Dollars & Sense: Clients happy, but confused

Canadian advisors can take pride in the satisfaction they give their clients, but on the topic of compensation, there is still a gulf between client perception and reality, according to the Sixth Annual Dollars & Sense Survey, conducted for the ADVISOR Group.

On average, survey respondents served 374 clients, representing 277 client households. Almost half of respondents (48%) served between 101 and 499 clients. Twenty-one percent of advisors have found an easier path, however, serving fewer than 100 clients. At the other end of the scale, 6% of advisors somehow find the time to serve a client base of at least 1,000.

The majority of advisors (52%) said their average client had less than $100,000 invested with them, with the largest group (22%) saying the average account was under $50,000. The mean response for individual clients was $143,000, while the average client household represented $215,000 in assets.

The average advisor claimed a book size of $38 million, although 19% said they were under $3 million. Ten per cent manage between $3 million and $5 million, while 12% manage between $5 million and $10 million.

Only 6% of advisors could boast a book between $100 million and $250 million, while 2% of respondents said they topped the $250 million mark.

This year the survey added a new element, questioning not only the advisory community but investors as well.

The survey revealed that clients tend to have a high regard for their advisors’ services, as 62% said the advisor brought “a lot” of value to the relationship, while 32% said they brought “some.” A staggering 96% of investors expressed satisfaction with their advisors, with 68% saying they were “very satisfied.” The majority of clients (84%) are dealing with a single advisor.

But there remains a communication gap between the advisor and client.

Click here to read an Advisor.ca special report on the sixth annual Dollars & Sense Survey.

The majority of advisors (54%) rely on commission-based compensation, while a blend of fee plus commission is a distant second place, at 18%, and in a virtual tie with “salary plus bonus,” at 17%. Despite long-standing predictions that fee-based will sweep the industry, only 4% said they use this model of compensation.

Yet when we asked investors how their advisors are paid, the results were very different. Only 30% said compensation is commission based, while 32% believed their advisor is salaried. Twelve percent said compensation is a mix of fee and commission, while 17% simply didn’t know.

When asked which form of compensation their clients found most acceptable, only 30% said commission based. One in five said their clients didn’t really care, however, while 16% said they didn’t know what the client would prefer.

Investors, however, had a rather different opinion about what was an acceptable method of compensation. While advisors were correct that 20% did not care, 32% of investors said they would prefer their advisor to be paid a salary. Only 18% said they would prefer commission-based compensation. There was even less support for fee-based compensation, at 9%.

When advisors did discuss compensation with clients, 77% said they initiated the conversation, while 11% said their clients brought it up. Compensation disclosure was most often verbal, with 75% of advisors having such a chat, while 35% disclosed the information in writing — clearly some were using both. For 23% of advisors, it was part of their engagement letter.

Unfortunately — but perhaps not surprisingly — many clients’ memories were fuzzy. Only 55% recalled ever discussing compensation.

The mean personal annual pre-tax income for advisors in 2006 was $121,700, although this average was clearly skewed by the top-earning professionals. Twenty percent of respondents said they earned less than $50,000, while 23% earned between $50,000 and $74,999. Another 16% earned between $100,000 and $124,999.

Only 26% of respondents were clearly above the national average, with about 1% of respondents reporting earnings in excess of $1 million.

The split between IDA and MFDA registration has changed little over the years. MFDA registrants made up 57% of the survey, compared to 55% in 2005 and 58% in 2004. Thirty percent of respondents were registered with IDA/Accovam in 2006, compared to 28% in 2005 and 32% in 2004.

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The sixth annual Dollars & Sense Survey was conducted among a representative sample of 1,170 Canadian financial advisors between August and September 2007. The results are considered accurate within 2.9%, 19 times out of 20.

This year’s survey also included a representative sample of 1,886 adult Canadians who have a financial advisor, between August 9 and August 15, 2007. The results are considered accurate within 2.3%, 19 times out of 20.

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

(11/12/07)

Steven Lamb