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Why Punish Early Adopters?
12/14/2017 8:03:36 AM
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The Professional Financial Advisor
Toronto-based Financial Advisor John De Goey offers thoughts about fee-based advice, holistic planning and capital markets.



By John De Goey  | Wednesday, February 25, 2004


 
One of the primary attributes of where the OSC believes the industry needs to head (and I could not agree more) is the notion of transparency.

People resist change as a matter of course- that’s just human nature. The Ontario Securities Commission’s (OSC’s) so-called “Fair Dealing Model” has brought a number of advice-related issues out into the open that have been relatively muted in the past. As a result, many of the industry’s stakeholders feel threatened because focusing on process and advice rather than products represents a major sea change. The primary objective of the discussion paper is to flesh out the terms and conditions of any engagement between the client and any advisor and/ or firm. In essence, the idea here has been to more clearly delineate the obligations and responsibilities of both parties.

The model recommends that all relationships fall into one of three categories: self-managed, advisory and managed for you. The former applies to do-it-yourself people who work with discount brokers. The latter deals with people who work with advisors on a discretionary basis. The majority of consumers work with advisors using the middle- more consultative- model.

One of the primary attributes of where the OSC believes the industry needs to head (and I could not agree more) is the notion of transparency. The simple fact of the matter is that most financial advisors claim to be “independent”. In fact, I was on a speaking tour throughout English Canada in late 2003 and I asked about 2,000 advisors in Calgary, Vancouver, Toronto and Halifax if they considered themselves to be “independent”. In all four cities, the majority of advisors emphatically insisted that they are, indeed, independent.

Of course, since I derive great joy in pointing out the inconsistencies between others’ words and their deeds, I took the opportunity to challenge them on the point. I asked if these self-appointed “independent” advisors ever recommended mutual funds that pay no commissions or trailing commissions to their valued clients. Virtually none said they did. In essence, if the products did not extract advisor compensation from clients and pay it to advisors (thereby allowing advisors to be paid without ever having to ask directly for payment), those products would simply not be recommended to clients. Of course, everyone knows that advisors need and deserve to be paid. My point is simply that most insist that they are independent when, in fact, they are nothing of the sort.

Here’s where the change in perspective comes in. The most progressive (and socially just) option in the Fair Dealing Model is the notion that embedded compensation simply needs to go. Of course, there’s a small cadre of advisors who have been saying this for years. I’m one of them. As it now stands, perhaps 1% or 2% of all advisors in the country use products that pay them nothing and instead send their clients an invoice for services rendered. Much like what one might expect from a lawyer or accountant. This seems obvious. Unfortunately, old habits die hard- and embedded compensation for placing financial products is a very old habit.

The irony in all this is that the advisors who are most committed to transparency have to explain themselves to their clients repeatedly. Being what marketing types call an “early adopter” has its drawbacks. By now, most (virtually all) mutual funds in Canada are available with no embedded compensation (they’re called “F Class” Funds). These funds pay absolutely nothing to advisors. Unfortunately, newspapers and web sites only report MERs for “A Class” (embedded compensation) type funds if A Class funds are available. This leaves the clients of the cutting edge advisors wondering what’s going on when they check things out for themselves. Here’s a sample conversation:

Client: What’s the MER on that equity fund you just recommended?
Advisor: It’s 1.64%
Client: That’s what I thought you said. I looked it up in the paper and it says here that the MER is 2.71%
Advisor: That’s the MER for the “A Class” version of the fund- you’ve got the “F Class” version
Client: Where can I find the F Class version in the paper?
Advisor: You can’t. For equity funds, the MER is 1.07% lower. That’s a 1% trailing commission plus associated GST that DOES NOT apply to your circumstances.
Client: So how do I know I’m not a victim of your “double dipping”?
Advisor: Your statement will have the letter “F” at the end of your fund’s name

You just know this is a conversation that guys like me are having with their clients all the time. Here we have advisors that are open and responsible about what things cost- and they’re motives are being called into question precisely because they’re trying harder than anyone else in the business to be up front about how and how much they’re being paid.

From my perspective, the eradication of embedded compensation can’t happen fast enough. It is only when it becomes totally impossible to bilk the system that consumers can feel protected from advisors who “double dip” or invest money in money funds at “no load” while suggesting the funds in question are “free”. We’ve already established that advisors need to be paid. It should be obvious, therefore, that advice is never “free”. Sadly, too many consumers would rather avoid dealing with that harsh reality than work an advisor who has the decency to force them to come to terms with it.

John J. De Goey MPA, CIM, FCSI, CFP is a Senior Financial Advisor with Assante Capital Management Ltd., member CIPF and an author and instructor with The Knowledge Bureau. The views expressed are not necessarily shared by Assante. jdegoey@assante.com

 
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