Abolish commissions for good, CFP argues

Commissions for financial advisers have been banned in the U.K. and Australia as of this year and De Goey would like them see them abolished here too.

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There are four new and important changes every Canadian with a financial adviser—or anyone thinking of hiring one—should know about.

Regulators officially ushered in the Client Relationship Model (CRM) earlier this spring making it mandatory for financial advisers to fully disclose all transaction details, commission and fee breakdowns as well as annualized rates of return. Until now, advisers were only required to provide book and market value updates for client portfolios. (MoneySense’s Dan Bortolotti and Preet Banerjee recently published a free, downloadable rate of return calculator for investors.)

CRM also mandates that advisers regularly evaluate whether their clients’ investing strategy and risk tolerance matches their goals and time horizon with additional check-ins at certain “trigger” events like steep, prolonged market drops.

“I don’t think it goes far enough but it’s a step in the right direction,” said John De Goey, a Certified Financial Planner (CFP) and author of The Professional Financial Planner book series.

Full CRM compliance will be phased in over two years.

“We’re taking a few baby steps when we should be taking a few giant steps,” he told MoneySense ahead of the third installment of his book series due out this fall.

In Canada, most advisers get paid by providers for each product they sell and many of these commissions are not evident to the client. Skeptics say the practice entices advisers to push products that offer the biggest payout as oppose to products that are a client’s best interest. Commission fees have been banned in the U.K. and Australia as of this year and De Goey would like them see them abolished here too.

“Now in those places, the business of giving advice becomes a true meritocracy where if advisers aren’t really adding value, they can’t get paid just for selling stuff,” he said.

“It’ll going a long way to rationalizing the industry, getting rid of some dead wood and turning the industry into more of a bona fide profession.”

De Goey is not alone in his views but he’s not in the majority either.

Critics argue banning commissions may actually lead to higher costs for investors.

Without commissions, planners will likely look for other ways to make money and that may lead to higher portfolio management, hourly and project fees. Small investors may also be shunned in favour of richer clients with bigger portfolios.

Greg Pollock, CFP, is the President and CEO of Advocis, the Financial Advisors Association of Canada.

He estimates roughly nine million Canadians are getting financial advice these days and the vast majority of that advice is paid for through commissions that are embedded in the cost of products.

“If we were to change that business model overnight, we would have a huge number of Canadians that would not be receiving the financial advice that they now need more than ever,” Pollock said. For the record, the no. 1 priority listed in Advocis code of conduct is the client’s best interest.

Still, more advisers are opting to go the fee-based route charging an all inclusive 1%-1.5% or by the hour/project. MoneySense provides a free listing of fee-only planners in Canada.

But even fee-only advisers charge some version of commissions, Pollock said. Charging a fee based on assets under management, is essentially a commission, he said, adding there’s room for a number of business models in the industry.

Whatever the compensation model, CRM aims to make it crystal clear to investors.

De Goey said the financial services industry in Canada has been deluding itself with regard to transparency “forever.” (According to his own estimates, De Goey currently charges commissions less than 10% of the time and only on certain products that are only available to him on a commission basis, such as flow-through limited partnerships, or upon client request.)

When De Goey published his first book, he was considered a “pariah,” for supporting fee-based compensation models.

“It was a threat to the people who were fat and happy and making a lot of money by not talking to their clients about commissions,” he said.

He suspects it will take 10 years or more before commissions are banned in Canada but expects the transition to be smooth since many advisers are opting for fee-based models already.

Pollock on the other hand, doesn’t see commissions falling out of fashion at all.

“Our sense is that most Canadians don’t want to pay a separate fee for advice. They like the current system…this way they don’t have to take out their cheque book a second time for that advice,” he said.

11 comments on “Abolish commissions for good, CFP argues

  1. Commissions are not the 'Devil' within the investment industry.
    Contrary to what most investors believe, Financial Advisors make 3 to 4 time more by switching to a 'fee' based revenue model and their work load is substantially reduced (Minimal customer contact is required and they still collect their quarterly cheque). So, Advisors actually love the 'Fee' platform – What could be better, higher income stream, less work and all from the same amount of client money.

    Investment firms also prefer the 'Fee' platform to that of a commission platform. 'Fees' give the bank/brokerage a consistent, reliable, controllable and regular income stream, unlike a commission platform. What could be better? As a firm, you want more revenue – no problem – we now charge 2.10% instead of 2.00% and revenue increases 5%. Try that with a commission model!

    For over 15 years (at two major bank owned investment firms), I help clients manage their savings by investing only in individual stocks and bonds, all within a commission platform. Each year, I was easily able to provide clients with a computer print out listing and totalling their annual commission costs, which were always between 0.20% and 0.40%. (Remember, this was at expensive bank owned firms.)

    That's a lot cheaper than the 1.75% to 2.50% the majority of investors will pay under a 'Fee" revenue platform. Advisors and investment firms can only dream that Canada bans the commission platform.

    Maybe, Canadians should simply demand better disclosure requirements from the 'Self-Regulated Investment Industry'. A better informed investor is what is needed, but unless investors demand it, do not expect the Advisor or their firm to voluntarily help.

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    • Did you manage over 150 million in assets? Because that's the only way you would keep your job with a low turn like that my friend.

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  2. As a retired financial advisor I can't agree more. The emphasis on sales, sales, sales within the banking and financial services industry at all costs, serves no one when customers are looking for advice! The customers have significant distrust of the advisors (often well deserved) and the advisors are focusing on the wrong aspect of the client/advisor relationship. I was punished for just giving advice to clients vs. selling something at every appointment. A true advisor teaches clients how to make prudent financial decisions for themselves. However, in my experience the industry is based on acquiring assets, selling expensive products and just barely meeting regulatory guidelines.

    Management talk about 'building relationships' with clients, but what that actually means is to find out what assets are available to be brought in-house which increases the trailer income to firms. Lots of clients don't need a full financial plan, but need help with non-dollar issues like wills and estates, dividing assets in divorce, ensuring adequate insurance protection at reasonable prices, and solving budget issues. Those discussions don't bring in commission income, so are often viewed as a 'waste of time'.

    I relinquished my credentials and qualifications that I worked so hard to acquire and left the business to pursue other interests. I was not prepared to wring every dollar out of every client (often at cost to that client) in pursuit of making ever more money for myself and my employer. I had lots to offer clients as a true advisor, just not the will to work in the very flawed industry as it stands today.

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    • Out of curiousity, why didn't you start up your own company? If, as you state, you had lots to offer clients, why not go on your own and offer what you think clients need instead of leaving the industry which doesn't help them at all.

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      • Unfortunately, I left to take care of my elderly parents who desparately needed me at the time. Since I live 800 km away from them, it involved leaving my community for an extended period. After I had been out of the industry for over a year, I just couldn't see myself going back into it as my own family was also having some health struggles – you know the sandwich generation! I missed the clients I had dealt with dearly, but had to focus on my family's needs first. Do I have some regrets, yes, but I did what I had to do at the time, and can live with my choices.

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    • what Heidi means is she was not successful as a financial advisor, because apparently she left out her integrity. Why would you sell the wrong product to the client… what happen to your values? I have been an advisor for 15 plus years and would never sell a client the wrong product… I am the one with the relationship… why would I take advantage of it? Are there other relationships that you “cheat or lie” in?

      If you help the clients, and are true to your values, your clients will benefit which in turn will benefit you both professionally and financial…

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  3. For the record, the no. 1 priority listed in Advocis code of conduct is the client’s best interest. (also for the record, virtually no one in Canada is responsible or accountable for ensuring that the above actually takes place. Every investment referee is strangely paid by the industry…………..

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    • Integrity. Easy word to say, perhaps not so easy to find. I have always told people "I work for you". I also tell people that if they have any concerns with regards to the advisor they are working with, they should interview a few and select one that they are most comfortable with. A client should never be worried if their advisor is working in their best interests and if they are, time for a change. Sadly, it only takes a few bad apples to ruin the lot. What I can say is that I have even talked myself out of a sale because it was right for the client.

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  4. Unfortunately, this regulatory paper tiger does not address any of the fundamental regulatory changes required in Canada to protect retail investors. Examples of the required changes include: (1) a government rather than industry run regulatory infrastructure, (2) fiduciary duty toward retail investor by anyone calling themselves “advisor”, (3) a “fee only” rather “commission based” compensation structure.

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  5. I am of the opinion that asking clients to pull out their cheque book and write a cheque to yourself or your firm for the time you have spent with them providing advice would be counter productive to increasing the number of individuals receiving financial advice. I suspect that this would cause far more to shy away from the service and as a result more people would enter retirement with a significant amount of uncertainty. Let us consider doctors. Any time that there is the discussion of a fee for service concept when you visit your doctor there is an uproar. However, because of a wonderful plastic card – our health care card – we do not have to open our own wallet and yet the doctor gets paid. Though I will admit that this is not the same, there are some similiarities. The commission process allows you to get, hopefully, sound advice without opening your wallet to the advisor but rather they are paid via the commission.

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