More people than you would think don’t know what they pay in fees or how much and how their advisor is paid. I wrote previously that when I asked investors if they had a clear understanding of advisor fees and compensation, “I had no idea” or “I knew I was paying something but wasn't really sure how much” were common replies. (According to the Globe and Mail, 75 per cent of investors do not completely understand the commissions and fees they pay their firm. Source: J.D. Power 2015 Canadian Full Service Investor Satisfaction Study released August 20, 2015.)
In my column, I also wrote about the Client Relationship Model (CRM) II, which is part of new Canadian Securities Association national legislation that requires clear disclosure of investment costs to investors, investment performance reporting and client statements.
CRM was a long time in the making. It is based on the fact that a client should know what they are paying for, how much they are paying and whether they got good value for what they paid.
Financial advisors are usually in paid in one (or a combination of ways) based on their business model and their clients’ needs and preferences.
There are two common advisor payment methods:
Fee-based advisors are paid an annual percentage of the assets you invest with them. I am a part of this group and will discuss this in more detail later. This is common among investors with more than $250,000 to invest. The more investments they have, the less they pay. For example, they might pay 1.25% on $1 million in assets or 1.50% on assets of $500,000. The fees are split between the advisor and the advisor’s firm and the advisor is paid to not only manage the portfolio but to provide advice that will serve the client well and reflect their best interests. What you get depends on what you negotiate with your advisor. Some advisors include retirement, estate and succession plans in addition to investment management in their fee. It’s up to the client and advisor to decide what advice the client needs and whether the advisor is able to offer it.
Commission-based advisors make their living on commissions generated when they buy or sell investments such as equities on behalf of their clients. They may also make commissions, which are embedded in the financial products they sell you, by selling mutual funds and insurance products. Commission-based products can be complicated and for some clients, very hard to understand.
For example, many investors aren’t sure how commission-based advisors are paid. They may think paycheques are coming out of the company profits and that the advisors are salaried employees. The advisor may tell them that their company pays them, which is a half-truth. They aren't told that the company pays them in direct proportion to what and how much you buy from them. (Embedded commissions have been banned in Australia and the United Kingdom where clients now pay their advisors directly).
Clients must hear the whole story. It’s the law.
Clear communication between client and advisor is critical. It helps ensure the client has a positive investment experience while the advisor is fairly compensated for the service he or she provides based on years of education and experience. So, let’s get the elephant out of they way and I’ll talk about how I am paid.
I am a fee-based advisor, which means my clients pay me based on the value of assets they invest with me and for the services I provide.
Our fee schedule is as follows:
Asset minimum: $500,000 in investable assets
$500K - $1M 1.25%
$1M - $3M 1.00%
$3M - $5M. 0.75%
$5M - $10M. 0.35%
Our fee structure encourages clients to consolidate their assets so they get the benefit of reduced fees on larger sums of capital and a better understanding of what their returns really are.
Services offered by The Jim Sanderson Group at ScotiaMcLeod and its range of qualified experts supporting its activities include: retirement, estate and succession planning, portfolio construction and ongoing management; insurance and merchant banking and investment programs for diversification of corporate retained earnings
Affinity programs can help your dollars go further
I am an associate member of the Ontario Road Builders Association (ORBA), the Ontario Stone Sand and Gravel Association (OSSGA), and the Aggregate Producers Association of BC (APABC). Some of these associations have implemented affinity programs.
These programs help service providers communicate cost – effectively with their customers and prospects. An affinity program is a vehicle for selling goods and services (often at a discount to program members and their families) by building trust and creating relationships with compatible companies and brands. This increases brand loyalty for companies and products and can heighten market awareness and sales for both.
Becoming a member of an affinity program can allow you to network within the community and identify potential customers faster and more enjoyably than through traditional marketing routes.
As a portfolio manager serving members of the aggregate and road building industries across Canada, I am growing my business among operators and associate members who want help in creating and building wealth outside their businesses.
Members’ marketing costs can also be reduced as member companies have access to the affinity program’s membership and the opportunity to efficiently carry out research programs focusing on its fellow-members. Some affinity programs offer affordable benefits as well as complimentary training sessions to benefit members and their employees.
You’re in the right business
Being involved in the road building and aggregate business in Canada has its advantages. Although there is not one main association in this industry across Canada there are many associations in each province. That is why I have instituted my own affinity program.
Benefit from a complementary second opinion and a discount on your annual management fees
You may be faced with a barrage of different opinions from friends, colleagues and the business media that confuse you more than help you. Some questions about the current state and future of your hard-earned wealth may include, “How much am I paying in fees? Am I properly diversified?” As part of our affinity program commitment, we are offering all road building and aggregate members from associations across Canada (and their employees) an objective, second opinion on their current investment portfolios in response to these and other questions – at no charge and with no obligation. Our analyses have confirmed for many individuals (and clients) that we offer real value and save them thousands of dollars in fees.
Should they become clients, our follow up offer for the affinity program is a discount on our already reasonable wealth management fee.
The benefits of membership may not always be easy to measure, but the more effort you put into cultivating your membership, the more you will receive in return.