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Fee-only financial advice is not the answer for most Canadians

In his December 19, 2013, column "Advisers, and rules they thrive by, need to come out of the shadows," Brian Milner argues that all adviser compensation should be fee-based only, and that a statutory fiduciary duty should be imposed on all advisers.

While a fee-based compensation model may work well for wealthier investors, this is not the case for "Main Street" Canadians, most of whom will be unwilling or unable to pay higher fees. Moving to a fee-only arrangement would put financial advice out of the reach of hundreds of thousands of middle-class individuals and families.

In Canada, over nine million people receive advice from financial advisers, with the vast majority paying for this service through trailer fees. One of the biggest benefits of this arrangement is it offers consumers affordable access to financial advice.

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Statscan reports that on average Canadians put approximately $2,600 into their RRSPs (through the purchase of mutual funds.) Let's look at the cost of advice on a $2,600 investment, where the trailer fee is around 1 per cent. For $26, the investor typically receives a number of services such as:

  • The development and monitoring of an investment strategy
  • Portfolio rebalancing
  • Proper account structure and appropriate placement in each account
  • Continued understanding of the client’s objectives and risk tolerance
  • Advice, reporting, meetings and ongoing management

That's a pretty good deal. Paying a fee for the same services would cost anywhere from $150 to $350 an hour.

The second part of the argument, the legal fiduciary duty that Mr. Milner is keen on, will put the client-adviser relationship into a straight jacket. Removing the flexible common law fiduciary duty that already exists would place all adviser-client relationships on equal footing, requiring advisers to override even the wishes of their most sophisticated clients if they think the client is not acting in his/her own best interest.

Yes, there should be clear disclosure of compensation, and it's coming. New rules being phased in over the next two years will make these fees entirely transparent.

And yes, we agree that there is potential for conflict of interest in the current system. Advocis wants to change that too. We want to prevent bad advisers from practising, and put the unscrupulous out of business. But our approach is different. We don't believe eliminating third-party commissions and imposing a best interest duty will address the problems.

Advocis maintains that the most effective way to address potential conflict is to enhance transparency, as the new rules will do, and raise professional standards in the industry. Advocis's Professions Model would require all financial advisers to be registered with an accredited body, meet and maintain proficiency standards, and be subject to disciplinary action including loss of registration for misconduct.

Studies have shown that those who receive professional financial advice are better off financially. A 2012 study from the Center for Interuniversity Research and Analysis of Organizations (CIRANO) demonstrates that people who use an adviser have two to three times more wealth, save twice as much and are better prepared for retirement.

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So let's not respond to the challenges by narrowing choice and reducing access to financial advice. That's where banning commissions will take us, as both the U.K. and Australia are discovering.

Let's put in place a system of oversight that will raise the professional bar while ensuring that this advice remains affordable.

Greg Pollock is the President and CEO of Advocis, The Financial advisors Association of Canada.

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