Advisors defend the trailer

Advisors have been stepping up to the plate to defend the trailer commission, following our story this week on the possible threats facing the dominant compensation structure.

According to our metrics, this article has been one of the most read articles that we have posted in ages. This doesn’t surprise us much, as any threat to an advisor’s livelihood should be taken seriously by all in the industry.

Just a note on the role of the media, though. Reporting on this developing trend — Australia, UK, and now, it appears, the U.S. — does not mean Advisor.ca is calling for the end of trailing commissions. Editorially, we support the advisor’s right to determine his or her own compensation structure.

The follow-up story on fee-based practices simply illustrates that the model will not be affected by any move to ban trailers.

As we expected, the original story generated some reader feedback. Here’s what some of your colleagues have had to say about the issue:

“So, foreign securities regulators and certain pundits in Canada are raising objections to trailer fees and other commissions paid to mutual fund representatives, because they are increasing the cost of consumer investing to an unbearable level.

Forget that the 25% of fees collected is paid to the representative, what about the bulk of the costs? The average equity fund charges something over 2.5% in MERs alone, and negotiated sales commissions are on top of this.

Why not focus on the rest of industry? We all know the answer to that. Take on the real money? To many cowards and dependents on the system to do that. Rather let’s pick on the little guy — they are an easy target and cannot defend themselves.

By the way, regarding this “fee-for-service,” what exactly is the percentage of assets that is being charged — 1% or 2% depending upon account size? Versus what, 0.35%? This is a savings to the client? No wonder proponents like it. They are making more money than ever. The only negative I see is that fee for service downloads fee collections to the representative.

No doubt there is greed feeding the system. It appears the client and the representative are at the bottom of this food chain. ”

It was also pointed out that fee-for-service may work for relatively affluent clients, but that the model involves costs that cannot be borne by those with limited assets.

“I manage over $15 million in investments for low- to middle-income clients. Most of my clients have between $25,000 and $100,000. Now in my mind they need to have quality advice and sometimes supervision on how they invest and spend their money so as to ensure the money will last.

Now I do get paid a 2.5% commission and a trailer fee of 0.12% to 0.25% per year. This is done under a deferred sales charge. This is much cheaper than charging them an upfront fee-for-service or even a monthly fee. I do give them my time and access to my 28 years of experience and the access through our company and office for more expert advice if and when it is needed. I see most of my clients every six months and at one year intervals.

So if these types of clients will not accept an upfront fee-for-service where will they go?

Well it will be the banks and what will then happen is this: once all the small brokers and agents are gone — and the few left are dealing with high net worth clients — the fees will increase.

I truly feel we do have a good system and yes some things in our business need improvement. Clients should be aware of the fees they are charged and advisors should be obligated to disclose them. I have never had a problem on telling a client what and how I get paid.”

(08/12/10)