Dealers need to think fee-based

Broker-dealers that do not support a fee-based advisor model should think twice about the offering, as it will prove to be the future of financial services, says outspoken fee-based planner John Nicola.

“When we take a look at the price for advice, here’s what I’m going to suggest: in the future, if you have more than $500,000 to invest, you’re not likely to want to pay more than 2% a year,” says Nicola, president of Nicola Wealth Management in Vancouver.

Speaking to a dinner audience at the Advisor Group’s Mutual Fund Dealer Symposium in Collingwood, Ontario, Nicola said serving the relatively tiny fee-based community seemed to be a low priority for many dealers. That’s why Nicola chose to bypass the dealers completely and serve as his own dealer.

But things are changing. He points out that Manulife and Assante are both working on a fee-based model. These heavyweights could tilt the entire landscape of financial services, as wealthier clients discover they could pay lower total costs by switching to fee-based advisors.

The freedom to redeem an investment and reallocate the proceeds, without incurring the usual costs associated with mutual funds or securities trading commissions, is very appealing to affluent clients. And since fee-based advisors tend to serve the coveted high-net-worth market, the dealers are missing out on a key market that will only grow, Nicola notes.

Advisors too should rethink the fee-based model and learn to appreciate value over price.

“If I was starting into the business now, knowing what I know, I would look for companies that could help me with the buying and selling of books of business,” Nicola says. “I would like to know that they could help me with specialists where I don’t have the expertise.”

As an advisor to HNW clients, he would also want to know that his dealer could help him place clients in exempt products, while providing assistance in training his staff.

“I’m asking for a lot, but at the end of the day, the advisor has to make the choice,” he said. “They aren’t likely to get the best payout, but they are likely to get the best result.”

That was a decision Nicola made in licensing as well. He opted for the ICPM registration. He admits that there appear to be additional costs to the ICPM registration, such as paying for third-party compliance and data feeds, plus the in-house production of client reports.

But registering directly with the BCSC allows him to offer discretionary accounts and also grants him virtually unrestricted access to product — not only mutual funds but hedge funds, real estate LPs and other exempt product. Quite simply, he says, it is the best fit for the fee-based model serving HNW clients.

It has also enabled him to create his own pooled fund. Even factoring in the costs of outside services — such as custodial and audit services — he calculates the end cost to clients is between 1% and 2%, compared to an estimated cost of 2.75% for the average equity fund.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com