Even as they ponder what the change means to their businesses, financial advisors are moving their clients’ assets into fee-based accounts at a clip.
This year, for the first time, Investment Executive included in our annual Brokerage Report Card survey the question, “What percentage of your book of business is fee-based?”
And the answers pointed to a clear trend. “A good 10%-15% and rising,” says an Edmonton broker with TD Evergreen Investment Services Inc.
“Not enough,” an advisor with National Bank Financial Inc. in Montreal adds. “It’s 2% of my book right now, but it will increase.”
Across the country, over 400 advisors at Canada’s 10 national investment dealers say that on average about 19% of their business is in fee-based accounts. In our 1999 survey, the overall average was 7.7%, up from 6.5% the previous year.
While this looks like a healthy leap, averages at each firm vary widely, from 2.1% to 36%. The range may have something to do with interpretation of our question than with any real disparity. Many advisors count mutual funds, which provide a trailer fee, into the equation, while others do not.
To better quantify the trend, we cross-referenced our numbers with Investor Economics Inc., a Toronto-based consultant to the financial services industry. The results were clear. As of December 1999, the share of full-service brokerage industry assets in fee-based accounts, including mutual funds, was 33%; without funds, it was 6%. That’s up from about 30% and 4%, respectively, for 1998. In short, fee-based accounts have grown two percentage points in one year.
In the past, IE has posed the question, “What percentage of your book is in proprietary products?” Generally, we defined proprietary products as those sold only by the firm, such as wrap accounts. We have also asked “What percentage of your book is in mutual funds?” In both cases, we have watched the numbers increase – and in the case of mutual funds, increase significantly. Now we are witnessing the growth of fee-based accounts.
Fee-based products – including mutual funds – continue to sop up more investment dollars at a greater rate than straight commission sales such as stocks. Investor Economics says that while commission-based investments grew by 12.2% in 1999, fee-based assets grew by 29.1%. And while funds are still tops, pure fee-based products, such as wraps and comprehensive investment accounts, are catching up quickly.
What is behind the trend?One factor: investors have spent most of the 1990s watching their assets grow in mutual funds and now they afford fee-based products with their heftier minimum account thresholds. Another factor: advisors can see the writing on the Internet.
As interesting as the jump in percentage of fee-based business is, brokers’ responses to the follow-up question, “Do you have any comment about the move to fee-based business?” tells an even better story.
Without getting into a full-scale discussion of the relative costs of commission vs fee-based investing, part of the equation is that advisors also realize they now have to compete with cheaper, do-it-yourself transactions via electronic discount brokerages.
A BMO Nesbitt Burns Inc. advisor in Ottawa says he can see 80% of his business down the road being fee-based. “Going fee-based will take away 80% of the business from the discounters,” he predicts.
But advisors also acknowledge the potential for conflict of interest when selling products on commission. A recent poll of Canadians by Toronto-based Environics Research Group, sponsored by Talvest Fund Management Inc., pointed to a steady erosion of consumer respect for traditional authority over the past 15 years – including parents, police, religious figures and financial institutions. “They increasingly mistrust anyone who makes their living via commissions,” says Murray Douglas, president of Montreal-based Talvest.
“The move to fee-based [business] is good because the clients know that when you call them you’re not just fishing for commissions,” says a CIBC Wood Gundy advisor in Toronto.
There is a downside to fee-based businesses. It can be expensive for clients. And although advisors like the fact their income stream no longer mirrors the stock market – the fee-based salary schedule is consistent – a Hamilton-based advisor with RBC Dominion Securities Inc. points out: “Fee-based accounts remove conflict of interest, but if the market is slow clients get angry because the broker is still getting paid.”
Another Wood Gundy advisor sees fee-based accounts as a ruse by brokerage houses to keep business in their own hands. It can limit the advisors’ freedom if they want to leave the firm and take their clients with them. Advisors can also invoke huge capital gains taxes for their clients by taking them out of the firm’s proprietary product.
“Zero per cent [fee-based],” says one Evergreen advisor. “And it’s going to stay that way.”
Still, advisors’ perceived pressure to sell proprietary products remains unchanged. Perhaps it is because advisors feel the push to sell wrapped products is not coming from the firm, but rather is industry-wide. In any case, the likelihood that advisors will pick stocks and mutual funds outside of the firm’s proprietary products is lower than it once was.