Never let your guard down when dealing with the financial industry, even when it’s offering something as supposedly client-friendly as the fee-based account.
In theory, fee-based accounts give advisers a transparent, above-board way to answer the question of how much they charge for their services. Instead of paying commissions buried in the cost of investment products, clients pay annual fees equal to a percentage of the value of their account plus any costs associated with the investments they hold.
Ask a fee-based adviser what his or her fee is and you’ll have no problem getting an answer. What you may not be told is that:
-There are “list prices” for fee-based accounts and real-world, negotiated fees;
-Fees vary widely from adviser to adviser;
-Fee-based accounts could cost you more than a commission-based account.
A report on pricing in fee-based accounts was recently completed by PriceMetrix, a software firm that specializes in helping advisers improve productivity. The conclusion for investors trying to make sense of the fees charged in fee-based accounts: “It is an opaque market,” PriceMetrix president Doug Trott said. “It’s like buying a Persian rug.”
Investors are going to have to become familiar with fee-based accounts because they’re gradually taking over in the advice business. The analysis firm Investor Economics reports that the share of fee-based assets had grown to 48 per cent in the full-service brokerage business as of March 31 from 36 per cent five years ago.
PriceMetrix said advisers are converting existing clients to fee-based clients to a limited extent. The big emphasis is on getting new clients to adopt this type of account instead of the more traditional commission model.
Stay open-minded when an adviser pitches a fee-based account to you. If advisers lock in a stream of fees from a client, they shouldn’t be tempted to put juicy commissions ahead of client suitability when recommending products or strategies. The fee-based arrangement also suggests you’ll get continuing advice and planning. Just as the fee is out front in the fee-based model, so should the level of service.
But what about the fee itself? What investors need is some context to judge the fees they’re being asked to pay.
PriceMetrix found that investors in Canada and the United States pay 1.32 per cent on average (the two markets are very similar), but account size has a huge impact on your actual cost. With household assets of up to $100,000, PriceMetrix found you could be asked to pay as much as 2.12 per cent on average. At $500,000, you might be asked to pay 1.84 per cent.
But those are “scheduled” fees that an investment firm will publish for the sort of rube who pays full list for a car. Actual fees range from 1.68 per cent on average for households with assets up to $100,000 to 1.32 per cent for those with between $500,000 and $1-million.
These average numbers hide the fact that fees can vary by as much as one percentage point from firm to firm, which is a huge margin. “The price is all over the map and the reason, I’ll hypothesize, is that there’s a lot of supply but very little competition,” Mr. Trott said. “If there was fierce combat on fees, you’d find more of a common price for similar services.”
Still, PriceMetrix says the cost of fee-based advice declined steadily between 2007 and 2009, before levelling off in 2010. The firm said it’s very difficult for advisers to raise the cost for existing clients, although they can pass along higher fees to newcomers.
With a commission-based account, it can be difficult to know how much you’re paying in fees because they may be buried in the cost of buying and owning products. Still, it’s quite possible that paying commissions will cost you less than a fee-based account.
