What's the damage?... Wait, don't want to know!

Late last week, I was discussing the state of the retail investment industry with a proud do-it-yourselfer. It was clear from immediately talking to him that he knew more than the average Canadian, and I was quick to commend him for his knowledge and passion. All that being said, he completely devastated me with his next comment:

"It is ridiculous. Some advisors now charge their clients twice: a fee for themselves in addition to the MER."

It must be added this line was said with contempt, although it wasn't particularly relevant to this gentleman, a retiree who very much enjoyed picking stocks for his portfolio. The clients are charged twice but only after significantly reducing the MER to accommodate this charge (these are referred to as F-Class funds). This is done in order to make it clear to the investor how much he or she is paying to their advisor, leaving just the MER, which goes to the fund company, embedded. This method is clearly, I believe, beneficial to the client, which leads me to wonder: How widespread is this belief that this transparent fee serves as an increase in fees to the client?

The term, "unbundling," I first encountered in John DeGoey's book, The Professional Financial Advisor. At full-service brokerage firms, it is referred simply as "fee-based." (*) Basically, it means the financial advisor's embedded compensation is removed and fees are charged to the client in a transparent manner (in brokerage firms, it is as a percentage of clients' total assets). Whether it is recommended or even provided as an option is purely at the discretion of the full-service financial advisor. DeGoey, himself, mused the riskiness of convincing a client to convert to fee-based. I never thought it'd be such a challenge till hearing this comment.

Through the course of Onus's research of Toronto's full-service financial advisors, it is more likely they offer it as an option without recommending it. This conclusion I always found unsatisfactory......unsatisfactory, that is, until I heard this remark.

Investor advocates have been screaming for transparency in the industry. Not because they enjoy screaming mind you, but for the good of Canadians. Finally, on account of such efforts, the industry is moving into such a direction as to allow clients to see how much they are spending on their financial advice as opposed to it remaining hidden. If this is all for naught...

Do clients genuinely feel better not knowing how much in fees they are paying? Is it truly difficult for Canadians to see the value of unbundling? If this is so, do even the most passionate of 'investor advocate' advisors have the guts to recommend this approach?

On the last question...Of course, I believe so.




-------------------------
(*) Fee-only at a full-service brokerage, which is more accurately referred to as 'asset-based,' is not to be confused with authentic fee-based advisors, who charge an hourly or fixed fee. As their pay comes directly from the client, this is where their loyalty is directed. For an example, see http://www.secondopinions.ca/ or http://www.tewealth.com/.