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The Trailer Truth
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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, July 12, 2004

Simply put, if trailer fees are in fact trailing commissions, then how can a person who gets paid through trailing commissions honestly purport to have a “fee based” practice?

What does your advisor call those little recurring revenue streams that many mutual fund companies pay out? Are they trailing commissions or trailer fees? For the record, virtually all prospectuses refer to them as “trailing commissions”. This doesn’t stop virtually all advisors from referring to them as “trailer fees”. Which is it? Mutual fund industry participants need to get their story straight.

Some people suggest that we’re getting bogged down in semantics here, but I would respectfully disagree. If “trailers” are commissions as stated in prospectuses, then advisors should refer to them as commissions. If they are fees as suggested by most advisors when they speak with clients, then we should all move to have new prospectuses re-printed that call them fees. The simple point is that they are either one or the other- they can’t be both simultaneously. Presently, most advisors give their clients a prospectus that refers to these payments as “trailing commissions” and then refer to those payments as “trailer fees” from that point onward. What mysterious alchemy of logic causes this miraculous transformation?

This is an effective form of re-branding, since many advisors are positioning a somewhat unseemly compensation system as being both virtuous and professional. According to advisors, they aren’t sales agents who earn commissions for placing products, they’re value-adding professionals who charge fees for offering high-quality, independent advice. The difference is presumably accomplished (at least in consumers’ minds) through the miracle of changing the phrase “trailing commission” into “trailer fee”.

When I speak to most advisors who claim to have a fee-based practice, I ask them exactly what that means. I get varied responses. Right away, that should be a source of concern. What kind of business (please don’t call it a “profession”) can’t even agree on what constitutes a fee-based practice? Most who claim to have a fee-based practice actually earn the bulk of their income through trailing commissions.

Today, there are two ways for advisors to be truly fee-based: charging an hourly fee like a lawyer or accountant or charging a direct asset-based fee. In turn, there are two ways most advisors would suggest an asset-based fee could be charged: have the investment products recommended deduct fees from the investment product units and remit payment to advisors (trailing commissions) or have no such deductions with the advisor sending the client an invoice (direct fees). Obviously, the former is technically still a commission. Neither format is inherently right or wrong, but the problem that presents itself is the question of semantics versus substance. This goes way beyond innocuous wording and spills over to the realm of deliberate misrepresentation.

Simply put, if trailer fees are in fact trailing commissions, then how can a person who gets paid through trailing commissions honestly purport to have a “fee based” practice? A more professional, candid and accurate depiction of the arrangement would be for trailer-based advisors to say they use a business format that involves no up-front commissions, loads or redemption schedules and better aligns the interests of the advisor with the client. That’s a depiction that fair-minded people could buy into. However, suggesting that trailing commissions are a type of fee is probably crossing the line into fibbing- and real professionals don’t fib.

Furthermore, if advisors are allowed to use misleading terminology to describe their services, I wonder what would happen if we were to re-brand trailers in the opposite direction- perhaps as “independence compromising bribes”. Imagine having a financial advisor come up to you and say “I run a bribe-based practice”. That would not only add to the frankness of the ensuing discussion, it would also explode the myth that most financial advisors are independent. In fact, most advisors fail to recommend many of the best fund companies’ products because they can’t bear to hand their clients a bill. In spite of this, they sanctimoniously insist they are independent- even though embedded trailers effectively limit the products they recommend. This arrangement allows some advisors to actually suggest that their financial advice is free, which is patently false.

The financial services industry has some soul-searching to do. A substantial number of advisors hold themselves out as professionals- irrespective of the business model they have chosen. A smaller number suggests that professionalism is demonstrated through an absence of up-front commissions. Neither goes far enough. True professionalism involves not only transparent billing and compensation disclosure; it also requires meaningful proficiency standards, ongoing training and a host of other attributes.

If advisors want the general public to think of them as professionals, they will need to do their part. To date, the discussion about financial advisors being true professionals as opposed to commission-based sales agents has generated more heat than light. It’s high time we looked at these issues more closely.


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


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