Fee's, disclosure and what is best for all party's.

For many years, certainly over my entire career, the main focus of investor ire towards the investment and insurance industry has been how opaque and complex everything seems. Very few investors seem to have a handle on the products and services they are buying, how the internal mechanisms work inside an investment or insurance vehicle, how much they cost and or what the role of the advisor even is.

If I am being honest, a large percentage of the industry itself is in the same boat. A smaller but very successful portion of our industry uses the lack of clarity to take advantage of the public (more on them below), and an even smaller fraction understands the problem and is working to help their clients and prospects solve some or most of the issues we see within the industry while also working to clean away the mud in the water.

Then there is the regulator. I could go on and on here, but simply put, the regulator group in this country has lost its way. Regulation over the last decade or so has done more harm to the investor than good, while at the same time has taken ownership over actions and decisions away from the individual ultimately making decisions. There are indeed bad actors in our industry, but there are far less than you think. I would argue that the majority of people are trying to be the best they can be and are being punished for a few bad apples, which has led to apathy within the group.

I want to focus this post on investment fees, specifically on advisor compensation and what it means to investors. There are a lot of terms that get thrown around, and I think we need to share some harsh truths with you, the investor.

Right off the hop, it is high time the investor, the advisor and the regulator to accept that even at the best of times, with the best advice, ideas and products, things can go bad. It is also high time for everyone to accept that most of the time, things go mediocre, and that leads to most of the trouble we see floating around the industry today.

If you read my post, written on Halloween, I allude that most of the referrals and new business we see comes from investors who are unhappy with their returns and are looking for a change. This change leads to a new commission, without the investor necessarily understanding the financial consequences of this change.

As soon as an individual invests into a new product or concept, the clock starts ticking. A countdown begins, where that specific persons attention and awareness is finite. If an advisor doesn’t take the proper care, and more importantly, outperform their peers, they’re going to lose that account. It is a matter of time. More often than not, this is the reason for a transfer out of assets and contracts from one advisor or firm, to another.

This is where the issue of transparency arises. Does the investor understand what their options and rights are? Do they understand the fees and possibilities? Probably not.

I agree with the regulator on this point, that the responsibility to provide adequate transparency and disclosure is pretty important. That responsibility falls on the advisor… well, most of it does, in my opinion. Some of the responsibility must fall on the individual investor. Why don’t they carry any water here?

As the person signing a contract, you ought to be held responsible for your actions. To a point, the investor has to do their homework, to best understand what it is they bought. With all the booklets and information you receive, there is really no excuse to not have a solid understanding of your purchase.

What you don’t understand, you ought to be asking about. The only bad question, is the one you didn’t ask.

As an advisor, we have to know, that the investor doesn’t know what they don’t know and teach them what to ask, guide them. Such is the relationship here, it is a two way street. I have expectations, just like you ought to. This is the foundation of the long term relationship we are going to try to build together. If I (we) do the job correctly, you will begin to understand what you don’t know, and we will have better and more comprehensive conversations.

Where the simple conversations ought to begin, is around compensation. Something the regulator, in my opinion, doesn’t believe should exist for people in my industry. This is not hyperbole, it has happened in other parts of the world (the UK and Australia) and lead to worse advice, worse outcomes and removed thousands of years of experience from local industry, overnight. Proper compensation is vital for everyone involved. End of story.

You want the best products and returns, with the least amount of risk possible. I want to feed my family and grow a business. The better you do, the better I do. We’re both winning. But as the regulator strips options and choices away from both of us, it makes it harder and harder to win.

Some options aren’t worth using, or are simply replaced by better options that come as a natural (or forced) evolution of the industry. One such option would be Deferred Sales Charge (DSC) investment loads. DSC’s were a very poplar option an advisor and investor would agree upon for many decades. Simply put, if you invest $1, $1 is invested on your behalf, and an advisor is paid a commission on that $1.

If you choose to take your $1 within a set time frame, you would lose a % of the net value of that dollar, on a scale that reduces every year that passes.

At the time, this seemed a better option than paying an up front fee.

Let’s say that an advisor makes 5% on initial transactions.

• with a Front End Loaded (FEL) fund, $0.95 would be invested and the advisor would be paid $0.05

• using the DSC model, $1 is invested and the advisor still makes their $0.05

  • the caveat here, is the pool of fees collected by the fund will pay this commission, if the funds are taken out within a specific time-frame, someone has to pay the fund back

  • At the end of the day, there had to be a better way.

Back end loaded funds like DSC’s were a great option for most people because 100% of the initial proceeds were invested immediately. There was no deficit that had to be made up. Problem is, people tend to use their money at times that are inconvenient and they were paying the price.

So the industry, looking at this and what the regulator was saying and said “we can do better, and we will!”

Thus, the Charge Back method was born. No more would the investor pay to use their own money. A major risk was taken from the table, for the investor anyways.

They could invest $1, and $1 would be invested on their behalf and the advisor would be paid the same as the DSC, but if the investor took their money out, for any reason, the advisor would be charged back the commission on a similar declining per year scale as the DSC. This put the investor first in the front and back.

This is a choice that many investors immediately found attractive. As soon as this became an option for us, we jumped all over it. It made total sense. Until that first redemption, that is. We had to pay the piper.

Luckily for us, we’d built a solid business with a foundation that is absolutely see through. NO secrets, no hiding behind contracts and clouded mirrors. The business could afford to have investors spend their money at their wish. Frankly, most investors wait longer than the schedule of fees lasts anyways, so this option just kept making more and more sense as time went bye.

The regulator however, doesn’t see things this way. It looks at bad actors and the apathetic in the industry and paints us all with a broad brush. So, as of now, the 45 or so regulating bodies in our industry from coast to coast are looking at the idea of banning the Charge Back model of commissions. It looks to take away an excellent option; a choice you are able to make with your money and with your advisor. Which leaves you with fewer choices and a defensive industry. Fewer choices seems like a good idea, but advisors need to make a living. The fewer choices we have, the more likely it is we will look to re-muddy the waters.

Or, completely simplify things, and charge you for our time, instead of being paid by other parties.

Generally the first meeting we hold with a new individual or couple will last between two and four hours. From there we like to see people another three to four times a year individually and once or twice at education events we hold for our clients. Under normal circumstances, we would hold three to four of these a year.

If we start charging a fee, the educational events go away in their current form.

If we start charging a fee, we will no longer attract business from the average person as they are unlikely to write a cheque, and will seek advice from institutions who pay their employees from their profits. Which does not benefit the average person.

If we start charging a fee, I get paid either way. Whether you invest or not. No more earning my dinner, now I have an interac machine at the front desk.

Reducing the industry to a bunch of people billing hours would de-legitimatize and destroy our industry. The flip side of this coin, perhaps, is it would add legitimacy by creating a fiduciary industry, like the legal and accounting professions. Which would push most people out of the business, and remove investors in bulk, because the costs are too great.

Go see your lawyer four or five times next year, see how much it costs. Better yet, have your accountant do your taxes once a quarter… get it?

Point is, we need choice. Choice leads to evolution, and better more transparent products, better relationships and results.

We have some pretty solid lobby and advocacy groups in this industry, but they can only do so much if the people who actually buy these products aren’t involved in the conversation.

What do you think?

Are the options on the market good enough, and is removing the option to invest in Deferred Sales Charges (DSC’s) a good idea?

I think we are in a good spot, but am always open to conversation.

Thank you

Darris Cameron,
CEO
Financial Value Inc.