Financial advice may cost you, but not as you expect

Most people in Canada receive their financial advice and direction from financial advisers, planners, and investment salespeople who are compensated by some form of commission paid by product manufacturers.

"Manufacturers" are mutual fund companies, life insurance companies and banks, supported by a retail sales network of investment dealers.

In some cases, it is the investment dealer who charges a commission for trades. Some financial planners receive commissions at the time of investment purchases, often to compensate for the initial financial planning advice they provide when a person becomes a new client.

(In a modified compensation model, some advisers are "fee-based," meaning they negotiate a recurring fee based on a percentage of the investment value, rather than charging on transactions.)

The basic system has been in place for many decades. In 2004, the Ontario Securities Commission released a massive document called the Fair Dealing Model which, among other things, proposed to eliminate all third-party commissions. That recommendation was not adopted.

However, with England, Australia and several other countries lately moving in the direction of outlawing all commissions and setting up a regime where all consumers must pay directly for financial advice, this debate is heating up again.

There is some conjecture that commissions could be eliminated in the United States, as well. That would certainly put pressure on the Canadian financial services industry.

My personal feeling is it would be a mistake to implement government regulations that outlaw third-party compensation or commissions.

The current system -- which gives freedom of choice to consumers -- is likely superior. However, I have worked hard over the years to improve the level of disclosure and transparency among all advisers, and I support any moves in that direction.

In the spirit of full disclosure, I must admit I am a strictly fee-for-service adviser, and have been since 1992. This means I don't accept any commissions, referral fees, or any compensation from any source other than fees clients pay directly. These fees are all fully disclosed and invoiced. But I don't believe that model is best for all investors, or for all advisers.

Here are some of my concerns with forcing that type of arrangement on all consumers:

-- not everyone can afford to pay directly for advice;

-- some consumers clearly like their costs -- whether commissions or taxes -- to be hidden; and,

-- from a selfish point of view, it helps me differentiate myself from investment advisers who are selling and advising on investments only.

However, there are some improvements I suggest to the current system. The first suggestion is improved transparency, so that all mutual fund investors understand how much they are paying for advice, how much for investment management and how much for administration and taxes.

Currently, all of these costs are embedded into the management expense ratio of most retail mutual funds. Consumers should be shown disclosure that separates those costs, at least for the sake of understanding them.

The next step -- more complicated -- would be to truly "unbundle" the different costs and allow consumers to pay directly for the personalized advice, separately from the investment management of the funds.

Proponents of the fee-for-service model point out there is an inherent conflict of interest in an adviser purporting to be a financial planner or adviser, when that adviser only gets paid if the consumer buys investments.

Without debating that point, my suggested solution is for those advisers to simply and openly declare any potential conflict, so that it is on the table. Like so many issues that get in the way of healthy relationships, everyone knows the issue; the only way to eliminate any problem is to talk about the issue openly.

Sounds like good marriage advice, too. However, for now, let's just try and open up the relationships between investment advisers and consumers.

David Christianson is a fee-for-service financial planner and portfolio manager at Wellington West Total Wealth Management Inc. He can be reached at

dchristianson@wellwest.ca

Republished from the Winnipeg Free Press print edition December 3, 2010 B11