Perhaps in light of the recent financial turmoil, more people around the world are waking up to the fact that many financial advisors are salespeople since many are paid based on commissions. This leads to a structural bias in the system that not all can rise above. Different products pay different amounts of commissions and a loose rule of thumb is that the riskier the investment, the juicier the commission.
UK To Ban Commissions to Financial Advisors
Earlier this year in June, it was reported that the Financial Services Authority (FSA) in the United Kingdom had decided that commissions to financial advisors would be flat out banned starting in 2012.
The FSA has published a consultation paper on the Retail Distribution Review (RDR), which as its name indicates, reviews the retail distribution of financial products and services. The proposals for change are listed here and you can download the Retail Distribution Review paper by clicking here.
This has been all the buzz lately when chatting to people in the industry because now that a precedent has been set, will other countries follow?
Yep.
Australian CFPs May Not Be Allowed To Accept Trailing Commissions
I read an article by Mark Noble yesterday titled, Australian CFPs Forced To Abandon Trailers, in which he explains that members of the association which is responsible for giving out the Certified Financial Planner designation (CFP) in Australia will no longer be allowed to collect trailing commissions from product providers if they wish to maintain their CFP designation.
It is the norm for Registered Investment Advisors in the US to compensated on a fee basis not on commissions. In a way, RIA system in the US is one step ahead of everyone else and is the fiduciary model that other countries or systems will follow. Like John Bogle, I believe strongly in a fiduciary system.
Removing the trailers is a great idea. The last three financial planners I’ve interviewed all proposed portfolios made up of mutual funds that significantly lagged their indexes, had very high expense ratios, and paid a fat trailer to them. Without exception, when I’ve suggested just buying simpler index funds/ETFs they have come out against them. In one case, when I pointed out a different version of a mutual fund paying a lower management fee (and smaller trailer), they objected. Needless to say, none of them are getting a cut of my money.
We don’t want a “cut” of your $1000 portfolio.
I am surprised you’re ok with paying a mortgage broker a trailing fee when you get a mortgage. Were you even aware that he/she is getting paid a trailing fee on your mortgage or were you too busy writing down all the buzz words from BNN that may or may not pertain to your $1000 portfolio?
I bet you get your expert advice from your local Bank Branch where your “advisor” changes every quarter based on which high school CO-OP student is available.
The only thing to keep in mind with advisor compensation – in addition to what has been mentioned – is that advisors can offer valuable advice beyond mutual funds in tax, estate and insurance planning.
Also, most of your portfolio’s performance may indeed come from strong asset allocation as opposed to the performance of the indvidual underlying funds.
Insurance and investment products are how many get paid. The difficulty is differentiating good planners from sales people.
If you can’t monitor all of this yourself – you might find paying an advisor worth your while. Trailer is one way to do this. It’s impressive what a well designed financial plan can do. Emphasis being on “good”.
Preet- here is my question- do you think advisors should move to a billable hour model and if they buy products on behalf of clients, they charge them as disbursements with no mark-ups?
The issue with that model is that it flies in the face of the “everything is free” ethos of our society so push back would be great.
The UK proposals are also in consultation stage. It will be interesting to see how watered down they are when approved. If the economy starts to turn and the consultation process drags on into a job recovery, I am not sure they will push as hard.
Have a good weekend.
@Thicken My Wallet – I don’t know what model would “work” best. Theory and practice are of course two different things most of the time. I agree that if we have a great recovery we will see more lobbying against the change, but for now no one is willing to voice their disagreement too much as they don’t really have a leg to stand on.
I could see a flat rate, or hourly accounting for financial planning. I could see a separate model for investment execution and monitoring. Right now its too bundled (on the whole).
Anyone paid commissions or referral fees = salesperson. It’s not hard to differentiate
Hiding fees and charges should be a crime. Then people will understand the real price of “free” advice (usually multiple times a fee-only planner’s rate).
If people can’t count on the government to stand behind social security, or companies to stand behind their pensions, the least they should get is proper regulatory oversight of the financial industry. Commissions need to be banned.
How about proper regulatory oversight on the amount of “non-essential” government employees? Less public service would lead to less taxes because we would no longer be responsible for paying sally the coffee getter or mark the seminar room booker’s wages.
I am a “Qualified” Financial Planner with a CLU and CHFC Designation (which took me 11 years of 1-2 three month College level courses a year for a total of 16) and a long term member of Advocis (The Financial Advisors Association of Canada) which is a Volunteer organizationfor Financial Advisors and Planners. Advocis has a specific Code of Ethics that “puts the interests of the client FIRST”.
Now, I would say that the MAJORITY of our members do put client interests first. There will always be a few “bad apples”, but that would include every business and it's employees, from Financial Plannering, to Contractors, CAW workers on the production line to the very government that make the laws of this land. So, lets not jump all over the “Financial Planner as being unique to this situation. Most of us do work in the best interest of the client! “Trailer Fees/Commisions” are provided to allow ongoing servicing of a Clients Total Portfolio”, whether investments, insurance or advice. These “Trailers” are not as much as one is led to believe. For most Advisors/Planners, their average client would have several Insurance plans with premiums of $1,000 per year and $50,000 of invested assets(including GICs). The Trailers on this would be in the range of $$200-$300 a year. Most do not have more than $5 million in total assets and $350,000 in premiums, which translates into about $40,000 a year. Initail Product sales would be ontop of this.
Most of us are independant business owners working, employing, paying taxes and financially supporting causes in some sort of geographical area. Most of us could only dream of having large milti-million dollar investment client accounts. Most of the “Financial Planners” assist clients with much more than INVESTMENTS such as various types of Insurance, Tax/ Retirement/ Education/Debt/Estate Planning. All this adds up to huge overheads. In addition, “Continuing Education' is Manditory, with requirements of 30 hours of courses per year at our time and expense. Living and working in small towns means having to travel to cities to obtain the hours. In my case, to get my 30 hours per year could cost from $1,000 to $3,500 and from 50 hours to more than 75 hours of my time depending on where I have to travel to get them. You should also know that the number of Financial Planners in Canada is decreasing and the average age is in their mid 50s. Younger people are not getting into this profession because of the failure rate (huge up front and ongoing expenses, very long hours, much personal time lost doing Education, and the “being Self Employed” expenses.
So the question I would like to offer, from going this round about way, is who will be able to afford the hourly rates. If you go to a “Qualified” Financial Planner, what would be the cost? I would submit, like any other profession, like Chartered Accountants, Lawyers, and Doctors. Some may laugh at this comparison, but, a good Financial planner can save thousands of jobs by making sure business owners are properly Life/Health/Disbility/Critical Illness insured so that it something happens to them the companies can the company going and all its employees working. A good Financial Advisor can make sure a Family cottage in “Cottage Country” isn't seized or sold to pay income tax owing on death of one or more owners. These are just a few points a “Qualified” Financial Planner must consider and have the knowledge for. Most Canadians do not realize the complexity our lives and lifestyles can have. With all this, comes a price for the use of a “Qualified” Financail Planner.
So, what fee or hourly rate would ALL Canadians be looking at. Before I present what I would consider reasonable expectations one must consider what this cost must cover, in addition to what I have presented above. First and foremost there is the Planners Legal Liablity, now called the Planners Fidutiary Obligation. This is where the planner being Licensed to provide various FINANCIAL SOLUTIONS (products) to clients and fails to offer them to all clients. For example, client a comes in and invests $30,000 into an RRSP. The client dies, is disabled or comes down with a bad illness a while later and the Planner is sued because the client wasn't offered Life/Health/Disability/Critical Illness Insurance. Yes, Canada is becoming Americanized…… sue first, ask questions later. So, it is not just a simple matter of signing some paperwork and it's done. There is much behind the scenes work done.
I suggest that the Hourly Rate would be tied to what the Planner or Advisor is worth and what is being offered. If it is advice and some sort of “Product Profit Margin” is retained by advisorwhen a product(s) is purchased, then the rate would be somewhat lower. This might range from $50-$100 per hour, with a 1 hour minimum charge. If just advice with no product purchase for say Estate Planning, then it would either be a set fee and or an hourly charge and that would vary depending on the complexity of the case. This might have a $1000 fee + $100-$200 per hour after 10 hours of work. For just the sale of a product, there would again be a charge, which would range from $50- $200. Then, is there ongoing work that would be required by client. This could be a negotiated flat fee depending on commitable hours and resources. This could range from just a few hundred dollars to thousnads of dollars a year.
Here is the problem with Fees and “Billable Hours”. How could the average Canadian afford THE PROPER ADVICE. The little guy comes in to invest 10% of his income, or $3000, into an RRSP. He just tells the Financial Advisor ( in this case, just being a sales person with no advice), the bill to the client might cost between ($100 and $200) depending on the commiteed resources the advisor needs to apply to processing the product(s) for the client. No onging service is provided, without and additional charge of $200 minmum per year = $300 – $400. Compare that to now, with zero out of pocket, but it may cost 1- 2 % less rate of return = $120-$175 (and $50-$100 less in premiums if Insurance purchased). with advice, product(s) and ongoing service. And, for investments only, the fee for product and ongoing service would vary little for a $3,000 acct. vs a $100,000 account. The average Canadian would greatly suffer with a Fee and Hourly Rate system over how it is today. These are the people who need their help in so many ways, yet are the least capable of paying the costs. These are the MAJORITY of Canadians, and in my books, Majority still rules!!!!!!
Thanks you for your time.
I agree. going fee based would be great for us “Real” advisors because it would clean shop with all the people who don’t belong in our business (ALL Primerica and World Financial “advisors”). Paying someone to tell me to cash in my RRSP, incur a LARGE loss to tax so I can pay off my mortgage, which is good debt, does not sound apealing.
Let’s clean shop Canada!