Advisors brace for blow to embedded comp.

Advisors brace for blow to embedded comp.

Advisors brace for blow to embedded comp.

The latest report from the CSA on fund fees may have miffed embedded commission advisors, but the second one will likely have them up in arms.

“The Brondesbury study is just the tip of the iceberg,” says Burgeonvest Bick portfolio manager John DeGoey, a fee-based player. “Cumming [author of upcoming CSA report] will provide the smoking gun that embedded compensation advisors are biased beyond all reasonable doubt.”

The CSA’s first report published by the Brondesbury Group wasn’t well received by many advisors in the MFDA world especially those generating commission-based revenue. The major findings suggest three things: that funds that pay commissions underperform; distribution costs raise expenses and lower returns; and advisor recommendations are sometimes biased in favour of more compensation for the advisor.

Fee-based advisors such as DeGoey aren’t surprised by the findings. Others, however, think the regulators are missing a big part of this whole discussion, which revolves around costs and the expenses involved in operating an advisor business.

“I’m not so sure the regulators have been talking to the advisors,” Michael Gentile, president of Personalized Investment Planning told WP. “We have costs. Nobody is addressing those it seems. Nobody is saying, ‘Hey Mike, you run a business, you have rent, utility costs, staff payroll costs, research costs, licensing fees, you’ve got a ton of stuff that you have to expense.’”

DeGoey reminded WP that the executive summary details exactly what the research study is and is not intended to be.

“Judging by some of the online commentary [at WP], many people do not understand the distinction. …What on earth does ‘running a business’ have to do with the question at hand – either way?” says DeGoey. “The Cumming study (to report later this summer) is designed expressly to fill the gap because no one had actually looked into the question of how compensation may or may not skew advisor recommendations.”

7 Comments
  • Larry Hillmer 2015-06-18 10:50:25 AM
    My solution to investment-bias-based-on-trailer is not to ban embedded trailers but to have a trailer that has been agreed to between the adviser and the client. The same process as fee-based accounts except having the fee charged at the fund level. Series A 1.5%, Series B 1.25%, Series C 1.00% etc. With the current system, the only way to "charge" a 1.25% trailer with a small client is to show them funds that pay 1.25%.
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  • Michael Gentile 2015-06-18 12:26:48 PM
    If I understand this correctly "Cumming" has concluded that imbedded compensation is the overriding factor on investment selection NOT fund performance or managerial track record, needless to say his statement at best is incredibly broad and at worst totally inaccurate.

    The other comment
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  • Mike Gentile 2015-06-18 12:41:07 PM
    If I understand this correctly, "Cumming" has concluded that imbedded compensation is the overriding factor on investment selection NOT fund performance or managerial track record. Needless to say, his statement at best is incredibly broad and at worst, totally inaccurate.

    The other comment "what on earth does running a business have to do with the question at hand?" It has a lot to do with the question. Unless I miss my guess entirely, the object of this whole exercise is to eliminate any and all imbedded compensation on the assumption that all advisors are only interested in offering funds that pay the most income regardless of performance.

    In conclusion, the dictionary definition of "business" is "the practice of making ones living by engaging in commerce" or providing services in exchange for money.

    Please let me know when that changes.
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