Compensation disclosure sparks advisor debate

(October 1, 2004) The thorny question of how much clients need to know about advisor compensation stirred up debate this week in Advisor.ca’s online forum, the Talvest Town Hall. Although most advisors agree clients should be aware of how much an investment costs, there’s some argument as to whether it’s necessary to provide a complete breakdown on fees.

The issue has attracted recent media attention after a report on reforming the mutual fund industry produced by CARP, Canada’s Association for the Fifty-Plus, and the Small Investor Protection Association (SIPA) suggested the creation of a standard fund checklist form that includes information on advisor compensation.

On top of that, an informal survey conducted by Advocis and reported in the September issue of Forum magazine suggested that 72% of advisors did not support compensation disclosure as outlined in the Ontario’s Securities Commission’s Fair Dealing Model.

“I have no problem telling clients the MER (management expense ratio) that they are paying,” wrote one advisor in Advisor.ca’s online forum. “But it ends there. I don’t think they need to know exactly how I am compensated on deferred sales charges versus front-end loads or which funds I make more money on.”

“What the cost is to the client is a completely different issue than what we are paid,” added Brent. “The cost to the client is the MER. That must be disclosed. Beyond that, it is no business of the clients what we as advisors make from our business.”

But other advisors take the opposing view. “The comment that it is no business of the customer what the advisor is getting paid is simply wrong-headed and a cop out,” one advisor wrote. “I keep hearing that financial advisors earn their fees and commissions. Your clients should understand that. If you all did it, it should not be a problem.”

Another agreed, stating he has no problem telling clients exactly how much he gets paid from any transaction, “broken down to the dollars in my pocket.”

SIPA’s Ken Kivenko says the intent of the CARP/SIPA report is simply to understand how an advisor is compensated. “If commissions are transaction dependent then we feel they should be disclosed. Percentage would be fine by me but some advocate dollars and cents disclosure,” he said.

In the Advocis survey, one advisor called for a level playing field, suggesting that if financial planners and insurance representatives are forced to disclose compensation, bank employees who offer advice and sell funds should have to disclose their salaries.

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One solution suggested by an Advocis survey respondent would be to clearly spell out commissions earned by the dealer and the advisor in a letter of engagement at the beginning of the relationship. “That’s a professional way to do it,” the advisor believes. “I do not support having to do it every time I do a transaction.”

Outspoken investor advocate Joe Killoran says the current advisor business model, with its numerous and often complex compensation models, is flawed, and that’s why investors need to access all the information they can.

Killoran suggests a one-page “point of sale” advisor disclosure document. “The many advisor remuneration combinations and permutations are totally visible when my forensic one-pager is completed in full,” he says.

In fact, Killoran would look to see advisors go a step further and issue a performance report card. “How well advisors do choosing funds for clients is a critical component and it’s not there.”

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Join the ongoing debate on compensation in the “Free For All” section of the Talvest Town Hall on Advisor.ca.

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

(10/01/04)

Doug Watt