Financial advisors in Canada are gradually changing the compensation structure of their practices from commissions to fee-based models and are earning more income as a result, suggests a recent survey. But without regulatory pressure or greater industry efforts to accommodate this shift, experts say, it will take at least another decade for fees to become the dominant form of compensation in the industry.

“We hear about this trend [of advisors moving toward fees], but I don’t think it’s as prevalent as everybody believes it’s going to be,” says Marc Lamontagne, founder of
To Fee or Not to Fee, an Ottawa-based advisor training company that offers workshops on the transition to the fee-based model. “It will take a long time for us to get there.”

To Fee or Not to Fee recently released the results of a survey, co-sponsored by the Mississauga, Ont.-based Canadian Institute of Finan-cial Planners, that compared commission- and fee-based advi-sory practices. Conducted in March and April, the survey was completed by 250 fee-based advisors and 295 commission-based advisors.

The survey found that many advisors are charging fees but are also relying on commissions. In fact, fee-based advisors said investment commissions comprised an average of 24% of their gross earnings in the past year — and insurance commissions made up another 17% .

Some of these advisors are still in the process of changing to the fee-based model. Indeed, the survey found that most advisors move to a fee model very gradually: only 34% of fee-based advisors surveyed said they had a formal plan for adopting the new compensation model, and roughly 60% said they move fewer than six clients per month to the structure. This slow “migration” is popular because it limits the decline in income advi-sors can experience during the transition.

“The whole thought of moving all of your clients tends to be quite daunting, even though it usually isn’t,” says Lamontagne, who is also a certified financial planner and partner with Ottawa-based fee-for-service financial planning firm Ryan Lamontagne Inc. “So, what happens is [advisors] move over to the fee-based model very, very slowly.”

Even advisors who have completed the transition to fees are often unable to avoid commissions entirely. Insurance products, for instance, cannot be sold on a fee-basis in Canada, says John De Goey, a CFP and vice president of Hamilton, Ont.-based Burgeonvest Bick Securities Ltd. He switched to the fee-based model in 2001, but finds he is still forced to conduct about 10% of his business on a commissions basis: “To the greatest extent possible, I’m fee-based. But there are certain exceptions that I can’t avoid.”

In order to allow advisors to adopt fee-based compensation fully, Lamontagne says, the industry must take steps to remove certain structural impediments.

“The industry isn’t set up for fees, whereas it’s very welcoming to commissions,” he says. “There has to be a much greater buy-in by all the industry players — regulators, dealers and product suppliers.”

Lamontagne expects fee-based compensation will become as prominent in Canada as it is in the U.S. — where, he estimates, more than half of advisors charge fees. But, he says, it will take at least 10 years to reach this point.

Despite the slow pace of the shift, a growing number of advisors are clearly embracing fees. Almost two-thirds of fee-based advisors surveyed said they had switched to the model in the past 10 years.

Says Jack Rando, director of capital markets with the Investment Industry Association of Canada: “What we’re seeing is that the industry, as a whole, has definitely become more reliant on fee-based programs.”

This trend reflects a broader industry shift toward more comprehensive financial planning, he says, with advisors offering tax planning, wills and estate planning, and other services for which they don’t receive commissions.
@page_break@“Advisors today are taking a more holistic approach when it comes to managing their clients’ wealth,” Rando says. “Fee-based platforms do well with this type of approach.”

Also driving the growing popularity of fee-based compensation is the potential for advisors to earn more income. The CIFPs survey found that a substantially higher proportion of fee-based advisors than commission-based advisors were earning annual income of more than $250,000 — 34.2% vs 23.1%, respectively. As well, almost 40% of commission-based advisors said they earned less than $100,000 vs 27% of fee-based advisors.

The fee-based model also appears to provide advisors with an opportunity to work with higher net-worth clients. The survey found that fee-based advisors had, on average, a smaller client base but a sharply higher proportion of clients with assets of at least $1 million.

The advisors surveyed said that wealthier clients often prefer paying fees over commissions, says Lamontagne: “The higher net-worth client tends to be better aligned with a fee-based model and tends to prefer it that way.”

According to the survey, other clients who prefer fees include those in professional or management-level occupations; those who are self-employed; and those with a higher level of education.

But some clients are less receptive to paying fees, particularly when they’re accustomed to a commissions structure in which they don’t pay their advisor directly. “They bristle at the idea of paying for something,” says De Goey. “when they didn’t have to previously.”

This attitude is a key obstacle fee-based advisors said they had expected to encounter when switching to the model. Among other challenges were a drop in income and uncertainty around setting fees.

But some of these hurdles were smaller than anticipated. Almost half of advisors said they experienced either little or no decline or in income after completing the transition; another 20% said the drop was less than 20%. For those who did see their income decline, the vast majority saw it return to pre-transition levels within two years.

Still, many advisors are likely to avoid the daunting transition process for as long as possible. Says De Goey: “Change is the sort of thing that people are not comfortable with, and they would rather not change until they are forced to.”

He expects Canadian regulators will eventually follow the lead of their Australian and British counterparts, which have taken steps to ban commissions embedded in investment products, forcing advisors to move to fees. “The industry is clearly moving away from commissions,” De Goey says. “Even if advisors don’t want to, they will have very little choice down the road.”

But unless a similar ban is introduced in Canada, he expects a majority of domestic advisors will continue to use commission-based compensation.

Others are less convinced that Can-adian regulators will take such drastic steps. Rando says it’s more likely they will continue to push for improved disclosure of advisor compensation.

But advisors are likely to continue to embrace fees for the benefits they offer, Rando says. And he expects the industry and its regulators to adapt accordingly: “Regulations do evolve over time to [meet] the changing needs of the marketplace.”

IE