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professional development
Part of the problem is a regulatory regime that covers securities trading but not financial advice
$1,000 to have a proper financial plan laid out,” says Laurence Booth, CIT chair in structured finance at the University of Toronto’s Rotman School of Management. “That was the big advantage with deferred sales charges on mutual funds.”
But many in the industry maintain that advantage has diminished with a long-term regulatory trend toward transparency. Consumers are becoming more aware of fees, helped in part by aggressive advertising from online brokerages.
“As an advisor, that’s your weakness if you are utilizing models that are less transparent or have conflicts of inter- est,” O’Leary says.
Part of the problem is a regulatory regime that covers securities trading but not financial advice, encouraging compensation tied to investments. Clients “end up paying for advice all the time when they really only need it once in a while,” Deloitte’s Thompson says.
“There’s a lot of pressure on the industry because the average Canadian might only need in-depth planning or support for six to eight major milestones.”
As Booth puts it, “It’s a very difficult business to make your unitholders better off and for the advisor to afford a reasonable standard of living without charging those fees. Ordinary investors are getting smarter about that.”
As DSCs die out, there’s an opportunity for a broader decoupling between compensation for investment management and for other services. Démoré says a por- tion of the marketplace either wants to self-direct via low- cost ETFs or “couch-potato investing.”
“What they’re lacking are the retirement and estate plans, and all the other pieces,” he says.
He’s started offering hybrid and tiered options for clients who only want financial planning, or whose assets don’t
meet the threshold for the assets under management (AUM) compensation model. Those clients can pay for a retirement plan à la carte. The plan costs $1,500; reviews, at the client’s request, cost $500. He also offers general portfolio reviews billed on an hourly basis.
Another option is to charge a flat fee for planning and then manage investments for a lower percentage of assets — half the standard 1%, O’Leary says. This would disaggregate planning and investment management.
O’Leary also recommends the monthly retainer model as a succession tool. Junior advisors can charge a planning fee to younger clients who don’t meet asset thresholds. It’s a way to establish relationships with entrepreneurs or younger people with good income but few assets, charging a price at which the advisor can afford to serve them. The client can be converted to an AUM pricing model as their assets grow.
“Now you’ve got your next generation of planners serving your next generation of clients in a model that allows them to be profitable from the get-go,” O’Leary says.
No client left behind
Many advisors also talk about a duty to provide accurate, tailored advice to those without a lot of money — a kind of Hippocratic oath for finance. Fortunately, this is becom- ing easier.
Gunn says Edward Jones encourages advisors to view prospects as clients for life.
“Smaller accounts that I started with grew quite rapidly, from a $10,000 account very quickly to a $200,000 account or a $300,000 account,” says Gunn, who worked as an advisor in Alberta in the 2000s.
Today, the firm pays new advisors a salary in their first four years; it declines gradually based on assets gathered. This allows advisors to focus on opening accounts and building relationships with clients, Gunn says, rather than only on winning large accounts.
While grids at some brokerages mean advisors aren’t paid to serve clients with account balances below a cer- tain amount — providing a strong disincentive no matter how efficiently the client can be served — independent dealers may offer more leeway.
“I can onboard a small-asset client and still make some money to compensate my time, but I don’t need to make
a lot,” says Anderson, who’s been involved with pro bono work through the Financial Planning Association of Canada.
O’Leary, who has also done pro bono work for people hit by the economic fallout from Covid-19, says advisor compensation based on a percentage of the client’s AUM risks excluding most Canadians.
“It feels as if we’re failing society if we’re all chasing 5% of the richest Canadians, and 95% of Canadians are getting no help,” he says. AE
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An end to DSCs
The investment industry has defended deferred sales charges (DSC) on the grounds that they allow advisors to serve smaller accounts. Opening accounts requires (or at least used to require) considerable upfront work from the advisor. DSC funds ensured the advisor was compensated for that work right away.
However, new technology has eliminated much of that preliminary labour. In outlining its upcoming ban on DSC funds, the Canadian Secur- ities Administrators (CSA) said innovation has created “significant new avenues for serving smaller accounts at an affordable cost.” A spokesperson for the regulator pointed to the growth of robo-advisors, ETFs, do-it-your- self options and fee-for-service models.
A 2017 CSA consultation paper looking at alternatives to DSCs noted that increased automation can also lower costs for dealers and their clients.
DSC funds have seen “deep net redemptions” for more than a decade, according to Investor Economics. At the end of 2019, DSC assets in Canada represented 7.4% of the industry total, the firm said in a March report.