Regulatory changes in our industry usually start in Great Britain, then progress to Australia and New Zealand, then to the US and finally to Canada. (Source: Dan Sullivan, The Strategic Coach) I don’t know why it follows this pattern but it does.
So, if you want to look at how advisors MAY be paid in the future in Canada (the decision is not final yet), look to Great Britain now.
In previous blogs I discussed how the fees charged to clients are confusing. Well, the financial services regulator in Great Britain agrees and has legislated that as of May 2012 all fees on investment products must be explicitly disclosed.
Further, deferred sales charges (DSC‘s) will no longer be permitted.
It is estimated that 70% of all mutual funds in Canada are sold on a DSC basis. This generates 2.5% to 5% of the amount invested in an upfront payment to the advisor’s grid. That is a significant income boost for the advisor. But then the DSC arrangement only pays between 0.25% to 0.50% of the amount invested to the advisor on an annual basis. This is called a trailer.
This trailer is going to be the only fee that the advisor will collect in the future. If they had not invested the client’s money on a DSC basis they could have qualified for a trailer of 1%.
Let’s look at an example: A client has $100,000 to invest. If the advisor places the client in a Canadian equity mutual fund on a DSC basis with a seven year maturity (the client must stay with the fund company for eight years) the advisor gets paid $5,000 up front and would also receive a trailer of $500 per year.
If instead the client’s money is placed on a no load basis the advisor would usually receive $1,000 from the fund per year.
By year 3 the DSC arrangement would have paid the advisor $5000 + ($500/year X 3 years) $1500 = $6500. The non DSC method would have paid 3 years X $1000 = $3,000. It would take until year 10 for the no load method to beat the DSC payout.
For those advisors not already on a flat fee, this will translate into a drop in revenue triggering a lower income to them. See page 155 for how to select a investment advisor. You want to invest your time in an advisor who will be around in the future.
This article was prepared solely by Larry Short who is a registered representative of HollisWealth®, a division of Industrial Alliance Securities Inc. (iA Securities), a member of the Canadian Investor Protection Fund (CIPF) and the Investment Industry Regulatory Organization of Canada (IIROC).The views and opinions, including any recommendations, expressed in this article are those of Larry Short alone and not those of HollisWealth®