By Jonathan Chevreau National Post FP Investing Section Thursday, September 23, 2004

Only one in four of Canada's financial advisors believe their compensation should be disclosed to clients, according to an industry survey.

A poll conducted by Advocis --which bills itself as The Financial Advisors Association of Canada -- found 72% of its members are opposed to compensation disclosure and another 5% are undecided. This was one of 10 findings published in the current issue of Advocis's Forum magazine (see www.advocis.ca).

It's a finding that doesn't surprise former regulator Glorianne Stromberg. But "it's amazing they have publicly admitted it."

The two reports on the Canadian investment funds industry Stromberg wrote in the 1990s made the case for more disclosure of how advisors are paid.

True, 26% are in favour of full disclosure. A typical response was: "Yes, I support compensation disclosure. If we are to be regarded as a true profession, then compensation must be clear in order for clients to determine our value."

But if the poll is representative of the feelings of most financial advisors, the vast majority prefer to keep clients in the dark. This suggests some discomfort over how much value they believe clients will perceive in their services if they knew how much they were really paying for them.

"I feel the client needs to know how we are compensated, but not how much," one told Advocis.

Another unnamed advisor cited by Advocis favours using engagement letters to disclose commissions earned by brokers and dealers but not doing so for every transaction. "I do not think the client wants to be reminded every time they do a deal how much money I (and my dealer) are going to make."

Advocis spokesperson Caroline Spivak says the finding was one of 10 compiled from a year's worth of topical issues the association gathered. She said it reflects input from a "few hundred" advisors so is "not statistically sound."

Also, she added, the context of the question was disclosure as it relates to proposals in the Fair Dealing Model (FDM) being developed by the Ontario Securities Commission. The model would require advisors to disclose sources of compensation as well as the amounts. When services are performed, separate statements would be issued.

Advisors feel this would entail a "nightmare" administrative burden, Spivak says. But generally speaking, "Advocis heartily supports disclosure because it's in the best interests of clients."

At one point, the Advocis site reported that another aspect of the FDM garnered widespread support from advisors: an amazing 95% supported eliminating "embedded compensation" like mutual fund trailer fees and commissions.

Too amazing, as it turns out. The data published on the Web site was done so in error. After this was brought to their attention, Advocis edited the result to correspond with the version in the print edition of Forum Magazine: in fact, 95% of advisors do not support the elimination of trailer fees and commissions.

If eliminated, quipped one advisor at the site, every mutual fund salesperson would have to get a job at a bank, become a fee-for-service planner; retire or "move their whole block of business to universal life insurance products."

Another suggested lack of advice is more harmful than lack of transparency, as if the two were mutually exclusive.

Some who favour killing embedded compensation are moving to fee-based commission, selling exchange-traded funds or F class mutual funds (stripped of trailer fees) but adding their own fee set as a certain percentage of total client assets (typically 1%).

An example is John De Goey, author of The Professional Financial Advisor, which details how advisors can make this shift.

Asked to comment on his profession's reluctance to disclose how they're paid, DeGoey said: "Most advisors sanctimoniously insist they are 'professionals,' but when regulators ask them to make disclosures like other professionals, they shy away ... Transparency is a key element of any professional meritocracy."

One problem is some advisors portray their advice as "free," particularly those selling DSC (deferred sales charge) funds.

DeGoey says mutual funds in 2004 are like cigarettes in 1964.

"Evidence is coming out that they are harmful in many ways, but the industry product manufacturers pretend everything is fine. The government needs to step in and police the industry because it clearly has no capacity to police itself."

While more transparent, fee-based advice is a still just a variant of the mutual fund or wrap account game. Clients often end up paying 2% or 2.5% of their portfolio value in annual fees.

A purer alternative is true fee-only planning, which entails paying a la carte for services like designing financial plans, or paying for truly objective advice by the hour -- with no compensation paid from the sale of financial products.

This is normal practice in most professions -- clients expect to pay a fee each time they engage a lawyer, dentist, plumber or mechanic.

But most Canadian investors "will not pay fees to get advice from a financial planner," one Advocis advisor insists. "Even though they know they pay fees indirectly through Management Expense Ratios (MERs), they do not want to take money out of their pocket."

Adrian Mastracci, a fee-only advisor based in Vancouver at KCM Wealth Management, says he has no problem presenting invoices that make it clear exactly how much they have to pay. His clients are happy to do so, he says.

NOTE: The information provided above is intended for general informational purposes only. It does not constitute advice for anyone's specific situation. Everyone should always first consult directly with their advisors to determine the appropriateness of any information contained above before taking any action. KCM Wealth Management Inc. assumes no responsibility for any loss or damage arising from the use of, or reliance upon the above information.