Canadian investors are expected to hold $2.9-trillion in fee-based accounts by 2026 – up from $900-billion in 2016, a recent Investment Funds Institute of Canada report estimates. To get there, many financial advisors who still depend on commissions-based revenue will have to make the switch to a fee-based model.
But how? Advisors who have been through the transition say it’s not easy, but it’s worth it.
“It’s definitely a lot of work,” says Nicky Trasias, investment and insurance advisor with Essential Wealth Group at Industrial Alliance Securities Inc., in Kitchener, Ont., who started moving clients over to fee-based accounts about five years ago.
She estimates her team invested at least 20 hours per client. That included painstakingly switching every mutual fund in every account to F-class and scheduling at least three one-hour meetings with each client: one to introduce the concept and to get signatures; one to follow up 30 to 60 days later; and one a few months later to discuss how clients felt about the fees they were suddenly seeing every month.
Ms. Trasias implemented her transition gradually because of the extensive paperwork required and her specific circumstances. She made the decision to adopt the fee-based model when she bought her mentor’s book of business five years ago, when he began the process of unwinding his business on the way to retirement. Ms. Trasias then transferred her mentor’s clients one-third of the book at a time, with the last group added about a year ago. Each of those new clients had to be coached through a lot of change.
Namely, Ms. Trasias’s mentor was licensed by the Mutual Fund Dealers Association of Canada, while she was licensed by the Investment Industry Regulatory Organization of Canada. She had to explain the differences between the two platforms to the clients and sign them up under her dealing representative code. Then she had to introduce them to the fee-based model and do the administrative work to get them switched into the appropriate products. It wasn’t something that could be accomplished in one fell swoop.
The gradual approach worked for her – and she recommends that other advisors do the switch “one client at a time.” Before making any moves, she says advisors should see if there’s an opportunity to consolidate clients’ holdings into a smaller number of investment funds to reduce the complexity of the transition and the volume of paperwork. She emphasizes that it’s critical to consider that switching investment funds in non-registered portfolios may be a taxable event.
Five years in, Ms. Trasias has 75 per cent of her clients in fee-based accounts. Some of the outstanding 25 per cent were part of the final group of clients making the transition from her mentor. Others don’t meet the minimum for her fee-based accounts, but she is committed to continuing to work with them.
“I know some advisors who say, ‘You know what? My book is 100 per cent [fee-based] because I’ve given the lower-asset clients to someone else. We’re not doing that,” she says.
Wes Boag took a different route to establishing a fee-based practice. In May, 2018, he moved to FundEx Investments Inc., from Investors Group Inc., and co-founded Paradigm Wealth Management with Kostas Foussias in Toronto. As one former client after another called him (he couldn’t initiate the conversations because of a non-solicitation agreement with Investors Group), Mr. Boag would start a conversation about fee-based compensation by asking, “Do you remember we used to talk about the need for transparency?”
Then, like Ms. Trasias, he met with clients several times to explain the new model.
In some ways, his transition was simpler than Ms. Trasias’s because almost every account transferred over in cash. That was necessary because his clients had been, by and large, in proprietary Investors Group mutual funds.
“We were starting fresh,” he emphasizes, which made the messaging to clients easier, too. “This is what we’re doing now. These are our fees. This is how we charge our fees. Do you have any questions?”
That said, to seal the deal, he broke down for clients what they were paying in fees at that time versus what they would be paying under his model. It made for a persuasive argument. “For most of our clients, there were savings of half a percentage point to a full percentage point.”
His advice to other advisors embarking on a transition to a fee-based model is this: “Tell your clients why you’re doing it. Explain it to them. Show them the numbers – ‘This is how it’s going to benefit you.’ … Nobody wants to pay more fees.”
Mr. Boag likes that a fee-based model gives him much more control over what clients pay and what he earns than when he depended on embedded fees. The switch to the fee-based model also gave him an opportunity to educate his clients about the costs associated with investing – something he feels they should understand. As a result, he is confident every one of his clients knows the fees they pay for advice in both percentage and dollar amount.
“[Fee-based is] the way of the future,” Mr. Boag says. “My suggestion to any advisors out there who are still on an embedded fee model is ‘make that switch before you get left behind.’”