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With fees, commissions, volatile equity markets and near-zero interest rates, what your broker earns can be the difference between you making money or owning a shrinking nest egg, experts say. (Christine Glade/iStockphoto/Christine Glade/iStockphoto)
With fees, commissions, volatile equity markets and near-zero interest rates, what your broker earns can be the difference between you making money or owning a shrinking nest egg, experts say. (Christine Glade/iStockphoto/Christine Glade/iStockphoto)

The flaws in Canada's financial adviser system Add to ...

Mr. Ross, the former mutual fund wholesaler, said brokers sometimes face pressure to dump the perfectly good funds already in a client’s account in order to buy new ones, simply to generate fees needed to make their pay “grid.” He said the mutual fund industry helps feed this thirst for income with a steady stream of new closed-end funds, which pay the broker up-front fees and may be sold at an initial discount to their book value to drive sales.

“The public doesn’t have any idea what goes on,” added Mr. Ross, who now works in real estate. “They don’t have a clue.”

Just to break even, investors typically must generate annual returns of 5 to 8 per cent to cover fees, commissions, trading costs and inflation, estimates Victor Therrien, a mutual fund industry veteran and former executive vice-president of Brandes Investment Partners.

“Investing is a zero-sum game, right out of the gate,” said Mr. Therrien, who left the industry in 2008, disillusioned at the way investors were being treated.

“Investors don’t understand. If you have commissions, it makes that mountain you have to overcome so much more acute.”

Clarity around an adviser’s fiduciary duty would be a step forward. But the OSC isn’t making any promises. Ms. Shaw-Rimmington said the issue is complex and the OSC wants to review the implications of imposing a “best interests” or fiduciary standard before moving forward.

Early next week, the OSC-funded Investor Education Fund is releasing new research on adviser relationships and investor decision-making.

There’s also interest in Ottawa. Ursula Menke, commissioner of the Financial Consumer Agency of Canada, agrees that imposing a fiduciary duty for advisers would clearly be good for investors.

“The compensation model, by its very nature, creates a conflict of interest,” she said in an interview.

Dumping the current duty-of-care model in favour of something more stringent is likely to face stiff resistance from the industry, which maintains that Canadians have ample legal protections now.

But Ms. Singer, the investor advocate, said imposing a fiduciary duty is the right thing to do, particularly at a time when governments and employers are gradually shifting the burden of providing for retirement onto the shoulders of individuals.

“This kind of duty is important to the fabric of the country,” she argued.

“Canadians have to rely more on their own savings to get them through their retirement years. And if your savings are placed with a financial adviser, it is even more important now that greater responsibility is placed on the shoulders of the people providing the advice.”

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HOW YOUR FINANCIAL ADVISER GETS PAID

The grid: Many advisers are paid according to what’s known as the grid, typically a one-page table that spells out how gross fees are shared between the adviser and their brokerage firm. The more fees the adviser brings in, the more of that cash they keep. An adviser generating fee and commission revenue of $200,000 a year might get to keep, say, 25 per cent. One earning $400,000 would get 35 per cent. Some brokers impose a minimum amount the adviser is expected to generate.

Fees: Some brokers charge an all-inclusive flat fee, typically in the range of 1 to 1.5 per cent, based on the size of your portfolio. A broker may also operate on a fee-for-service basis, either by the hour or based on the specific services they provide. Many other advisers offer what appears to “free” service, when in fact they are compensated via a vast array of fees on the investment products they put in your account. Many of these fees are not readily apparent to the investor.

Front-end sales or load commissions: You buy $10,000 of a mutual fund, and your adviser gets 2 per cent or $200. So your net purchase is actually $9,800.

Back-end or deferred fees: You buy a $10,000 mutual fund, $10,000 goes into your account and the adviser gets a commission. But sell that investment before a set period and you will be charged a fee.

Redemption fees: Paid by the investor to the fund when you sell units in a mutual fund.

Switch fees: Fee charged to investors when they switch funds within a family of funds.

Trailer fees: Annual fee the mutual fund pays your adviser and his or her firm to keep you in a particular fund. Rates are typically in the range of 0.25 per cent to 1 per cent a year.

Management Expense Ratios: This is the percentage of a mutual fund’s assets that are deducted annually to cover operating costs, trailer fees, marketing, and fund manager salaries. MERs range from less than 1 per cent to 3 per cent or more. This comes right out of your return. So if a fund’s investments generate a 5-per-cent return and the MER is 3 per cent, your return is about 2 per cent. Published returns are after fees are deducted.

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