TO FEE OR NOT TO FEE? THAT IS THE QUESTION: THE CASE FOR FEE FOR SERVICE

Most financial advisers in Canada are paid by commissions on the products they sell.
Consumers like the current sys­tem. They don't fork out money for advice since the cost is covered by product providers.

In a survey by the Investment Funds Institute of Canada, mutual fund buyers were asked if they wanted to pay for an adviser's help through bundled fees or through a separate annual payment.

More than half (54 per cent) said they wanted the cost of advice included in their mutual fund fees. Only 37 per cent preferred to pay separately. Nine per cent didn't know.

The survey did find declining investor confidence in the advice given by mutual fimd sellers. Only 20 per cent of buyers were "very satisfied," compared to 25 per cent a couple of years ago.

The way in which advisers are paid and the quality of advice they deliver has become a contentious issue around the world.

After the 2008 financial crash, the compensation system came under ­attack for distorting the recom­mendations that consumers re­ceived.

Advisers earn higher commis­sions on stock funds than bond funds, so they have an incentive to push clients into riskier invest­ments.

Some governments, concerned about poor product choices, are moving to ban or limit commis­sions for financial advisers.
Canada is still on the sidelines.

Instead of changing the commis­sion system, our regulators want to beef up disclosure.

On Jan 1, 2011, mutual fund com­panies have to produce a new doc­ument, called Fund Facts, and make it available on their websites next year.
This project has taken 10 years and is still incomplete. Investors won't get a disclosure document before they buy a mutual fund for another few years.


Why is Canada lagging behind?
Can it resist the worldwide trend to make consumers pay directly for financial advice?

At a conference sponsored by the Financial Planning Standards Council on Oct 6, I was the moder­ator of an expert panel looking at these questions.

It's fairly obvious that product bias leads to mis-selling," said Nick Cann, chief exec­utive of the Institute of Financial Planning in the United Kingdom, where all advisers will be fee-based as of 2013.

Australia will ban commissions on the sale of investment products in July 2012. Unlike Britain, ifs not banning commissions on insurance sales.

"Commissions create actual conflicts of interest between advisers and clients in some cases and perceived conflicts in all cases;' said Deen Sanders, deputy CEO at the Financial Planning Association of Aus­tralia

Marc Lamontagne, an Ottawa-based fi­nancial adviser, stopped selling investments based on commissions in 1996.

He changed his business model to a fee­based practice.
"Everyone said I wouldn't make money.
But it turned out to be better;' said Lamon­tagne, who has written a book, To Fee or Not to Fee, on the issue.

He also trains advisers who want to make the transition.

Kevin Regan, executive vice-president of Investors Group in Winnipeg, defended
commission-based sales. "Our advisers sell in the context of a plan.
It's not just a ruse to get into the door with a client They actually mean it," he said .

Beefed-up disclosure of compensation is a better solution for Canada than to import ideas from countries that have gone through more severe crises, Regan argued.

Sanders disagreed, saying disclosure doesn't heighten awareness.
"Consumers can't engage meaningfully with documents written by lawyers. It never works. In fact, disclosure schemes_can em­bed bias even further."

About 5 per cent of advisers are fee-only in Canada, Lamontagne said. There has been little movement away from commission based advice.

Still, there was a feeling that Canadian regulators will join the campaign to make advisers more professional through limiting commission sales. In time, things will change.

Bottom line: Don't fight the trend. Industry leaders should make plans to change their compensation systems before regulators force them to do it.

Ellen Roseman
The Toronto Star
Business
moneyville.ca
10/11/2010