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By Jonathan Chevreau
National Post
FP Investing
Tuesday, August 19, 2003 |
Advisors who lived by commissions find fees aren't
so bad.
The August issue of Forum (the Advocis magazine
for Canadian financial advisors) features a familiar
face on the cover.
Jonathan Chevreau says,
"True fee-only advisors
are rare. Long-established ones do not sell products
but bill for their advice on an hourly basis,
like lawyers or accountants. Some fee-only advisors
may charge, say, $1,000 for a one-time financial
plan or other services, crafted independent of
product commissions.”
Toronto-based advisor John De Goey is captured
running down some stairs, over which are superimposed
the words "Taking the Leap: Are you fee worthy?"
De Goey is no stranger to this column. Based
on his FundLibrary.com articles, we've dubbed
him an "MER heretic" for his call to
mutual fund investors to throw off the shackles
of high Management Expense Ratios.
In the same issue, Forum editor Kristin Doucet
mentions the "bad press" MERs are getting
and says "investors are now starting to question
how their advisors earn their keep."
Forum is written for professional advisors. The
question for their clients -- you, the investor
-- is whether they should follow advisors who
make the DeGoey-like leap from commission-based
model to a fee-based one. Another advisor profiled
in the article mentions how pleasantly surprised
he is by his enhanced revenue stream just two
years after making his leap to fee-based. Where
do you suppose that revenue stream comes from?
First, let's clear up a common source of confusion:
the difference between fee-only and fee-based.
Many fee-based advisors benefit from the rosy
glow of objectivity enjoyed by fee-only advisors,
but the two terms are far from synonymous.
True fee-only advisors are rare. Long-established
ones do not sell products but bill for their advice
on an hourly basis, like lawyers or accountants.
Some fee-only advisors may charge, say, $1,000
for a one-time financial plan or other services,
crafted independent of product commissions.
Examples are Adrian Mastracci
of KCM Wealth Management
and Terry Greene, both based in Vancouver.
We're also starting to see examples of newer
fee-only advisors transitioning from the commission
world. One is Norbert Schlenker. Another is Leonard
Hughes.
Hughes is in the middle of a tricky transition
between the two worlds. In order to keep his licences
he must be sponsored by a dealer. Thus he still
sells mutual funds through GP Capital at zero
front load (but with annual trailer fees). He
can also sell insurance and hedge funds, which
carry hefty commissions.
Clients choosing the pure fee-only route implement
his product suggestions through a discount broker.
In such situations, the key is open disclosure
to clients and "no back-door stuff,"
Hughes says.
Which brings us to the true nature of the fee-based
model, which has Forum so excited. It's nothing
mysterious: just another version of the "asset-based"
model of the mutual fund or wrap industries: charging
a set percentage of assets on a total portfolio.
So a 2.5% fee on a $100,000 portfolio means $2,500
in annual costs.
A fee-based advisor may charge 1% or 1.5% of
a client portfolio invested in various securities.
Those who consider themselves "fee worthy"
talk a good game on the costs of investment management.
After years of selling DSC (deferred sales charge)
mutual funds they may now admit that, yes, MERs
are a bit high and yes, you are somewhat locked
in by DSC schedules.
The new breed of fee-based advisor like De Goey
prefers lower-cost investment products like exchange-traded
funds and F class mutual funds. F class funds
are regular funds with the advisor's annual trailer
fee (0.5 to 1%) stripped away.
However, F class funds can only be sold by fee-based
advisors who charge their own fee on top of the
reduced MER of the F class fund. The advisor's
1% or more comes on top of the underlying MERs
of F class funds, ETFs, closed end funds or individual
stocks and bonds.
For many investors, therefore, it may be a wash
at the cost level. Before, the DSC fund portfolio
may have cost you 2.5%. With F class, the fund
MERs may be only 1.5%, but after the 1% for the
advisor the total is again 2.5%.
Total costs may be less if ETFs are substituted
for actively managed F class funds. Then the all-in
cost may be between 1.17% and 1.55% for an advisor
charging 1% on the portfolio; more if foreign
ETFs are used.
This may be a fair price to pay for the admitted
benefits of using the services of a "fee-worthy"
advisor. However, remember a point financial writer
Bruce Cohen makes: that 1% fee will be imposed
on the total value of the portfolio, even if half
your investments are parked in a ladder of strip
bonds.
This is why I believe the best deal can be the
traditional brokerage model where you pay to buy
or sell individual securities. As long as you
take a buy-and-hold approach and have a broker
you trust will act in your best interests, you
pay one buy commission but then avoid the 1% annual
charge a fee-based advisor would levy on the whole
portfolio.
As the years go by, an ETF like the Barclays
i60s will cost you only the annual 0.17% MER,
and your ladders of bonds will benefit you more
than the advisor. Don't pity your broker, who
still makes a sale each year as bonds come up
for reinvestment.
Make it clear you don't wish to be a frequent
trader (with all the commissions and taxes which
accompany it).
If you can't find or train such a broker, go
the discount brokerage route and pay an objective
"fee-only" advisor when and if you need
such input.
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