules being enforced? If existing rules are not enforced, what is the point of making more?
    3. Perhaps there should be a study to determine which rules are not (or cannot) be enforced and eliminate them, freeing regulators and compliance to focus on those rules that are beneficial.
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  • Wealth Advisor 2015-04-15 10:03:02 AM
    The attraction of fee-based accounts for HNW investors (high net worth) is their scalability.

    No surprise that larger accounts pay proportionally less. It has always been so.

    The elephant- in- the- room question is this: What about the sub $125,000 investor?

    Scalability does not work for a $100/mo PAC either.

    Therefore fee-based accounts can't work for small investors -they are just not eligible to have a fee-based account.

    For the vast majority of commission based advisors, we tend to use fee-based accounts for our HNW investors and use the traditional commission based structures for small investors. You use the appropriate type of account -appropriately.

    If the CSA directive comes to pass and commissions are eliminated, we move from a two model system to a one model fee-based system so all commission based advisors become essentially, investment counsellors (without the CFA).

    That's a lot of competition for the HNW space and the small investor will have to find their own investment advice elsewhere.

    My view is that small investors eventually become large investors. Ignore the bottom 80% at your peril.
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