Letters to the editor: The embedded fee controversy

The question is how to remove bias while preserving access to advice for all? We believe the transparency enhancements in the second phase of the client relationship model are the answer. Wherever embedded compensation creates bias, we believe it’s because clients are unaware they’re paying indirectly for advice. The cost-reporting requirements that come into effect in 2016 address this issue.

De Goey suggests that replacing embedded compensation of 1% with a 1% fee charged by the advisor is a zero-sum game. We disagree. In reality, most small clients are currently denied access to fee-based accounts due to minimum asset requirements. Some dealers simply send small clients to a bank branch. Other small clients must fend for themselves. Banning the one model that provides [these clients] access to advice cannot be in their best interest.

Some dealers simply do not have the infrastructure to operate on a fee-based platform. We have seen no evidence that these dealers provide inferior service, and question why they should be targeted indirectly by the regulatory process.

De Goey suggests commissioned advisors alone refuse to place clients in direct-sold funds. But fee-based advisors also tend to avoid these companies. Why? Because direct-sales companies generally offer a single series of units that charges more than 1%; the typical Series F management fee is 1%.

Invesco will always support choice because it’s a crucial element of a free market. We’ve made an intentional decision to offer both fee-based and embedded-compensation options so advisors can determine with their clients which option works best for them.

Peter Intraligi
President,
Invesco Canada Ltd.
Toronto

Unlike John De Goey, i don’t believe that for small investors and young advisors, just rolling over the 1% embedded trailer to a fee-based account will be a zero-sum game.

I started in the business in the mid-’90s, at 23. With no assets under administration (no trailers yet), young and with no experience, I had to fight for every little account.

My first client invested $15,000. The commission I received from the deferred sales charge (DSC) structure justified my time on a full retirement plan. It helped my client invest with a focus. My plan changed his life; he never faltered in his monthly contributions. The seven-year DSC schedule was not an issue for him, but it granted me my pay.

Getting any new client in my first year was hard enough. The rookie I was would have been considered a rock star with $200,000 per month of new business. But I would have starved under a 1% fee-only structure. After a year and 65% payout, that’s just $8,450 gross – before expenses.

Regulators will be doing small investors no favour by putting the next generation of advisors in that situation. Even the most enthusiastic will drop out. The lucky ones will all probably be assisting advisors serving higher net-worth clients. But will these assistants/recruits have the entrepreneurial mindset to run our businesses when we retire? In all cases, small investors will be left without advice and no choice but to do it themselves. Without advice to drive them, will they really create their own wealth? I believe embedded commissions are the only way for small investors to afford the services of an advisor, and for young advisors to earn a less than mediocre pay in their first years.

For the sake of small investors and the future of our profession, regulators should concentrate only on full disclosure. Better informed investors will turn to discount brokerages if they want to do it themselves. Those who don’t will continue with our advice, knowing its value. Should we really risk the balance of an industry that built the wealth of Canadians?

Patrick Boucher
Financial Planner,
PEAK Investments Inc.
St-Jean-sur-Richelieu, Que.

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