The retail investment industry in Canada has been moving toward a more fee-driven financial advisory model and away from its history as a transactional business for some time. Now, that trend appears to be accelerating.
In the days before "wealth management" and before online brokerages offered trades for less than $10 a pop, the retail investment business was purely transactional, with stockbrokers relying almost exclusively on trading commissions to generate revenue. But through a combination of regulatory and strategic forces, that historical reliance on trading has given way to fee-driven revenue models. In fact, the results of this year's Report Card series reveals that this shift is gaining momentum.
Looking at the industry, overall, fees now account for 49.5% of the average advisor's gross overall revenue. This includes fee- and asset-based revenue, which makes up the vast majority of that total, at 46.7%, along with fee-for-service revenue, which represents only 2.8% of overall revenue. At the same time, transaction-based revenue now accounts for only 21.3% of the average advisor's overall revenue.
In comparison, fees and commissions were more or less on par with one another as sources of advisor revenue in 2008, with each type of compensation accounting for about one-third of overall revenue. This shift away from transactions and toward fees represents a persistent trend over the past few years, and that trend is most significant in the brokerage and mutual fund and full-service dealer channels.
Although advisors with banks, credit unions and insurance sales agencies also reported some portion of their gross revenue comes from fees and transactions, these advisors generally have very different compensation models. The former are paid primarily on salary, while insurance reps are compensated chiefly for insurance sales (both first-year commissions and renewals).
Focusing just on the brokers and the dealer reps, the trend toward fee-driven revenue and away from transactions is evident for both these channels of the business. For example, in 2008, 45.8% of brokers' gross revenue came from transactions. That proportion fluctuated a bit in the following years before dipping decisively below the 40% mark in 2013. Transaction revenue continued its slide in the past couple of years, to 35.5% in 2014 and to 32.5% this year.
Conversely, fee-driven revenue for brokers - including fee/asset-based and fee-for-service arrangements - was virtually on par with transactions in 2008, accounting for 46.2% of gross revenue. Since then, fee revenue has grown steadily, reaching 65.4% of overall revenue this year.
The shift is even more dramatic among dealer reps, for whom transactions have dropped to just 26.4% of gross revenue from 46% in 2008. At the same time, fee-driven revenue has to risen to 72% of top-line revenue from 50.5% in 2008.
This shift has accelerated in the past couple of years, and advisors point to regulatory reform as one of the factors responsible for the increasing move toward fees. In particular, advisors cite the adoption of the second phase of the client relationship model (a.k.a. CRM2) reforms - with their focus on enhancing the transparency of investment costs to clients - as a major reason for this trend.
"The fee-based platform is the future of the industry," says an advisor with Toronto-based RBC Dominion Securities Inc.
In such a regulatory climate, one of the advantages of fee-based compensation structures is that they can align the interests of clients and advisors better. When advisors are paid based on the size of a client's portfolio rather than the frequency of trading, the interests of both clients and advisors may align better.
Fee-based arrangements also are appealing to firms because fees create more consistent, recurring revenue streams than do compensation models dependent on trading volumes, which tend to be volatile.
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