We are getting a steady stream of messages fuelling the fee debate, as readers express their opinion on fee transparency, as discussed in our “Prepare for transparency” column posted yesterday (Read it here).
Amid the discussion over fee transparency, Andre St. Arnault, an advisor from B.C., wonders if it is at all possible for advisors to build their mutual fund books from scratch on a flat fee-for-service financial planning model. He asserts that “most, if not all, advisors in this country built their books on the backs of a fair and transparent compensation methods of the DSC, FE and Low Load options, mostly the DSC, as we all know.”
The 16-year industry veteran insists that good advisors are only paid once by clients when they invest in long-term investments on the DSC basis. He says a long-term relationship justifies the $50,000 DSC on a $1,000,000 purchase, as discussed in the prior column.
“If a client is 55 and decides to transfer his pension assets out to a locked-in RSP or LIRA, and the life expectancy is 90, then this is potentially a 35-year period where you will be working with this client and helping them to have these investments work for them now and until the end of their life.”
He points out that when $50,000 is divided by 35 years of service, the annual compensation, before trailers, amounts to just $1,428 — and that’s before the dealer takes its bite. Assuming the average split is 80/20, the amount advisor receives over the life of that relationship is whittled down to $95 per month, which is neither excessive nor unjustifiable.
Some advisors follow the practice of committing in writing to clients about their fee structures. “We tell our client’s up-front that we need to receive income or commission initially to advise on their accounts over time,” says Arnault.
“We commit to our clients in writing that each year the 10% free and matured units will be moved by us at no cost to the same fund at 0% front-end load, and that once assets are in front-load funds, if they are ever moved to a new fund they will be switched or moved to that fund at 0% front-end load in the future.”
A fee for service model, which charges on an hourly basis, limits the client-advisor interaction, depriving clients of learning opportunities and professional reviews of their plans, the argument goes. Not having to watch the clock affords clients plenty of time and opportunity for personal reviews, portfolio reviews, financial planning activities, and clients appreciate that, says another detractor of fee for service.
The sudden media attention to the issues of transparency, disclosure and compliance is due to investment firms and their compensation arrangements rather than complaints from the public, as it is often claimed, says Norbert Collette, an advisor from Winnipeg.
“I have very seldom been asked by a client as to what my compensation is before they do business with me and if that would have such a bearing on the advice I provide,” he says.
His message to advisors: take care of your clients’ needs, and they will take care of yours.
“We get paid very well to manage people and doing a great job for them is what our industry needs to strive for,” he says. “Let’s get rid of the bad apples that give the industry a bad name so the remainder of advisors can be of greater value to their clients.”
What do you think? Have your say in the Advisor.ca Forum.
(08/26/10)