Re: It’s time to ban embedded fees, editorial, Investment Executive, August 2016
I have been an established veteran of the financial services sector for 19 years and offer my clients fee-for-service financial planning, fee-based accounts as well as accounts under the traditional embedded compensation structure. My clients get to choose how they pay me. Having read your recent column stating that financial advisors have a “once in a lifetime opportunity to shed a system that devalues our service and deters us from developing into a genuine professional,” I felt compelled to respond.
By all accounts, I am a professional advisor as are many of my colleagues. There are thousands of advisors like me who have at least one “professional” financial designation, such as the certified financial planner, the chartered life underwriter, the chartered financial analyst and the chartered professional accountant. Each of these designations comes with a code of professional conduct that must be followed in order to remain accredited.
Your column asserts that becoming a “genuine professional” can only be achieved by unbundling fees and charging clients directly for advice and services. Real world experience shows that the method of compensation has absolutely nothing to do with being a professional. Rather, it has everything to do with the behaviour of the person providing the service or advice. As long as that person is acting with the client’s best interests in mind — whether he or she is bound by a professional code of conduct or not — and there’s an open and direct discussion about compensation, then that person is exhibiting the behaviour of a “professional.”
Does this mean that having a designation automatically makes you a professional? Not necessarily, but it goes a long way toward that. And it’s not just credentials that matter; it’s the behaviour that determines professionalism. A highly designated person could abuse a client just the same as one who has none — although it’s much less likely. By the same token, banning a specific type of compensation will not magically turn abusers into non-abusers. They will just find new ways to abuse.
As to your assertion that fees and commissions somehow don’t allow high-quality advisors to distinguish themselves, I wholeheartedly disagree. Professional advisors regularly distinguish themselves in many different ways. For example, I was just awarded first place in the 2016 PlanPlus Canadian national financial planning competition and was first runner up in its global competition. My financial plan submission in both competitions was based on a client situation in which a fee was paid directly for the advice and the investments used had fully disclosed embedded compensation (trailer fees).
The Canadian Securities Administrators (CSA) and the Ontario Securities Commission held several public roundtables to get input from stakeholders in their quest to review advisor compensation structures. I attended one such session in Toronto in 2015. One of the proponents of banning commissions gave a passionate presentation focused on the need to protect consumers from the “evils” of embedded compensation.
This person argued that most Canadians have a low level of financial literacy and, thus, presumably, are ill equipped to understand how advisors are paid. From this, the person concluded that all advisors take advantage of consumers in their own self-interests. The solution to fix the problem, the person said, was simply to ban commissions. This would free those same “financially illiterate people” they felt needed protecting, to go out and easily negotiate even more complex compensation arrangements directly with their advisors. Really? Sadly, the CSA seems to have adopted this same stance based on the questionable results of limited academic research.
The proposed solution to unbundle fees and force Canadians to negotiate compensation arrangements directly with advisors will only confuse the “average Canadian” with more complexity. The lofty goal of protectionism will get lost in the process. Consumers will be at increased risk of abuse by those same unscrupulous advisors who will be free to charge whatever they like with no standardization of fees or oversight as exists under the current embedded compensation structure. In addition, let’s not forget that those who wish to — and are capable of doing so — already have the option to use other non-embedded compensation options. Contrary to some beliefs, fee-based accounts are not the best option for everyone.
The “professional” advisors that exist today do an excellent job of helping clients with their financial needs. Their professional behaviour will continue to be the difference in their clients’ lives; changing a compensation structure that isn’t broken certainly won’t help Canadians.
Conrad Toner, B.A. CFP CLU
President, True North Retirement Counsel
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