Today, we have some good news and bad news -- and a call to action -- for both investment advisers and investors.
The news comes from a survey just released by the investment industry magazine Advisers Edge (advisor.ca) on investment adviser compensation. One thousand consumers of investment services were asked a series of questions about their knowledge and satisfaction levels with how their advisers are paid.
The release of these results this week was perfect timing for me, as I was writing about the new client relationship model (CRM) being instituted by the investment industry regulators, and how the CRM could result in advisers knowing more about their clients, consumers knowing more about how they pay for investment services and what those services entail.
Back to the recent survey. The good news for both consumers and service providers is the majority of investors think advisers are worth what they're paid, with 63 per cent rating their advisers' value provided as very good or excellent and another 21 per cent as good.
The bad news is there still is a lot of confusion and lack of knowledge about how advisers are actually paid. As many as 35 per cent of consumers reported they were not sure how they paid their adviser.
The call to action to advisers is to make an extra effort to ensure clients understand their compensation model, how much the adviser is being paid and what it costs the client, and be certain the clients understand which services they pay for and which are free.
At the same time, I appeal to the consumers of investment services and advice to ask their advisers more questions and share the responsibility for being fully informed.
The new CRM model is designed to encourage investment firms to design more transparent -- which means understandable -- disclosure of all means of compensation, all consumer costs and all potential conflicts of interest in the activities of investment advice and sales.
The first of these requirements was implemented in March 2013 and resulted in some clearly written explanations of the different models of compensation and how they work. Of course, the shortcoming of any standardized document is it, alone, does not explain to a client which of the models they are using. That's still up to the adviser, but here's a guide.
In general, you could be on a commission and transaction model, where you pay your adviser for transaction services in the form of commissions on mutual funds or trades of stocks and bonds. Funds and other products also pay an ongoing "trailing commission" to the firm to compensate the adviser for servicing the account.
The other general compensation model is fee-based, where the compensation is based on a percentage of the assets in the account, but no transaction fees are charged. Usually, the trailing commissions are turned off by using "F-class" mutual funds or other products.
Over the next two years, the level of disclosure will become even more explicit, to the point of requiring firms to provide the dollar amount (versus percentage) of compensation on future statements.
This may cause a big adjustment for some advisers and firms, but will be business as usual for others -- those who have always disclosed all amounts of compensation. A few advisers have even invoiced their clients directly for all fees, but this is rare.
Another positive (though expensive) step forward will be the requirement for regular reporting of performance on investment accounts. I say "expensive" because some firms have to pay out millions of dollars to develop the computer software to provide these reports.
For 20 years, my team toiled 80 hours a week for two weeks, four times a year, to assist in providing performance information our clients reviewed through their quarterly reports.
For us, having this process automated will be a huge step forward, as it will be for consumers of investment services.
Our only concern is our competitors are being legislated to catch up to us! Oh, well, it's good for all.
Happy Friday the 13th.
David Christianson, BA, CFP, R.F.P., TEP, is a financial planner and adviser with Christianson Wealth Advisers, a vice-president with National Bank Financial Wealth Management, and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance.