Commissions, mutual funds still preferred choice of planners: Survey

(June 9, 2004) Despite the industry’s ongoing debate over fees, Canadian financial planners are still relying on traditional methods of compensation, such as product commissions according to a new survey. The Credo Consulting study also indicates that while Certified Financial Planners favour mutual funds over all other investment choices, alternative products are also growing in popularity.

Nearly 70% of planners surveyed said they received product commissions, which comprised an average 64% of their total compensation — by far the largest source of reimbursement. Only 15% said they charged a flat fee for advice and those fees comprised just 25% of their total compensation.

“Compensation rates are still leaning towards product and trailer commissions,” says the study’s author, Cynthia Enns.

On the product side, 90% of CFPs questioned by Credo use mutual funds, representing 54% of total client assets.

“Even though alternative products have been at the forefront of the marketing parade for the past number of years, we were interested to note that financial planners are by no means abandoning mutual funds,” says Enns.

About three-quarters of the CFPs surveyed said they planned to increase or maintain their use of mutual funds in the next couple of years.

Enns notes that a comparable study in the U.S. produced similar findings, but the support for funds in Canada was higher. “In talking with advisors, they are still very happy with mutual funds as a tool, although there’s been lots of criticism of them, there’s definitely still a strong usage out there.”

There were also some strong numbers supporting mutual fund wrap programs, says Enns. Although only about 25% planners are using wraps currently, 79% said they plan to increase their usage of the product in the next one to two years.

“There’s an overall trend of planners trying to simplify their processes and have that automatic rebalancing so they can focus on planning, not investment choices,” Enns says.

The top three alternative products identified by planners were income trusts, separately managed accounts and linked notes. Hedge funds were on the radar screen, with about 10% usage. However, of those who were using hedge funds, 82% said they planned to apply them even more in the next couple of years.

Enns says she was surprised by the limited use of exchange-traded funds — which she says barely registered among planners — considering how much coverage they’ve received in the media.

“The main reasons are compensation and the fact that you have to have a securities licence to sell ETFs, which your typical planner does not hold.”

Vancouver-based Credo Consulting, with the assistance of the Financial Planners Standards Council, surveyed 529 CFPs in April and conducted follow-up interviews in May.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com