Embedded compensation: Does it really need to go?

Embedded compensation: Does it really need to go?

Embedded compensation: Does it really need to go? CRM2 implementation lays bare the dollars earned by advisors for providing financial advice. Yet, many fee-based advisors continue to advocate for the elimination of embedded compensation. So, why the big push?

On Wednesday WP speculated on the future of embedded compensation. Our take on the issue rankled B.C.-based advisor Harley Lockhart, a former chair of Advocis, and a big proponent of choice when it comes to fees.

Keenly aware about the issue of embedded compensation, Lockhart has several questions for those quick to bury a fee structure that’s worked reasonably well here in Canada.

Where’s the evidence that commission-based advisors give less robust or more biased advice than fee-based professionals?
This is supposed to be one of the issues that Douglas Cumming will address in his review of mutual fund company data. It’s unknown how the professor will parse this information in order to come to some conclusion but in Lockhart’s opinion, nothing to date has been released in terms of a study or analysis that conclusively proves one approach over the other.

On this point the jury’s still out.

Why are there NO licensing requirements for fee-based advisors while commission-based advisors are held to the fire?
The answer to this question is complicated by nomenclature.

Sheila Walkington, David Stewart and Kathy Waite are all advice-only advisors charging by the hour or project; they sell no products whatsoever. Some of them refer clients to portfolio managers and other investment professionals who handle the investment component of the overall financial plan – some don’t. Some receive fees for referring clients to those managers while others don’t believing to do so is a conflict of interest.

As Lockhart reminds us, none of these advisors are required to be licensed and left unchecked, are equally as harmful.

Why eliminate choice for the consumer?
As a matter of course Lockhart offers new clients the choice of being fee-based or commission-based, whichever they prefer.

“This issue is, most importantly, not about my business model, but it is about what is best for the consumer. Nevertheless, by way of disclosure, all my new clients are given the choice. We are working through our database to make the offer to existing clients. So far the CHOICE has been heavily weighted to commissions.”

Why do you think that is?

Because most people hate the idea of paying out of pocket for something if they don’t have to.

An example of what Lockhart’s talking about is the VAT tax. When you buy something in countries that use the VAT tax, the retail price paid includes the tax. You don’t pay anything on top of that. Embedded compensation works in much the same way.

The possibility of embedded compensation being eliminated won’t change Lockhart’s view that any system Canada uses to compensate advisors is based on what’s best for consumers.

“I’m not in favour of change for the sake of change. I’m certainly in favour of protecting the consumer. Nobody wins if the consumer loses.”