Realizing the Value of Advice

Posted 27 Jan 2017 by Rick Irwin, CFP, CLU; Lorna Maughan; Melissa Allan; Patricia Bell, PFP

Take a closer look at the annual statement you will soon receive for your mutual fund accounts with us and with your bank. Regulators have taken steps to promote transparency on how your financial advisor is paid.

Of these regulatory changes, one of the most prominent will be the exact dollar figure of the fees paid, out of your investments, to your mutual fund dealer; a percentage of which is paid to your advisor to manage your portfolio and give financial advice. This is a very welcome change in our office as our advisors are upfront about how we are paid from the initial meeting. It is important for you as a client to feel like your advisor’s services are valuable, and the compensation your mutual fund dealer pays your advisor is for the betterment of your financial situation. Each of our advisors recognizes the value of advice in the success stories of our clients:

  Rick Irwin, CFP, CLU

“While clients assume there is a cost associated with working with a financial advisor, most of them haven’t seen the exact dollars and cents until now. Advisors can discuss the cost of investing with their clients and demonstrate the value of their advice, to reduce their anxiety. 

In 2004, my dealer at the time, launched a fee-based platform. My father and I became among the first advisors to transition our eligible clients to this more transparent business model. At the time, I was looking at industry trends in the US and other jurisdictions and the increased media focus on embedded compensation, as well as what would be the most fair and open business model for my clients.

This shift towards fee transparency (for banks and independent advisors like us) has led to some positive changes to the funds’ price structures. For example, the introduction of preferred pricing for larger accounts, normalization of fees that previously paid enhanced trailers, and a higher focus on demonstrating the value of financial advice and actively managed investments. In the end, fee transparency benefits investors and enhances the client-advisor relationship.

So, what is my fee?

The standard “trailer” fee for most equity or balanced funds is about 1%. This fee is embedded in the cost structure of the fund and deducted each month. Moving forward, F-class funds (fee-based investing) do not have an embedded fee; instead, the account is charged a fee of, in my client’s cases, 1%, or the same as what the trailer was previously.

My initial focus when I shifted clients to fee-based investing was on non-registered accounts, as clients are able to deduct the investment advice fee for income tax purposes. The fees on registered accounts like RRIFs, RRSPs and TFSAs are not deductible and therefore, these investments are less attractive as fee-based accounts. This has changed over the last year, as many fund companies have improved the cost structure of F-class funds, using them in RRSP and RRIF accounts, even though no tax savings can be generated.

There are still a few roadblocks. TFSAs, the fastest growing segment of my client base, do not have a fee-based solution available. There are also account and/or household minimums required to set up fee-based accounts. These hurdles have prevented me from fully migrating to a fee-based business, but hopefully the coming year will bring greater flexibility to expand. Please do not hesitate to contact me if you are wondering whether fee-based investing would work for you.”

 Melissa Allan

“Everyone who helps manage your financial plan gets paid somehow. The fund managers who actively manage your mutual funds get paid for countless hours of stock research. Our mutual fund dealer, Quadrus Investment Services Ltd.(Quadrus), gets paid to keep advisors compliant and work with the CRA on tax reporting, among many other things. 

Investment representatives like us get paid a portion of Quadrus’s cut to retain business, rebalance client portfolios, ensure they are well diversified and more. At the end of the day, management fees allow us to provide the advice and products that we do. We plan, research and choose your investments, from the type of account you have to the funds you hold. We monitor and update your risk tolerance as your needs and goals evolve.

At the end of the day, we help keep you on track to meet your financial goals. That is our job and it is one we take pride in. We face a wide range of client questions that need answering, if not by us then by one of our strategic partners:

  • Should I invest in RRSPs or TFSAs?
  • Should I take Canada Pension Plan at age 60 or 65?
  • Should I quick pay my mortgage or save for retirement?
  • As a self-employed individual, should I pay myself a salary or incorporate and pay dividends?
  • How do I manage the tax-free spousal rollover provision when I die now that I am a widow? 
  • Should I name my estate as beneficiary on my RRIF or my kids?

An investment representative does so much more than just recommending mutual funds. A tax or estate planning error can be detrimental to your financial future."

 Lorna Maughan

“The UK has already been through similar changes (back in the mid 1990s) to Canada when it comes to advisor compensation disclosure. The fee cited on statements ( in pounds for any investment product, including insurance) includes the administration platform fee and the fund managers’ fee. This means the client can see exactly how much the investment product and advice is costing them. 

Another more drastic wave of changes was introduced back in 2012, with the idea to improve public confidence in the financial advice sector by enhancing professionalism and increasing transparency in the way advisers are remunerated. The two areas impacted most were advisor education and compensation. Advisors could no longer receive embedded commission for investments, pensions or annuity business – they would have to agree on an upfront service fee. Advisors also have to agree on an ongoing fee for reviews, often called trailers in Canada. Once the fee has been agreed upon, this can be paid out of the investment transaction rather than the client writing a separate cheque. Following these changes, advisors were also held to a higher educational standard before being qualified to give financial advice at all.

These more recent changes went one step further in the UK, and it’s been suggested that something similar could happen in Canada.

I have read several reports that concluded advisors obtaining a higher level of education are perceived as having a greater sense of professionalism. Coupled with the complete transparency of the fees and charges, clients now have more confidence in advisors and the advice they are given.

One of the negative effects cited in the review was a large decline in the number of advisors – from 40,000 in 2011 to 31,000 in 2014. A number of banks and credit unions withdrew from the financial advice market altogether. This means that clients who do not have either the ability to pay a fee or a large enough investment portfolio to warrant the cost of fees are at risk of not getting any advice! The long-term effects of this are yet to be seen, but it’s fair to say that most face-to-face advice in the UK is given to those who are more affluent, which is detrimental to the financial future of those with lower incomes."

 Patricia Bell, PFP

“The financial services industry and the way Canadians access information is rapidly changing. And while many of us would acknowledge that change can be scary, change also often comes with opportunity.

The year end statement you’ll be getting soon is a case in point. No matter where you currently invest your hard earned money, you’ll be able to see exactly what fees have been paid to manage your accounts. 

When you look at those fees it’s important to remember not all financial advisors are created equal. In today’s complex marketplace, it can be overwhelming to choose products and build a diversified portfolio that’s right for you. Because Trinity Wealth is independent, we have access to sophisticated global investment opportunities and tax efficient solutions that may not be available to you through traditional means like a bank or investing on your own. We meet regularly with the fund and portfolio managers to stay ahead of a rapidly changing marketplace and explore potential opportunities. This is what we do, all day, every day. We don’t offer mortgages (although we can point you in towards those who do!), or open chequing accounts, or take bill payments.

Because you work with an independent advisor you are among investors who could enjoy nearly three times the net worth of investors who don’t get advice1. Statistically, investors who work with an advisor not only accumulate greater wealth but also avoid emotional investment decisions and be more prepared for both retirement and dealing with life’s unexpected bumps. 
Knowing the cost of investing is an important part of any trusting advisory relationship and if you still have questions about I’d encourage you to get in touch. Our relationship doesn’t end with the purchase of your investment, it begins.“