My advisor takes off 10% and puts back into fund same amout of money

Guys talk more i like the coversation for someone with no money

Also, please amend the settings on this blog so long comments are allowed.

Hi Rob, I just switched something on the blog so hopefully long comments are now allowed. Mind you, I'm not really proficient with web stuff - so it may have made things worse. I don't know. lol

thats good - I hope you could tell that my last comments got split up out of order - thanks for fixing

I read tax interpretations and study trust laws in my spare time (fun). I also do client tax returns because it helps me add so much more value in the advice I am able to give and then implement. (I charge a nominal fee for taxes but lose money on it figuring that my tax work helps me better earn my investment revenue. I have to have an office, computers, staff, etc to help me. All of this costs a lot of money.

I do all these things because it becomes very easy to add a lot more value to clients than say $525,000 (your numbers) before grid and expenses. I would go on to say that any advisor that can't add 1% of value to their clients is in the wrong business. (I realize many or most don't but it is really easy if you're trying to).

But to extend your analysis, how much should grid be and expenses be? and how much should I earn for the work I do? I feel the clients are properly disclosed what they pay and the market is working just fine. Would you resent someone challenging what you made when you sold your business? So instead of implying that I make too much (if that is what you're doing), why don't you quantify what I should make.

I sold my business to someone I didn't have a fiduciary responsibility to, so there is no comparison.

What should a grid be? 0% with a bill for advice by the hour. Good advisors would set their hourly rate and maybe a guy like you with a CFA gets $500/hour. You'd be compensated well for your time, but this model would require downloading regulatory requirements to either the fund companies, or the brokerages. Maybe annual account fees are higher, but I would argue that higher account fees, with hourly advice is going to be much cheaper for the client, provide less conflict of interest, and ween out advisors who do lots of upfront selling and no servicing.

Or we can keep the current models and require advisors to go to school for years, apprentice under a senior advisor and have them swear an oath of fiduciary engagement.

In a perfect world, the hourly rate model would more closely allign the work done to the money paid. The problem (one of them anyway) with the commission model is sometimes a lot of work is done for a little pay and sometimes a little work is done for a lot of pay. That is certainly less-than-ideal, and certainly is abused by many bad advisors. The good advisors (there are a few) explain to clients what their advice costs and people tend to find that, over the long term, the 'work paid' to 'work done' ratio becomes better alligned.

But I certainly acknowlege the abuse that happens from the commission model, and while I know I am able to operate within it and maintain a fiduciary duty, many choose not to.

I will counter, however, that while the hourly rate model looks better, it is not without conflicts. Suddenly, jobs that could take an hour are taking three, and disbursements start rising too. Lawyers charge by the hour yet I don't think clients feel particular in control of their costs, and certainly not until after the fact. What happens with the hourly model is people try to avoid fees (for example think of the many people who think they should avoid a lawyer fees and write their own will (can it be done? yes, possibly but 99.0% of the time it is an absolute disaster in what I have experienced).
The other problem with the hourly model is people starting out with small accounts can't afford to get any decent help.

Obviously, I would welcome higher proficiency standards for advisors, but I am not sure apprenticing with a senior advisor would work that well but closer supervision under a competant branch manager would help, and as for swearing a fiduciary duty, that sounds good, but you can't legislate ethics. If someone wants to rip someone off, they can (and do in any other industry including those such as law, CAs etc.- I have seen it many times).

The only way the industry gets better is when the public get better at purchasing. Regulating it to death doesn't work. Anyone relying on a fiduciary duty and not willing to learn some basics is doomed to being ripped off in every area, not just finance.

I heard a model the other day where the advisor takes a percentage of a clients entire net worth, and not just the investment assets. I think that would be an improvement to those providing advice in all areas and then there are incentives to reduce a clients debt, etc.

I just heard this idea so I haven't thought it through but maybe paying an advisor some percentage of a combination of 'net worth' and 'annual cash flow' would be an interesting model.

Now back to your numbers (not mine), but let's suppose your numbers were accurate. $525,000 of revenue... before grid and expenses......

Keep in mind that I help clients negotiate better mortgage rates, set up corporations and family trusts to save tax, assist them with their group RSP and pension options, manage their life insurance (I earn commissions on this but with 99% of the insurance large term insurance policies, I can assure you I may just break even), I review wills and POAs as well as draft copies, I ensure clients pay off their debts quickly, and I regularly interview the managers of the very few funds that are any good. I research investments and am able to avoid the 99% of crap out there that is easy to sell and would make me a fortune. I have strived to get my CFA which was really hard, and obtained the too easy CFP.

That's fine that there is the cost-value analysis you provide for YOUR clients, but why does a individual have to pay for advice on their estate through mutual fund trailer fees? Why not send them a bill for advice which includes all the facets you discuss and leave the advisor compensation out of the portfolio cost?

I know, it's hard to do that and act honourably when everyone else doesn't hold themselves to that standard - they can have a song and dance to take business away from you and put people into crappy portfolios, and give them bad advice.

The point is that tied selling is wrong, but is an easier sell than showing a bill for everything a good advisor does.

As for MERs being too high, I would agree they are too high for 99% of the funds that aren't providing any value. That said, 99% of ETF fees are too high too. MERs are less related to unscrupulous and incompent advisors (for which there are many) and more related to the fact that the public are terrible purchasers of financial services. If people become better purchasers of financial products, the industry will be forced to change. It won't change any other way. CC's site is doing great work in my opinion, as he is smart, analytical, and balanced in his assessments. I can't believe he gives all that away for free but he does and people are lucky he does.

It used to frustrate me a great deal, but a long time ago, I gave up trying to chang ehe industry and resided myself to just protecting my own clients from it.

I agree with everything in this comment except that 99% of ETF fees being too high, there are plenty that are fairly priced, at least on an asset-weighted basis.

You can probably assemble 98% of ETF portfolios with 4-5 broad based ow fee ETFs - yet there are hundreds being created each week with tonnes of tracking error, illiquidity, and high fees. I stand by my comment.

First, I tell all clients it is their right to know exactly what they are paying, and how much I am getting of that.... and I will point out to any client who asks what I earn on their particular account to the penny. This is time consuming to do accurately because I sure don't want to overstate the cost, but I sure don't want to understate it when my word is on the line.

While I don't have a lot of interest in posting my bank statements or tax return on this blog - the $300K figure I citied is an estimate.... I haven't worked it out to the penny. I also don't disclose the size of my book to anyone but will state that it is higher than $52M.

Well it sounds like it should be higher since, again from your comment history on other blogs, you seem to actually know what you are doing and working for the clients first. Bravo.

Hey Rob, thanks for your comments. Hopefully you can appreciate that the nature of this blog is to start discussions on certain issues for the masses (which means sometimes foregoing the full analysis of what the DSC financing costs and how it is reflected in the MER). I've read your posts on Canadian Capitalist's blog and I do believe you are probably one of the good ones. So with that said, I hope you are up for a good debate (hopefully now and in the future) without thinking I want to beat you up. I really am looking to further discussions on this sort of stuff. You will always be welcome here.

Now...

Assuming my quick math is right, and the following assumptions: if you claim you could earn $300K extra per year by flipping matured units into DSC units then I would assume that your normal trailer fee is 1% and you don't do DSC (at least not predominantly), then an extra $300K would represent 1/7th of your book being rolled into new DSC units which means that you would go from making 1% that year on those assets to 5% on those assets (for that year, and excluding the 50bps trailer in that year), which means a difference of 4% on those assets. $300K in extra income is 4% of $7.5 million, which multiplied by 7 years would mean a book of assets of about $52.5 million.

So if you're not doing DSC and are one of the good guys, then you are earning, what, 1% on $52.5 million or $525,000 before your grid and expenses.

Am I in the ballpark? Please clarify if you would.

Then explain if MERs are not too high in Canada, and if that has nothing to do with unscrupulous (or incompetent) advisors...

Also, please point out the spelling errors - I can never find my own errors.

Thanks,

Gordo

WHEN IS IT CHURNING (in my opinion)
CONTINUED

Now, another very common practice is taking the 10% free DSC units, or units that have finished the DSC schedule (aka Matured units) and buying a NEW DSC fund to genreate a new 5% commission - I believe that this is 100% churning, bad for the clients, however rampent in the business since it is so profitable for advisors and their dealers. I could easily make $300K extra a year if I did it.... few advisors are going to turn that kids of money down, but it is wrong so we don't do it.

THAT's IT

CONTINUED
If the advisor is taking DSC units and buying the same front end units at 0%, then this is not churning. Yes, the advisor is getting paid 1.0% vs 0.50% which should be disclosed is the guy is any good. The clients costs do not change on a MER basis but their ability to move out of a DSC fund drops. Since the 10% free benefit is not cummulative each year, an advisor has to do this regularly or the client risks OVERPAYING.

You can argue about whether DSC is a good thing or bad, but I would argue the advisor who does not free up the 10% each year with his clients holding DSC funds, is not acting in his client's best interest.

Fund companies hate this practice because they have to pay an advisor more, but cannot pass this cost on to the unitholder. Who gets screwed is the holder of the limited partnership that financed the DSC in the forms of lower payouts. The real issue is the cost of processing all these small trades, and staffing a call centre to ianswer free unit inquiries but that is another issue.

Hey, I am an advisor (one of the few good ones I believe) and while I am very critical of the indusry and many of its practices, I disagree with you here:

I disagree with your comment "than MERs would be lower across the board (by about 0.50%)." - and, my suggestion from seeing the better written blogs such as Canadian Capitalist - you should be stating that this claim of a 0.50% MER reduction is your OPINION as opposed to FACT. ( a spell check wouldn't hurt you either, but I am a terrible speller so I shouldn't be talking)

So why do I disagree?

The fees would not go down because the fund company either has to fund the DSC commission (either internally or through a limited partnership) with the extra 0.5% or fund the full 1.0 % trailer. The net cost is the same.

Continued