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They’re Called Trailing Commissions
4/24/2014 7:15:33 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  | Monday, May 10, 2004


 
Imagine if a dentist earned a $300 fee for filling a mouth full of cavities. Now imagine that same dentist earning $30 a year every year thereafter- forever- whether the patient came in to have his teeth cleaned and inspected or not. That’s the difference. Fees require that services be rendered in exchange.

Saying something is so doesn’t make it so. If there were 99 people out of every 100 who said the earth was flat, it wouldn’t make the earth any flatter. It also wouldn’t make the 1 person out of 100 who said the earth wasn’t flat any less right. This is a trite little commentary, but there’s a point to it.

In the more than 10 years I’ve been a financial advisor, the very vast majority of financial advisors have referred to those ongoing payments made from mutual fund companies to advisors as “trailer fees”. The media has gotten in on the act, and they too use this terminology. The trouble is, if you look at any prospectus for any fund where ongoing advisor payment is involved, you will see that these are legally referred to as “trailing commissions”. Simply calling them fees doesn’t make them fees.

Of course, this is all part of the re-branding financial advisors have been engaged in since the beginning of the last decade. Most financial advisors are sales agents who desperately want to be thought of as professionals. So they use words like fees to describe what are in fact commissions. That’s because professionals earn fees. Sales agents, in stark contrast, earn commissions. Financial advisors want to be perfectly clear that they are professionals, not sales agents. I’m not buying what they’re selling.

The thing is this: it’s just not that simple. Changing what something is called doesn’t change what it is. A rose by any other name is still a rose and a commission that goes by the handle of “trailer fee” is still a commission. Read your prospectus. It should be obvious. Fees are what professionals bill their clients for value-added services. Commissions are what sales agents receive for placing products. If professionals don’t do the work, they can’t bill their clients (and earn fees). But if you sell a product, you can earn commissions for years after the fact, whether you do the work or not.

Imagine if a dentist earned a $300 fee for filling a mouth full of cavities. Now imagine that same dentist earning $30 a year every year thereafter- forever- whether the patient came in to have his teeth cleaned and inspected or not. That’s the difference. Fees require that services be rendered in exchange. Commissions are paid whether services are rendered or not. There are plenty of financial advisors out there who collect trailing commissions without earning them. The majority do earn them, but that’s not the point. The point is that it’s possible to earn money without doing work in the world of commissions. Not so with fees.

Here’s another way of looking at it. Trailing commissions are commissions because mutual fund companies extract payment through their funds’ MERs and remit that payment to advisors. Payment is effectively hidden and clients never see how much advisors are being paid. In contrast, professionals (lawyers, accountants, etc.) give their clients bills itemizing the cost for services rendered every time services are rendered and explained both clearly and in writing. Nothing hidden; everything accounted for.

There’s a speaker in the financial services industry that is extremely popular among advisors and last fall, I had the pleasure of speaking at a conference where he was also speaking. With a crowd of nearly 1,000 advisors listening, I sat amazed as he made at least six references to “people in our profession…” and “the great thing about our profession…” in a 45-minute speech. Again, he acted as if saying something is so makes it so. Later that same day, I took the stage and asked those same advisors if they thought this beloved speaker was right. Where advisors really professionals? The majority insisted they were. I respectfully asked for proof. Nothing compelling was offered up.

This might be a good time for those people who work with financial advisors to proactively request a little accountability. It’s time for consumers to take control. Ask your advisor if he’s a professional. If you get a straightforward “no, I’m a salesman”, say thanks for your honesty. Going into sales is an honourable calling in life and nothing to be ashamed of. Still, you might want to request that your advisor be more of a professional going forward if that’s what you want. If, however, your advisor insists that he is indeed already a professional, you might want to ask for tangible evidence. Here are some quick things to look into:

Does your advisor hold a designation in advanced, advice-based training?

  • Does your advisor carry errors and omissions insurance?
  • Does your advisor engage in continuing education?
  • Does your advisor have a letter of engagement?
  • Does your advisor have a rate card?

Think of the more established professions: doctors, dentists, lawyers and accountants. Now think of your advisor. How does your advisor compare? Ask about “trailers”. Specifically, ask your advisor if they are fees or commissions and listen carefully to the answer given. Above all, remember that saying something is so doesn’t make it so.

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

 
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