In the last post I talked about mutual fund fees and how confused investors are about what they are being charged. The same goes for how their advisors are paid because many investors do not see an explicit fee charged to their account. In fact, as part of beginning to work with a new client, one of the first questions that we ask is “What fees have you been paying for investment advice?” We have had lawyers, doctors, engineers and other highly educated people say “I am not paying any fees for investment advice.” Hint: the investment business is not run as a charity.
The mutual fund fees as well as revenue earned on bonds and Guaranteed Investment Certificates (GIC’s), and the flat fee charged by some advisors, are used to pay for your investment advice. Fees pay the mutual fund companies, the advisors and the companies that employ the advisors.
Here is how your advisor gets paid: A portion of the annual management fee, from as low as 0.25% to as high as 2%, or commission charged to you is paid to the advisor’s grid. The grid is a table splitting the fee you are charged between the investment advisor and the company he/she works for. Usually the grid payout rises as the gross revenue the advisor generates increases and as the size of the individual charge rises. Therefore the higher generating advisors are rewarded with a higher percentage payout and the lower generating advisors are weaned out and transactions that generate a large single charge are rewarded more.
The load on the fund, as discussed in the previous chapter is also applied to the grid so if you have a DSC load of 5% that fee is applied to the advisor’s grid and will be paid out at a higher percentage to the advisor than a 3% charge.
There are tremendous pressures on advisors to increase their revenue to stay high up on the grid. This can be done by increasing the dollar amount of assets the advisor manages or by investing clients in DSC mutual funds. This pressure can lead to a conflict of interest for your advisor.
See page 151 of my book, In Short: Successful Investing During Turbulent Times, for how the current way your advisor is paid is about to change.
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®