The CSA’s been busy in 2015 examining the issue of fees and how embedded commissions skew advisor recommendations. The potential fallout from these discussions is the elimination of embedded commissions and with it the controversial DSC fund.
Surprisingly, a Toronto advisor who switched his clients to a fee-based model starting in 2008, has some real concerns for the welfare of advisors toting smaller books.
runs The McClelland Financial Group of Assante Capital Management Ltd. He recently spoke to WP about the painful process of moving his client base to a new fee structure. When the discussion turned to the topic of DSC funds and what could happen if they were completely eliminated McClelland was clearly worried for some of his peers.
“If you take a guy who manages $10 to $20 million, he has to stay DSC. He can’t go fee-based. If you’re managing $10 million, even if he was getting a trailer on that or went to fee-based at 1% or even higher, 1.2%, he’s making $120,000 less the firm cut, less his staff if he has any, his office space, his marketing. He’s left with $20 grand. Even at $20 million it would be tough to go to fee-based,” said McClelland. “I think you probably can’t go to fee-based until you’re north of $30 million.”
Opponents of DSC funds have made it perfectly clear there’s no place for them in today’s wealth management industry. But many of those opponents haven’t walked in the shoes of advisors managing these smaller books. Advisors like McClelland have at least made the transition and know that it is not without its challenges.
As in other parts of the world there will be consequences.
“One of two things has to happen: They either have to go through a lot of pain for a year or maybe their spouse works and brings in another income and so they can do that or they have to bring in a heck of a lot of money very quickly, another $10 to $20 million, which if they’ve only got $10 million to start their chances of bringing in another $10 to $20 million is zero,” said McClelland. “Anyone north of $100 million needs to make that transition but they need to understand that it’s painful.”
The problem for many advisors is they’re being told to move their books to a fee-based model when their books might not be positioned to do so. With a significant number of advisors under $30 million in AUM – most of the industry to be precise – it appears many are in for a big pay cut.
“Could you take a 50% pay cut for the next 12 months?” Probably not McClelland reasons.