There is a huge gulf between how advisors are paid and how investors think they are paid; indicating that advisors are not putting in enough effort in educating their clients about compensation.
“We recently teamed with Rogers Publishing to survey investors and advisors about how advisors are paid. The survey revealed some disconnects between how advisors are paid and how investors think they are paid,” said Atul Tiwari managing director of Vanguard Investments Canada. “For example, 83% of advisors surveyed said they were paid at least partly by commission, while only 32% of investors believed their advisor received a commission.
“In general, investors don’t understand how their advisor is paid, nor do they understand how fees affect performance.”
The study was conducted amid a global move toward greater investment-fee transparency, a movement that is accelerating the implementation of the Client Relationship Model (CRM) reforms in Canada. The new CRM regulations took effect in July and have a three-year phase-in period. They require advisors to disclose all charges that clients pay, including trailer fees. A recent Canadian Securities Administrators discussion paper has also highlighted the issue.
“What’s taking place in Canada is part of a global shift away from commission-based to fee-based investing. Regulations that took effect this year ushered in fee-based models of investment advice in the United Kingdom, the Netherlands and Australia,” said Tiwari. “Similar efforts are under way in Germany and Sweden. In the United States, where investors embrace advisors as total-wealth coaches, 59% of advisor compensation comes from asset-based fees, up from 56% in 2012.”
Behind the changes is the acknowledgment that too many investors don’t have a clear picture of how they pay their financial advisors and that transaction-based commissions may in some cases be perceived as conflicts of interest.
"The new regulations and ongoing discussions in Canada may mean it’s time for you to start talking with your clients about how you provide value as an advisor," said Tiwari.
As well as benefiting clients, Tiwari argues that a fee-based business benefits an advisor's bottom line.
“We’ve taken what we learned from the survey, what we’ve learned from other markets in which The Vanguard Group, operates such as the US, UK and Australia, and what we already knew about the benefits of fee-based advice,” Tiwari said.
The company's research has shown that advisors who increased their assets in fee-based accounts by 25% or more have seen revenue growth of 47% over three years, more than double the average growth rate of 21%. That is compared to a revenue growth of 19% for advisors.