DSC, FE, percentage of assets, trading commissions, and however else advisors might charge for providing advice – the only thing that really matters is total cost, suggest industry vets.
“Most of it [trailing commission with clients at 0 per cent front-end] is 1 per cent,” says Whitby advisor Mark Matsumoto. “Right now when I generate a dollar in revenue, 15 cents goes to my dealer, five cents goes to one branch manager, two-and-a-half cents goes to another and I get 77.5 cents.”
The breakdown suggests that if Matsumoto invests $10,000 for a client into an equity mutual fund charging an annual MER of 2.75 percent. The client pays $275 of which Matsumoto makes $77.50 or 28 per cent of the total with his dealer getting $22.50 or 8 per cent of the total with the fund company pulling in the remaining $175 or 64 per cent of the overall fees paid by the client.
In this example it’s not difficult to see that Matsumoto’s not getting paid nearly as much as the fund company while arguably providing more service to the client in question. In this context it’s not hard to see why many are pushing for lower fund fees.
BC advisor Tim Affolter believes the real issue isn’t so much total cost but rather the provision of quality advice at a fair price that pays the advisor for his or her time but respects the client’s ability to choose.
"How do we, as an industry, provide quality, affordable financial advice, which is desperately needed by all Canadians, young and old, rich and poor,” asks Affolter, “while ensuring professional objectivity, accountable client engagement, and transparent, fair, sustainable compensation?"
Affolter provides clients with a hybrid fee structure that offers three levels of service starting at a flat fee of $1,500 for a very basic financial plan all the way up to $5,000 annually for a very complicated plan that includes at least two face-to-face meetings per year as well as ongoing monthly communication along with nice extras like money coaching for their kids. In addition to the financial planning, he charges a flat fee of 0.30% for third-party asset management charge.
“You have to add up all the pieces. You deal with three or four different advisors, you deal with a tax preparer, you deal with a notary public, you deal with an investment advisor, you deal with a banker,” comments Affolter. “So, when you go for comprehensive financial advice there actually is a difference in the list of areas on which you’re receiving advice and in order to have that all integrated, you have to have somebody that’s at least coordinating that advice across the various disciplines.”
“And if you don’t have that you end up with a subpar result.”
The only thing that really matters? It’s not total cost but rather quality advice done right. Sometimes quality costs more than 2 per cent of assets.