The issue of advisor compensation has dominated the pages of Advisor’s Edge the last few months. We’ve looked at how much advisors get paid, and how they get paid. Discussion on the latter question has been fuelled by the CSA discussion paper on mutual fund fees, released last December. The regulators float the idea of following in the footsteps of Australia and the U.K.—an all-out ban on commissions. Ninety-nine comment letters poured in. Those opposed offer a number arguments. They included the following:

  • Embedded compensation gives smaller investors access to advice they wouldn’t be able to afford if fee-based advisors were their only choice. Banning embedded commissions would therefore leave many Canadians rudderless on the way to retirement.
  • CRM II and the Point of Sale initiative will probably address the concerns of those opposed to commissions, so the best thing to do is wait for it to have its effect instead of introducing more burdensome regulation.
  • Investors should have a range of choices, and commissionbased advice is one of them.
  • Polls show most people are happy with their advisors, so the paper is a solution in search of a problem. Those in favour of a ban argue:
  • Embedded compensation creates a conflict of interest because it induces advisors to recommend products based on commission rates rather than investor needs.
  • Third-party compensation makes advisors beholden to the manufacturers that pay them, rather than clients. › Many investors have no clue how much they pay for mutual funds, and are shocked when they learn of MERs of 2.5% or higher.
  • Industry advocates are stalling when they suggest waiting to see if CRM II addresses investor concerns.
  • The transparency issues CRM II would solve do not remove the conflicts of interest that result when advisors aren’t paid by the people they’re supposed to serve.
  • The excessively high cost of mutual funds in Canada has a cumulative, profoundly negative impact on investors’ longterm savings potential.
  • Most high-priced, actively managed funds don’t beat their benchmarks, adding salt to the wound for investors who pay for performance they can get elsewhere for a fraction of the cost.

The discussion paper elicited comment letters from more than just the industry. Ordinary investors came out in droves to voice their dissatisfaction, and confusion, with the status quo.

Excerpts from their letters provide insights into how your clients may perceive advisor compensation.

“I am glad to see that the OSC is finally considering banning these ridiculous trailer fees,” says Tiina Baumbach. “Why am I paying these exorbitant costs even if I’ve received no service at all from my advisor in the last year? Most investors aren’t even aware that they’re being g[o]uged for this money. […] The current situation is an absolute disgrace [and] constitutes a conflict of interest on the part of the advisor.”

Craig Montgomery, who describes himself as a 25-year mutual fund investor, praises the discussion paper for “outlin[ing] the truth about the relationships between fund providers, so-called advisors and investors.”

He says he “was never directly informed about any charges— upfront, deferred, MER, trailing commissions, etc. until after the purchase and generally found out about these fees inadvertently.

“I have received little service for what was paid,” he adds, “and I have come to realize that the advice I have received from advisors was in their interest and not mine.”

Ottawa resident Bill Graham isn’t much happier. In his view, advisors “are really salespeople” who don’t truly understand how markets work.

“I have just over $720,000 in mutual funds and my advisor earned about $7,200 in retainer fees for a few hours of work,” he says. “It is my money and this year I made 1.79% or $13,680. This hardly seems fair. The mutual fund company made more than I did since the average MER is 2.4%—they made about $17,800, [a]pproximately $4,000 more than me. So I’m looking at how to move my mutual funds into a self-directed investment account. Even if I just buy TSX index stocks I will do better.”

Annette MacDonald of Wasaga Beach submitted the most eyeopening letter. When she was in her thirties, she invested through her cousin, a “financial planner with one of the big companies.

“Because I knew and trusted her, I did not pay attention to, nor did I even understand that there were hidden fees. During the time she managed my investments I was mildly satisfied with the returns but at no time was there any disclosure of MER fees that I later found out were among the highest in the industry. These fees…eroded a significant portion of the returns.”

After the meltdown her cousin left the business, passing her file to another advisor. “Once again, there was no discussion or disclosure of fees or penalties,” MacDonald writes.

About six months later, the advisor suggested “the file be transferred to someone in their Owen Sound, [Ont.] office because they were closer geographically to me; in other words, once she made the up-front commission, she was no longer interested in providing the service.”

Then, “I was introduced to an ‘[i]nvestment advisor’ with another institution who said she could manage my portfolio even though my investments were in [the first firm’s] proprietary funds and could not be transferred…or ‘cashed in’ without incurring penalty fees.”

The advisor tried to get Mac- Donald to incur the penalties, which amounted to $12,000. She refused and “the advisor became disenchanted with providing any kind of service.”

A friend’s husband caught wind of the situation and suggested she write to the fund provider’s compliance officer, which she did.

MacDonald says the firm did a 90-day review of the financial planner’s files and determined there was no evidence of fee disclosure. Her statement concludes with the claim that the firm offered her an $8,000 credit on condition she sign an agreement not to discuss her experience with anyone.

If true, her ordeal is surely exceptional. But investor letters show her claims aren’t isolated, and could sway regulators.

Solve client complaints before they head to regulators

Clients and regulators are asking a lot of you. But they don’t always know what you do.

“Over the past decade, there has been an increasing muddying over the four pillars of the financial services industry,” Lawrence Geller, president of L.I. Geller Insurance Agencies, told the Advocis regulatory affairs symposium in October. There’s less distinction between banks, trust companies, insurers and securities dealers, as each pillar ventures into the others’ territory, he says.

“This has resulted in a great deal of confusion for consumers [and] their legal and accountancy advisors, as well as for regulators. There is no longer a level playing field where a consumer can expect the same type of regulation of everyone who sells them different types of product,” he adds. The trend in the industry is toward extreme compliance, adds Barry Papazian, partner at Papazian Heisey Myers.

“In the MFDA area, it’s getting very aggressive in terms of the review of complaints that are coming in,” he says.

He adds some regulators are now initiating reviews based not on complaints, but on the findings of other watchdogs. But standards keep changing, says Geller. And regulators tend to judge advisors’ past actions using today’s standards, he adds, instead of the rules in place at when the client purchased the product.

Standardization of regulation across financial sectors would be helpful, especially for advisors who hold multiple licences, says Ralph Cuervo-Lorens, litigation partner at Blaney McMurtry.

Many disputes stem from conflicts due to the advisor’s dual role as advisor and salesperson, he says. “It’s extremely difficult to manage the inherent tension of those two things,” he adds.

“I can look at a dispute and see where the advisor has lost sight of that distinction…and I can see the result in that, which is usually trouble, because someone will be suggesting that they did too much of one and not enough of the other,” he notes.

How to handle a complaint

Often, a client will take her initial complaint to her advisor, says Wade Baldwin, a Sun Life advisor at Baldwin and Associates in Calgary. Use this opportunity to work with your team to solve the problem before it escalates.

Examine the complaint yourself and determine whether you made a mistake, says Cuervo-Lorens.

“If you have screwed up, then by all means just say so,” he says. Apologizing doesn’t always mean that you’re liable for the mistake, he adds.

Communicating with the client after she advises you of a serious problem also helps diffuse the situation and hopefully prevents it from turning into a formal complaint, he says. “If you respond by clamming up…All that kind of stuff is just escalating it,” he says.

If you’ve looked back at your records and found you aren’t at fault, re-sending the email in which you outlined a client’s options and decisions could resolve the dispute, says Geller.

Ideally, you would have run through the key points of a meeting with a client before it ends, says Cuervo-Lorens. “That will catch the miscommunication that is often the source of these problems.”

Says Geller, “It’s amazing how quickly a complaint can turn into an apology to an agent when clients realize that they had an opportunity to see everything in advance and that they made an informed decision.”

If the client’s problem isn’t with you, but with the insurance provider or fund manager, then offer to help the client navigate the system, says Geller, even if your role may not formally include that responsibility. In the case of a formal complaint, the regulator will come to the investigation with a cookie-cutter approach, says Cuervo-Lorens. So ask to sit down with an investigator early, before they form an opinion of you or the complaint, to explain your process, he says.

“Oftentimes the investigator will appreciate that you’ve taken the time, because it makes their job easier,” he explains.