Fee for Service

Compensation disclosure to investors is on the rise in Canada.  Both recent and pending legislation will require financial advisors to disclose their compensation, embedded or otherwise, to investors at the point of sale and on a cumulative basis if certain proposed legislation is approved.

Embedded (or hidden) compensation such as back-end loads and trailer fees are reported to clients in prospectuses and information folders but many investors say that they do not read or in some cases, understand this important information. 

Over the past several years, many financial advisors have begun to opt for a Fee for Service compensation arrangement whereby their compensation is collected by charging the client a fee on the total investment assets under management.  This is a transparent and disclosed fee to the investor and in many cases, some of the investor’s holdings are redeemed to collect the fee. As well, through regular reporting, the investor is informed of the fee collected and in certain circumstances, can use the advisor’s fee as an income tax deductible expense.

No Bias on Fixed Income or Equities

When you charge a standard fee on the total assets managed, you, as the financial advisor, get paid the same amount regardless of the asset class in the investor’s account.  As an example, if an investor’s account is holding fixed income mutual funds and equity mutual funds in a non-Fee for Service account, you will be paid a lower trailer fee on the fixed income mutual funds. This could lead to a bias for equities.  With a Fee for Service account, you can hold many types of investments within an account and your account fee is collected on the account rather than asset type.

Annuitize Your Book – Increase your Book Value

Recurring revenue on a fee for service book of business can be worth more when it comes time for an advisor to think about their succession planning.  Typically, fee revenue is more predicable and profitable than a variable commission based business.

Develop your own Wrap Service Offering

Fee for service accounts gives full pricing flexibility to the advisor which can help the advisor develop a business plan/ wrap account offering for their practice.  As an example, an advisor can opt to charge a lower fee based on the amount of assets under administration to encourage larger accounts. Furthermore, an advisor can add specific services and benefits based on account sizes and fees.  Another example would be to advertise for accounts over $250,000 and for a 1% fee, I will offer a comprehensive financial plan, one income tax preparation, a will review and one annual portfolio review.  If the account totals $500,000 or more, then the fee will become 0.90% and I will offer the same services but add one more income tax preparation.

In conclusion, the industry is moving toward more compensation disclosure and a fee for service approach is one way not only maintain your competitive advantage but to also improve your offering.