One of the strongest arguments made by investment industry groups against banning embedded commissions – or the trailer fees paid to advisors when you purchase mutual funds – is that investors don’t want to pay up-front for financial advice.

Advocis, which represents financial advisors across Canada, and the Mutual Fund Dealers Association, believe things are fine just the way they are, claiming that, “investors prefer to pay for financial advice through fees that are part of their mutual funds.

Related: More ways the investment industry is screwing Canadians

These arguments are used to convince regulators that a ban on trailer fees would only hurt investors, with potentially “devastating consequences” for those who are just starting out and don’t have the means to pay directly for advice.

I’ve tried to debunk this argument in a recent post, stating that it’s up to the investment industry to adapt and deliver new service (and cost) models to meet the needs of consumers.

But a recent study by Morningstar India shed further light on the gap between investor expectations and what advisors perceived to be investors expectations.

The study found that over one-third of investors do not seek out professional advice when it comes to their finances, instead relying on their own knowledge or help from family, friends or colleagues.

Advisors were convinced that this was because investors simply did not want to pay for financial advice, or had a bad experience with financial advice in the past.

What was surprising was that investors were not averse to paying for advice. In fact, 42 percent of the investors surveyed stated that they were willing to pay for advice while another 42 percent were open to it.

“If investors are willing to pay for advice, what is it they really want? Our survey tells us that they want quality advice (41%) from a financial adviser they trust (34%).”

A similar survey conducted by Morningstar UK revealed that trust was the most important factor when choosing an advisor, and that cost was only the third consideration after past investment returns.

Related: My advice to switch out of mutual funds draws ire of industry group

It’s nice of the mutual fund industry to tout the benefits of their products – and while it’s true that the funds are accessible to anyone, that’s only because the fees are embedded inside the mutual fund and so you don’t even notice them.  It doesn’t feel like a lot of money because you’re not writing a cheque to your advisor every year.

And that says nothing about the inherent conflict of interest when your advisor is selling you products and collecting a commission on that sale.

Final thoughts

One of the challenges we thought we might face after starting our fee-only financial planning business this year was this reluctance to pay up-front for advice. Consumers just weren’t used to it and so we thought it would be a major hurdle.

Guess what? Like the Morningstar study indicated, most of our clients were looking for quality advice from someone they could trust.  Cost has rarely been an issue.

I haven’t seen any evidence of the so-called advice gap that the industry feels will widen if regulators ban trailer fees. Half of my clients are what the industry would consider to be “small investors” and the fact that they are willing to pay up-front for independent financial advice means the tide may indeed be turning.

Related: Can you trust advice from your bank?

By showing clients what they currently pay in dollar terms they usually end up grasping the value in paying directly for objective advice.

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5 Comments

  1. Tracey H on November 24, 2014 at 7:53 am

    I prefer to pay for my advice in such a way that I get a tax break (that is, not embedded in the MER). I do use advice from a big company where I have bought mutual funds (and now have private counsel that buys a variety of things for me), but until recently, I couldn’t claim the fees. Now I get to claim my 1% fee.

  2. Kathy Waite fee only @ Your Net Worth Manager on November 24, 2014 at 9:13 am

    Great blog Rob!
    I find I get clients who are “small” which means few investable assets but maybe 5 years from retirement and want to know if they are OK. An example in Regina Saskatchewan, is we have a lot of government workers, long service, large pensions, debt free but not much in savings. They cant get any help from someone paid on commission as they want a “plan” and advice, will be a lot of work but don’t have much to get a % commission on. They come under the minimums for the better advice channels in the bank.
    They also want the truth not a sales pitch.

  3. Grant on November 24, 2014 at 12:08 pm

    The idea of paying for a service based on how much money you have (whether it be trailer fee or % of assets under management) rather than work done, does not occur in other service industries. Imagine if you went to your doctor (or lawyer, accountant etc.) and he/she said the fee would be a percentage of your financial assets? I think it has happened because people don’t understand how much the AUM fee model is costing them, and the impact it has on their wealth.

    A much fairer model is an hourly rate, or flat fee based on work required, as you are doing, Rob, for DIY’s, or for those who want portfolio management done for them, such as done by Bason Asset Management. I’m not sure if the later is even available in Canada.

  4. Potato on November 24, 2014 at 9:56 pm

    To be fair to the incumbent industry, it could be that most people do not want to explicitly pay up-front for advice, but because there are so few fee-only planners in the country each of you/us could be awash in client demand anyway.

  5. Paul N on November 28, 2014 at 12:22 pm

    To be fair yes, people would love to have everything for free if it was available. IMO the problem is how to make it fair for both parties. If you have $200,000 invested in a MF and you have a 2% MER that is $4000.00 of fees every year. The MF industry does their utmost to not show your “lost $4000.00”, but prefers to say 2% deliberately to hide the raw number.

    If you simply have a basket of say 4 or 5 funds or ETF’s, the work involved is the same for $50,000. as it is for $1,000,000.00. So yes there should be a flat fee or a maximum fee. I also for example would be quite willing to pay additional for legal expert tax “avoidance” strategies.Someone who plans out a smart strategy in your last years before retirement so you don’t screw yourself on some technicality you may not be aware of. This is really where you need a intelligent planner. Making a simple effective portfolio or indexing (which most people should do for simplicity with maximum return) will be just fine as long as they can follow a simple plan and have some discipline.

    The industry has a black eye. It seems that slowly things are changing for the better. There are still problems out there but in the last few years there are finally low cost options coming “out of the closet” so to say. A few years ago Vanguard was not available in Canada, there is Shareowner, Ishares helps you construct a simple portfolio. MF companies reluctantly and in 0.1% increments are slowly dropping some of their fee’s… Wealth management companies are offering ETF’s where previously they offered only mutual funds. But some of these companies add 1%+ on top of the ETF fee’s, which I still don’t agree with. Then you don’t really change the fee’s, you just pay the same in a different way. They also need to cut their fees in half and work harder and get more clients, like we all have had to do at our jobs since the recession.

    The pressure is working and the industry has no choice but to slowly adapt. I’ve been a big pessimist on this subject but even I see the cracks forming.

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