Sticker shock and full disclosure

Sticker shock and full disclosure

Sticker shock and full disclosure by Mike Gentile, Guest Contributor

It always amazes me that those who suggest or imply that compensation in the form of trailing commissions should be banned and the MER’s should be significantly reduced enjoy above average incomes from the public purse or their employment in the private sector, i.e., legal fees etc.
I keep reading about an individual that I understand is a lawyer and the executive director of an organization that wants to ban trailers.
I would be interested on his take from the perspective of the fees he would charge. In the event he lost the case, would they be any different than if he won? I’m guessing “no” would be the answer.
I would have to believe that the reply would be “it costs a great deal win or lose to employ staff, do the research and administration and pay the rent as well as ongoing annual licensing fees etc. “
Why then is it any different for licensed financial advisors in the financial services industry?
Trailers cover the ongoing costs of administration, client reporting and service. Contrary to what some people believe the associated costs for these components, along with licensing fees, bonding, rent and payroll items do not go away. I suppose if you were to take this a little further, you might suggest that the communication and power infrastructure that has been in place for decades is now paid for and therefore should be received for free.
Think again.
Yes it would be nice if I could keep 100% of the trailers. However, the reality is that a significant amount goes to operating a very complex business. Of the portion I get to keep, a big part of that goes to my silent partner otherwise known as Revenue Canada.
I speak from experience when I say that industry administration and compliance costs continue to increase with no relief in sight. For anybody to suggest otherwise, is ludicrous.
Do you remember a time when GST and HST did not exist?
Do you actually believe that the increased costs associated with CRM2 and the additional burden of layer upon layer of regulatory authorities will have no impact on costs?
A recent quote in an article I read highlights the “The irrefutable evidence is in: Trailing commissions harm Canadian investors. It’s time for regulators to act.”
Based on that quote I would suggest that redundant regulatory authorities and wasted tax dollars is a much bigger problem. I think it’s fair to say that the intentions are good, but it’s the unintended consequences that we should be afraid of.
Imagine if you will, writing your own without the sage advice of an experienced lawyer or better still, writing your own prescription at your local pharmacy. There would likely be some unintended consequences.
I sincerely have to question how many of us would be prepared to embrace a do-it-yourself approach to investing or would be prepared to ante up $400-$500 per hour for advice in addition to $250 a year for data storage.
Most people would call that sticker shock after receiving the $1,000.00 invoice for a 2 hour meeting.
The blanket statement that an increase in trailers corresponds with a decrease in fund performance is questionable. Which funds? All funds? We [advisors] have no problem with full disclosure. We tell people how we get paid and what their options are. We also advise clients that we cannot time the market and that we will make every effort to match their investments to their objectives and their risk tolerance.
In essence, this means “don’t ask me to provide you with a Mercedes SL when what you really need is a pickup truck for your arborist business.”
In conclusion, there are no free lunches and that applies to those that provide advice as well as those who benefit from that advice.
Mike Gentile is a CFP who’s been in the financial services business since 1974. A graduate of McMaster University (background in Economic Geography), he served as past President of The Region of Waterloo Canadian Association of Insurance and Financial Advisors. Mike has authored over 60 magazine and newspaper articles on subjects ranging from investment vehicles to financial planning.
  • Murray Child 2016-01-06 11:28:58 AM
    You know there really is a simple solution to all the nonsense floating around from the regulators and our own advisory community.
    Simply establish maximum levels of trailers like 1% for equity funds 0.80% for balanced funds and 0.50% for fixed income. Add to this an engagement agreement that the client and advisor sign outlining the services to be provided. This should eliminate any bias that some fundcos try to project by offering ridiculous trailers of up to 1.5%. It is probably these companies, predominantly captive organizations, that Dr. Cummings is referring to.
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  • david 2016-01-06 12:02:50 PM
    Get real. You add no value to the client by selling mutual funds. I am a IA with over 30 years in the industry.

    What value are you doing for your clients. Nothing. You just sit back and recieve the trailors.

    I bet you even charge for a switch.

    Shame on you.
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  • Brad Jardine CFP, CLU, CHfC 2016-01-06 12:03:51 PM
    Mike, well-written and well said. With 30 years in the business now I've lost count how many times we've been able to save our clients many, many times our compensation. Simply factoring the myriad number of times we've advised on saving probate & legal fees, methods to finance significant purchases, twisting arms to save for a rainy day, education funding, retirement savings, debt reduction strategies, separation and divorce scenarios and costs..etc, etc. I think perhaps we're encroaching on other professionals protected fee territories and there's some underlying animosity. Nevertheless I feel very strongly that we earn our 1% (usually less) per year without question. When we factor in all costs and taxation we'll be fortunate to keep 25% of that figure. My clients will be getting our own CRM 2 document outlining the cost of doing business. If they're not happy with what they're paying they are certainly welcome to shop around or try it on their own. If our job was easy we wouldn't have one. Same for all qualified professionals.
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