Weekend Reading: Commission Bias Edition

I’ve written before about the changing tide of the investment industry and how banning embedded commissions is the inevitable next step.  Advocis, an organization that represents more than 11,000 advisors across Canada, is pulling out all the stops to prevent this change from happening.

The latest push came from a conference in which Advocis railed against the proposal to unbundle advice from product sales, saying that the people who need advice the most are in the least position to pay for it.

No doubt, the vast majority of investors believe they pay nothing for the advice they receive, even if their advisor is nothing more than a mutual fund salesperson in disguise.  That’s because trailer fees and commissions don’t come directly out of pocket, so many investors are none the wiser to the real cost of advice.

With a fee-for-service model, investors know precisely what it costs for financial advice – advice that’s not tied to commission-based product sales.  Organizations like Advocis believe a commission-based model better serves lower income investors who can’t afford to pay upfront for advice.

But that’s assuming the type of advice you get from most commission-based advisors is comparable to the advice you’d get from an independent financial planner.  That’s like explaining the difference between a car salesman telling you why their product is better than the competition and someone with a fiduciary duty of care looking out for your best interests.

This Week’s Recap:

On Monday I finished my two-part series on borrowing to invest with a guide to leveraged investing for those who can’t help themselves.

Marie had a very popular post that looked at life and money lessons from our elders.

Over on my Rewards Cards Canada blog I ranked the top no-fee and annual fee cash back credit cards.

Weekend Reading

Some perspective on how the current financial advice industry treats its clients – Is Gen Y worth the effort?

Do financial experts invest better than non-experts?  Research suggests no.

Ben Carlson explains how the market tempts us into making mistakes.

Lots of chatter about the family tax cuts last week.  Dan from Our Big Fat Wallet explains how income splitting works.

Maclean’s wonders if the Conservative tax plan is principled or just vote buying.

John Heinzl reiterates why an all-bank portfolio is bonkers.

Nelson Smith at Financial Uproar asks why index investors don’t just invest in Berkshire Hathaway?

Michael James takes a deeper look at his investments and explains how diversified his four-fund portfolio really is.

We’ve all been asked to donate money at the checkout.  Ellen Roseman explains why checkout charity campaigns can backfire.

The Financial Post’s Garry Marr says a new car is a better deal than a used car today.

Big Cajun Man lists some key financial rules when it comes to borrowing to invest.

My Own Advisor looks at the risks and rewards of the Aeroplan program.

The Blunt Bean Counter takes on one of the great estate planning challenges – inheriting the cottage/cabin/chalet.

Have a great weekend, everyone!

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  1. My Own Advisor on November 7, 2014 at 4:58 am

    Thanks for the mention Robb and Marie, always appreciated!

    Enjoy the weekend!

  2. Michael James on November 7, 2014 at 8:52 am

    If the results weren’t so sad I’d find the tortured logic supporting the hiding of investment costs from investors amusing. “… and that’s why it’s important that we continue to trick people into thinking they’re not paying for advice.” Thanks for the mention.

  3. Kathy Waite fee only @ Your Net Worth Manager on November 14, 2014 at 11:47 am

    I agree precisely what needs to happen is unbundling advice and products. Why don’t we let Doctors prescribe drugs? How would you feel if your Doctor prescribed a brands heart pill because it earns him more or got him a complimentary trip?

    I also believe human nature is “what you don’t pay for you don’t appreciate”. Clients are less likely to act on “free” advice as they have no skin in the game. (free gym membership vs one you pay for? which would be valued and used more?)
    Commissioned advisors usually get paid most when they take the investment on or sell the insurance. ( 5% AUM or 12 months premiums+ ) The trailers ( 0.5% or 1 month premiums ) are nothing compared to up front commissions. Therefore if clients don’t do what they suggest down the road what incentive is there to chase them up? Client is likely so apathetic wont move investments away whatever. So all the talk about motivating small clients is exaggerated , small clients rarely get looked after or reminded. Its onto the next upfront commissions to hit the target from head office so I don’t get fired or pushed down the reward matrix.
    Advocis are 11,000? How are they really representative of an industry of 60,000 plus, the fact the don’t have a higher membership shows most advisors don’t see them as credible anyway.

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