Nov 1st, 2011
Some advisors are worried the surge of ETFs means the death of trailers. That’s wrong-headed. Instead, accept these six realities to create a mutually beneficial relationship with clients
The storm clouds are rumbling—not just over the markets but over the touchy subject of advisor compensation as well.
Compensation always becomes more of an issue when markets aren’t doing well. And that’s reasonable. After all, given the prospect of a second negative-performing market in four years, clients are no doubt questioning why they’re paying advisors, and asking what they’re getting out of the relationship.
It seems I can’t go a week without seeing an article on “the death of trailers.” Is it enough to push the Canadian system to adopt regulations similar to those in the UK or Australia? Probably not; such changes would represent an earth-shattering shift in how the industry functions. But that doesn’t mean we won’t see steps in this direction—the right direction.
Not all clients are the same
Every client sits somewhere on a spectrum, with the do-it-yourself types on one end and the do-it-for-me types on the other. This extends not just to investing, but also to almost all aspects of financial planning.
While my firm specializes in planning, executing and coordinating the financial, investment, insurance, tax, estate and corporate planning needs of our clients, we are not for everyone. The same goes for every other advisor, since each firm offers a different value proposition. And that’s good, because different ways of doing business appeal to different types of investors. Everyone can find the right fit.
This is important because we too often speak about this industry in absolutes—we say one form of compensation is right and the other’s wrong; ETFs are better than mutual funds or vice versa. But the public we serve isn’t homogeneous. Instead, let’s say that as an industry, we focus on the real issue of compensation and transparency (see Reality #5) and continue to allow clients to have a range of options.
We too often speak in absolutes—we say one form of compensation is right and the other’s wrong; ETFs are better than mutual funds or vice versa. But the public we serve isn’t homogeneous.
We’re all here to make a living
No matter what you call yourself or how you charge for your services, both advisors and our clients need to acknowledge that we’re here to make money. I bring this up because a shocking number of clients I meet honestly believe they have gotten service for free (see Reality #5).
Do the math
Value of the value proposition to the client + compensation structure in line with value proposition + disclosure + client fit = a mutually beneficial relationship
Having the right mix = easy conversations with clients and prospects about key topics
Not having the right mix = something is broken
This doesn’t mean we’re at odds with the client
Compensation is not an “I win, you lose” proposition. Current mechanisms in the industry provide for enough flexibility for each advisor to determine for themselves how they should be compensated. It’s not the structure of the industry that can put clients’ interests at odds with the advisor, but the advisor’s choice of compensation. How do we avoid being at odds with a client’s interests? See Reality #4.
Value for money
What are we being paid for? This issue can either be at the core of advisor-client conflict or of a successful relationship. What determines this is fit and Reality #5.
Fitting a client with the wrong type of compensation system and the wrong value proposition leads to conflict. Just imagine a day trader matching up with an advisor using DSC funds focusing on financial planning, or a client looking for a comprehensive financial planner who connects with a commission-based product salesperson.
These two scenarios will clearly result in conflict, but there are endless potential mismatches. What advisors should do is ensure they provide good value for what they charge and look to take on only clients who fit the profile that would benefit from their service.
Disclosure is what really matters
What this industry charges for its services isn’t the real problem. The problem is clients often don’t know what they’re paying for and so can’t make an informed decision on whether their arrangement is acceptable.
Whatever you charge and however you charge it, you should have no problem explaining it to clients, and they should be willing to accept it. If they don’t, you’ve either failed to demonstrate the value you provide or you have the wrong client fit. If you can’t find clients that fit, it’s a good sign your compensation structure is broken.
If you can’t look a client in the eye and tell her what she’s paying you, then you clearly don’t think anyone believes you’re worth your price. This probably means you aren’t, which puts you on the wrong side of Reality #3.
There is an old saying in boxing: “Move your head, or someone will move it for you.” That’s a warning: If you don’t tell them, I, or some guy like me, will.
I cannot count the number of clients who have looked shocked when I explain their advisor received 5% upfront for investing in their funds, or that the reason their advisor wants them to stay invested for at least a year likely has to do with their bonus or the type of commission they received for selling a particular insurance policy.
The second part of that conversation leads to a discussion on what kind of service the advisor has provided and almost always leaves clients feeling lied to and cheated.
Advisors who fail to disclose make it easy for others to take their clients. After we have pulled back the curtain, we show them what we will do for them and tell them, upfront, what it will cost. For prospects who are a good fit, the choice becomes clear.
You see, disclosure can be a strategic advantage.
Evolution, not revolution
Ask any mutual fund wholesaler who’s been around long enough what percentage of funds are sold on a deferred-sales-charge basis now versus ten years ago and he’ll tell you the number has dropped from 70%-80% to less than 50%.
This industry is changing and many recent changes have led to positive developments in disclosure and compensation structures. This is a result of product innovation and a more-informed market for our services.
These changes will continue to happen. As an advisor, you can either sail with the winds of change, or live in fear of a UK-style shift in advisor compensation—the revolution.
Jason Pereira, MBA, FCSI, FMA, is a financial consultant with Woodgate Financial Partners (IPC Investment Corporation) in Toronto.