Fee vs. commission not clear cut

Establishing the compensation model for services rendered amounts to one of the most difficult decisions for members of any profession and normally flows from client preferences, the professional’s needs and his or her perceptions of the market. The professional needs adequate compensation while the client may or may not grasp the value of services rendered.

For the independent financial advisor, the principal options are commission-based, fee-based, or a combination of the two.

Influencing their decision is the fact that regulators in the United Kingdom and Australia have banned the commission model, and a view – currently unsupported by any clear indication – that Canadian regulators will take similar action. Add to the mix the effects of the market crisis which reduced revenues for fee-based advisors.

Most Canadians have made a de facto choice for the commission-based model, in the estimation of Advocis president Greg Pollock, pointing to an apparent lack of interest in the fee-based model.

“I have no empirical evidence, but I believe that it’s a myth that most Canadians would happily pay for financial advice separately from financial products,” Pollock says, stressing that the commission-based model does not represent an official position of the organization. Advocis does not hear any desire to separate cost of the product from compensation from either advisors or their clients, he explains.

“I think a lot of Canadians would be hesitant with respect to that approach,” he says, adding that he does not deny that there is room in the market for the fee-based model.

Pollock suggests that Canadians did not suffer the same financial damage to their portfolios as investors in other jurisdictions, and that the Canadian financial sector has not experienced the extent of systemic scandals that occurred elsewhere – two factors that led foreign regulators to ban sales commissions.

“They’ve had to come up with ways and means of dealing with the concerns (that) these consumers have raised. Often it’s the compensation system that the regulators have focussed on,” he says, adding that the net impact in those jurisdictions remains to be seen.

The choice is a philosophical decision, according to Marc Lamontagne, a fee-based advisor, partner at Ottawa-based Ryan Lamontagne Inc., founder of To Fee Or Not To Fee, an advisor training company and 20 year veteran of financial planning.

“I think it’s primarily a philosophical decision to say do I want to work under a transparent model that is very clear exactly what I make and it’s very clear that I work for the client,” he says. The commission-based model leaves the advisor in a sales role and open to bias, he believes.

“I’m not saying that makes you unethical; it just creates a bit of a bias,” he says. “A commission advisor does have a bias and no matter how ethical I am as a commission advisor if I’m sitting in front of a client and one mutual fund pays me a commission and the other one doesn’t – well, in the back of my mind it’s always going to be there,” he says.

Another client choice occurs with the individual who resists paying an transparent fee, even though that choice means they will pay a commission embedded in the investment “They’re happier that way,” Lamontagne says. “They don’t want to see it.”

The choice that an advisor makes now will also have an impact on the value of their practice, should they choose to sell their book of business, according to Sandra Foster, president of Toronto-based Headspring Consulting Inc.

Trailer fees tend to be “sticky”, meaning that an advisor buying the book continues receiving them, potentially raising the value of the book. That simplifies matters for the advisor.

“You wouldn’t have to justify what you were doing for the client because the fees are already being paid,” she says. “If fees are being paid upfront, the advisor really does have to justify value.”

In the end, says Lamontagne, many fee-based advisors have some commission business and many commission-based advisors have some fee business.

He estimates that between 30%-40% of advisors on the IIROC platform and 10% of advisors on the MFDA platform derive all or part of their income from fee-based services.

“There’s that myth out there that you’re either in the one camp or the other and that’s not the reality.”