A few years ago, i wrote in Investment Executive that Canada was unlikely to follow the U.K. and Australia in banning financial advisors’ commissions. But in February 2013, I hypothesized that the industry may well bring a commission ban on itself if it continues to fight regulatory proposals for fee and performance transparency.
So, it’s worth exploring the impact of commissions going the way of bell-bottoms:
– TRANSITION. If regulators ban commissions for advisors, I don’t expect advisors to send invoices to clients or clients to write cheques for financial advice. Rather, I expect fees to be disclosed to clients up front and at each annual review, then deducted from client accounts monthly or quarterly (either from cash balances or redemption of fund units) and shown on client statements.
– CLIENT RELATIONSHIPS. Advisors who took my advice long ago and voluntarily created meaningful transparency of their fees and commissions probably scored extra trust points with their clients – something I’ve experienced first-hand. Accordingly, I would expect a smooth transition for these advisors, as differences in transparency would be minimal for those already fully disclosing their fees.
Other advisors will have to get their clients up to speed on current fees and the coming changes. Although this can be tough, transparency is a long-term trust-builder. Today, I hear from many affluent investors who are suspicious of advisors that don’t come clean about fees.
Smaller clients, however, may be less willing or able to pay fees directly, which will result in the loss of some relationships. And to the extent that clients were never told, or don’t recall, the fees associated with their investments, those relationships are at risk.
– VALUE OF YOUR BOOK. Assessing the impact on any individual book should be examined in the context of the value drivers of the practice – for example, the level and sustainability of revenue, cash flows and the extent of growth over time. I don’t expect a huge dent in practices’ values.
In effect, a ban on commissions would put everyone on a fee-based platform. And fee-based platforms have minimum dollar fees, which raise the cost of an advisor’s services for smaller clients. Such investors – i.e., those with less than $250,000 in investible assets – may choose to go it alone or go to other ‘advisors’ not affected by a commissions ban. Thus, a commissions ban will impair the value of your book if it is full of smaller clients who are less willing or able to pay fees separately.
Advisors with high net-worth clients should see declining revenue only if current fees aren’t competitive. All other clients should be able to be moved to a fee-only model on a revenue-neutral basis.
– REGULATORY ARBITRAGE. The most troubling issue is “regulatory arbitrage.” I’ve heard of many advisors dropping their mutual fund and securities licences to escape the associated regulations. These advisors continue servicing their clients by holding an insurance license, which permits these advisors to sell segregated funds.
For now, advisor commissions are here to stay. But if they go, it won’t be a death sentence for the advisory industry; but it could make extinct the marginal advisor who provides little or no real advice or service.
Dan Hallett, CFA, CFP, is director, asset management, for Oakville, Ont.-based HighView Financial Group, which designs portfolio solutions for affluent families and institutions.
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