Embedded compensation come under fire… again

Embedded compensation come under fire… again

Embedded compensation come under fire… again A WP article from February defending the embedded compensation fee structure so enraged a Toronto advisor he just had to have his viewpoints heard. Whether he’s right or wrong is open to debate but what isn’t is his passion for the subject.

Burgeonvest Bick Securities advisor John DeGoey feels our headline Embedded Compensation: Does it really need to go? was way over the top. 

“Things that are inappropriate and / or past their due date should be eliminated,” says DeGoey, “even though the world would obviously not end if the practice was not eliminated.”

Those who feel the current compensation structure shouldn’t go the way of the dodo bird feel that choice, whether it be embedded or fee-based, is the best way to serve the vast majority of Canadians.

But DeGoey is among those stridently opposed to the former.

“The total cost that is borne by the client is the cost of the product plus the cost of the advice,” he says. “and by unbundling the compensation it frees up advisors to recommend what are often times superior products that are cheaper passing those savings on to the client.”

Why aren’t more advisors recommending those products right now?

“Because they don’t pay any embedded compensation,” argues DeGoey. “So what’s happening is that we have products being recommended from a short list based on those that pay embedded compensation. If there other products that are as good or better and they may ultimately be cheaper, even after you throw the advice on, advisors will not use them if they are commission-based because they don’t want to give clients a bill.”

At the end of the day DeGoey believes eliminating embedded compensation allows for cost savings no matter the size of client by substituting higher-cost products with lower-cost ones.

“The product price could go down a full point. So, if advice costs go up 20 or 30 basis points [by eliminating embedded compensation] and product costs go down 100 basis points, the client is still 70 or 80 basis points ahead, net net.”

But possibly a more insidious problem when it comes to embedded compensation is the reality that many products exist with absolutely no option to opt out of this particular compensation structure.

“If you want to buy a mutual fund from Mackenzie through a discount broker like TD Waterhouse, you have to buy the A class paying a trailing commission for advice that is neither received nor requested.

“Shouldn’t you have the choice of buying the product with or without advice? Embedded compensation as it’s currently constituted compromises choice at discount brokerages.”
  • Bea 2015-03-10 11:12:08 AM
    Think baby and bathwater. For the small investor, the embedded commission is a cheap way to get advice and for portfolio management equal to what most wealthier investors get. And because it is embedded, it is less likely to be cut when cash gets a bit tight. Mr. De Gooey is a very bright man, but I suspect it is years since he has accepted "small clients". He is absolutely correct that there are better solutions for clients reaching higher thresholds of holdings. But expecting the low-end investor to get to the level of assets Mr. De Gooey would serve without the ease of commission-included diversified funds... Don't think so: ETFs are of course cheap, but do smaller investors have the attention or understanding to pick the right one and manage them effectively? It would be helpful if people - media, investor advocates, advisors - didn't talk down a product that has helped many people and can help them going forward without providing them with reliable, easy other options. Not so easy?
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  • Peter J Sintic 2015-03-10 11:22:30 AM
    Please refer me John De Gooey's clients - we can get them TD and Mackenzie Funds in F class, so investors don't have to experience John De Gooey double charging them.
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  • Arthur C Salzer 2015-03-10 12:56:16 PM
    John, thank you for the forthright insight into the industry. Canadian investors deserve transparency and a wide range of options!
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