Advisors: Report fails to consider value of advice

Advisors: Report fails to consider value of advice

Advisors: Report fails to consider value of advice Yesterday’s WP article questioning the findings of the CCPAs mutual fund report left many front-line advisors extremely frustrated and none too pleased. Fees, it seems, are only one part of the service equation.

The biggest problem with the CCPAs take on mutual fund fees according to those commenting on our site isn’t necessarily that fees are high or low but that it fails to take into consideration the value of advice provided by financial advisors.

Sure, it points to an average MER for Canadian equity funds of 2.1%, but nowhere does it say the product costs “X” and the advice costs “Y”. If one assumes that the average trailer fee for Canadian equity funds is 1%, which we can consider the advice component of the fund or Y, then the product cost would be 1.1% or X.

One particular comment that sticks out amongst the many is from Bea (no last name) who states, “Was it Churchill who said there are ‘lies, damn lies, and statistics’?”

She follows up this harsh statement with an explanation:

“That's unfair, of course, and I have a great respect for the intentions of the CCPA author. What is true, however, is that most people have very strong views, but before expressing them it would be better to try to understand the whole story.”

“That part of management fees going to the dealer and advisor provide for the basic infrastructure to keep the business in business for when you need them (including investor protection insurance, regulatory costs, telecommunications, etc.) and the other part pays for a range of services that it can be a lot more expensive to get from a lawyer or accountant or tax professional, all on top of selecting investments.”

Essentially, Bea’s stating that even if the client is paying 2.1% for their mutual funds, it includes both X and Y components. Sure, the client might not realize this since the Y component is embedded, but any advisor worth his or her salt is already disclosing this upfront as part of the client experience. For those that aren’t, CRM2 will ensure that they do.

Which brings us back to value for service and what financial advice is actually worth.

WP asked B.C.-based advisor Tim Affolter about this; he was more than happy to give us his opinion. It helps that his practice is in the midst of converting from a business model built on embedded compensation to one that’s fee-based providing an excellent case study.

The Reader’s Digest version of Affolter’s story is that he’s wanted to move to a more transparent business model for several years; CRM2 helped him take the leap of faith. While projecting the move would cost him clients, the results so far suggest revenues have actually increased by 20% year-over-year. It turns out that clients are actually willing to pay more on a fee-for-service basis.

So, if Affolter’s example is any indication, the sticker shock from CRM2 might not be an advisor’s biggest nightmare after all.
“My hope is that the transparency being mandated by CRM2 will also bring with it an unbundling of the recipients of the fees and what that party brings to the client,” says Affolter.

“The breakout of fees will allow us to highlight how much goes to the investment manager, the fund manufacturer, the portfolio manager, the dealer and, finally, the advisor. Each layer provides a service for the client: security selection, product innovation, tax efficiency, reporting, compliance oversight, IPS process and asset allocation, rebalancing, and client communication/handholding. This is all part of what every Investment Advisor delivers, north or south of the US border.”
In other words it’s all about value for service.  
4 Comments
  • Doug 2015-02-27 12:37:56 PM
    Following the fee vs imbedded saga and from what reps and head offices are using to promote the move is that moving to a fee platform will increase head office's and a reps income. Am I missing something but who is paying for that increased income? And that benefits who?
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  • Tim Affolter 2015-02-27 1:44:56 PM
    You stopped short of my final comments, Will, which indicated that many financial advisors deliver much more than what an Investment Advisor delivers. I do believe that the cost of using an Investment Advisor will diverge (and probably be squeezed lower) by CRM2. However, the value delivered by a Financial Planner, for an extra cost, of course, will be much more evident as those costs and services become transparent.
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  • Will Ashworth 2015-02-27 2:14:09 PM
    Hey Tim,

    I was constrained by space. But you're so right.

    Transparency trumps everything else.
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