The professional way to get paid

Let’s face it, the ongoing discussion about the relative merits of differing compensation models is one of the defining issues of our generation for our industry. The four basic options include: by salary, by the hour, by assets and by commission. There’s obviously room to mix and match and to use hybrid models, as well. Any conversation about this topic requires the requisite disclaimer of ‘it’s a free country’ and ‘you can use any compensation model you want’, of course.

What I find interesting is that most advisors I talk to explain their preference in their terms, meaning they choose what they feel is best for them, as advisors. Relatively few of them talk about offering their clients choice. Indeed, some even say “my clients prefer option A” even though they never offer and alternative.

Like Henry Ford saying you can have any colour car, as long as it’s black, the advisors who have only one compensation model strikes me as being less than totally focused on their clients’ perspectives, which are almost certainly not homogeneous. Let’s be honest, if we asked a large sampling of clients which of the methods above they prefer, do you actually believe that the cross-section would be unanimous in their preference?

For advisors, it’s important to not only offer a choice (to demonstrate they can be client-centric), but also to advocate for a preferred option (a legitimate part of our role as advisors). Accepting that all forms of compensation are legal and legitimate, the onus then falls to us to itemize the reasons for our preference. My preference is for discrete fees charged as a percentage of household assets.

My reasons are as follows:

First off, it’s more appropriate. If you’re an investor, should your advisor be paid by you or by the investment dealer or mutual fund? To me, the answer is obvious. For parallel discussions, should your pharmacist be paid by you or by a drug company? If you hire a tax preparer, should that person be paid by you or by the CRA?

Second, it’s more transparent. Most people who work with a commission-based advisor, for instance, have difficulty in explaining how and how much their advisor is paid in exchange for services provided. Fee based clients understand very well.

Third, it’s potentially deductible. This obviously depends at least somewhat on the services being provided in the first place. Under the Income Tax Act, investment counseling fees are deductible for non-registered accounts: commissions and fees for planning are not. This also allows for ‘loss leader’ business models, where a (deductible) fee is charged for certain valuable services that include certain other (non-deductible) services that are part of the ‘value proposition’.

Fourth, it can be directed. The next best thing to putting (for example) $10,000 into your RRSP in any given year is directing that $10,000 in associated advisory compensation paid from outside your RRSP – allowing for increased tax deferred growth.

I might add that I have a few clients who prefer to pay by commission – and that I accommodate them. I also have a few clients who hire me to do ‘one off’ written (non-deductible) planning work. I accommodate them, too. In short, I’m all for advisors choosing their compensation model for themselves and for advocating in favour of their preference. The simple point that seems to get lost, however, is that it is our clients’ money and, as such, the least we should be willing to offer is a compensation model that is consistent with our clients’ values and preferences if they differ from our own.

John De Goey, CFP, is the vice president of Burgeonvest Bick Securities Limited (BBSL) and author of The Professional Financial Advisor II. The views expressed are not necessarily shared by BBSL. You can learn more about John at his Web site: www.johndegoey.com.