How pension reform might affect advisor compensation—and what you can do about it.

Wednesday, March 7th, 2012

By Marc Lam­on­tagne, CFP, R.F.P, FMA

Pen­sion reform is still in the news these days, but a num­ber of sto­ries going back to last spring got me think­ing about how a government-led shock could affect indi­vid­ual finan­cial advi­sors and the way we do business.

Pro­pos­als under debate included very seri­ous dis­cus­sions on the intro­duc­tion of a sup­ple­men­tary pen­sion plan such as a defined ben­e­fit pen­sion acces­si­ble to employ­ees of small and mid-size com­pa­nies and expand­ing Canada Pen­sion Plan con­tri­bu­tions, either on a vol­un­tary or com­pul­sory basis.

The likely result of such an intro­duc­tion would be less avail­able money for clients to save or the crowd­ing out of the RRSP con­tri­bu­tion room that is a major moti­va­tor for Cana­di­ans to save. Either will lead to a drop in busi­ness and, of course, com­mis­sion and trailer rev­enue for commission-based advi­sors. Iron­i­cally, this drop in rev­enue will hap­pen at a time that clients will be look­ing for expanded advice on the con­se­quences of pen­sion reform on their retire­ment plans.

Advi­sors as a group can be quite resilient in the face of adver­sity as they showed in the 2008–2009 bear mar­ket. Some advi­sors will sim­ply expand other busi­ness such as insur­ance when faced with a decline of rev­enue from their cur­rent busi­ness. How­ever, to avoid this cross-subsidization of com­pen­sa­tion from one busi­ness to another, commission-based advi­sors might want to look at what their fee-for-service col­leagues are doing.

Flat fees

Advi­sors are com­monly using flat fees to pro­vide advice uncon­nected to a prod­uct sale. This is usu­ally a lump-sum fee based on work out­side their day-to-day advice, such as a com­pre­hen­sive finan­cial plan. Many fee advi­sors also use flat fees for mod­u­lar finan­cial plans (a mini-financial plan that looks at one issue or “module”).

Accord­ing to the 2010 Advi­sor Sur­vey Report by To Fee or Not to Fee (TFONTF) and co-sponsored by the CIFPs, sur­vey par­tic­i­pants were asked what they charged for a finan­cial plan on the low end, what they charged on aver­age, and what they charged on the high end. This is more detailed than other sur­veys on finan­cial plan­ning fees which  often pro­vide sim­ple aver­ages with­out a full appre­ci­a­tion of ranges charged to var­ied client seg­ments or by advi­sors who hold var­i­ous invest­ment licences.

The TFONTF matrix approach reveals the full spec­trum of pric­ing. On the low-end, over half of the sur­vey par­tic­i­pants charge less than $1,000 for a finan­cial plan. The most com­mon fee seems to be fairly evenly spread from $1,000 to $2,000. On the upper end, finan­cial plans cost­ing over $5,000 were most fre­quent, fol­lowed by the $2,500 to $3,000 range.

Annual retainer fees

Retainer fees are flat fees charged for a ser­vice over a par­tic­u­lar time. Con­trary to the legal pro­fes­sion “retainer”, it is not sim­ply a pool of money on deposit with the advi­sor to be billed against for hourly work, but for a par­tic­u­lar ongo­ing ser­vice. Though few advi­sors are using retainer fees, it is the ideal com­pen­sa­tion vehi­cle for pro­vid­ing ongo­ing finan­cial advice unre­lated to invest­ment man­age­ment or insur­ance; for exam­ple, mort­gages, group ben­e­fits, rental prop­er­ties, and pensions.

Sur­vey par­tic­i­pants who use retain­ers are, for the most part, charg­ing very lit­tle. The smaller fees may sug­gest that this type of fee is used in com­bi­na­tion with other types of com­pen­sa­tion such as invest­ment man­age­ment fees or trail­ers. On the low end over 40% charge less than a $1,000 a year. On aver­age, the most com­mon fee was between $1,000 and $1,500, and on the upper end it was over $5,000.

Also of note is the fre­quency of col­lect­ing retainer fees. The largest seg­ment, a quar­ter of sur­vey respon­dents, col­lect this fee on a quar­terly basis in arrears. The second-most com­mon was annu­ally in advance.

Government-led shocks are a real­ity in this new-normal world, just ask any Ontario phar­ma­cist. Finan­cial advi­sors need to pre­pare for such shocks, and one way is to take con­trol of how they get paid for the advice they provide.

Marc Lam­on­tagne, CFP, R.F.P., FMA is a fee-based finan­cial plan­ner with Ryan Lam­on­tagne Inc., fee-model prac­tice man­age­ment trainer, and author of To Fee or Not to Fee II — How to design a fee finan­cial advi­sory prac­tice.  www​.tofee​ornot​tofee​.com

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Tags: Adversity, Bear Market, Benefit Pension, Business Proposals, Canada Pension Plan, Canada Pension Plan Contributions, Cfp, Financial Advisors, Fma, Last Spring, Lump Sum, Mid Size Companies, Motivator, Pension Reform, Rrsp Contribution, Serious Discussions, Service Colleagues, Subsidization, Survey Participants, Survey Report
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The trailer fee compensation model is making inroads—And why that might be a bad thing.

Wednesday, June 15th, 2011

By Marc Lam­on­tagne, CFP, R.F.P., FMA

Over the years there have been numer­ous debates about whether trail­ers should be con­sid­ered a fee or a com­mis­sion. Adding to the con­fu­sion are indus­try stal­warts (includ­ing yours truly) who have argued con­vinc­ingly on both sides, but new research sug­gests we may be wast­ing our col­lec­tive breath.

The results of the 2010 Advi­sor Sur­vey Report by To Fee or Not To Fee (TFONTF) and co-sponsored by the CIFPs indi­cate that the trailer fee com­pen­sa­tion model may be gain­ing trac­tion in Canada.

Think­ing of your gross earn­ings over the last 12 months, which one of the
fol­low­ing meth­ods rep­re­sented the largest per­cent­age of your earn­ings?

This ques­tion was designed to reveal which method of com­pen­sa­tion is the largest seg­ment of an advisor’s com­pen­sa­tion in a par­tic­u­lar com­pen­sa­tion model (fee or com­mis­sion). Invest­ment com­mis­sions, trail­ers, and insur­ance com­mis­sions dom­i­nate the com­pen­sa­tion of commission-based advi­sors.

On the other hand, basis-points and, inter­est­ingly, trail­ers dom­i­nate the com­pen­sa­tion of fee-based advi­sors. There is also a smaller group of fee-based advi­sors who rely on hourly fees as their main com­pen­sa­tion sta­ple.

Per­haps the trail­ers showed up sec­ond for both groups because of the par­tic­i­pants’ inter­pre­ta­tion of whether trail­ers are a fee or a com­mis­sion. Maybe they are nei­ther, but sim­ply a third form of com­pen­sa­tion favored by both groups.

Nev­er­the­less, trail­ing com­mis­sions (trail­ers), AKA ser­vice fees, dom­i­nate the com­pen­sa­tion of a large seg­ment of both com­mis­sion and fee advi­sors. For this rea­son TFONTF would like to declare trail­ers as a third, and dis­tinct, form of com­pen­sa­tion in addi­tion to fees and com­mis­sions. This new view of trail­ers will change the focus of future advi­sor sur­veys.

Though MFDA advi­sors in both camps favor trail­ers, it sim­ply can­not be explained away as a solely MFDA model (per­haps due to the lack of access to an in-house fee-based account) because there is also a high rate of usage by IIROC-licenced advisors.

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Tags: 12 Months, Basis Points, Cfp, Collective Breath, Compensation Model, Confusion, Debates, Fma, Gaining Traction, Gross Earnings, Hand Basis, Industry Stalwarts, Inroads, Investment Commissions, Participants, Segment, Staple, Survey Report, Surveys, Trailers
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You Missed a Great Conference!

Wednesday, May 25th, 2011

The CIFPs 8^th National Con­fer­ence Review

By Marc Lam­on­tagne, CFP, R.F.P, FMA

This is my sec­ond con­sec­u­tive year attend­ing this con­fer­ence and once again the agenda was PACKED. Each day began about 7:30 am and typ­i­cally went to 6:00 pm, with din­ner start­ing pronto at 6:30. You clearly earn your CE cred­its and receive your money’s worth at this conference.

The agenda was a smor­gas­bord; enough to quench the thirst for nov­elty of 500 to 600 atten­dees. The high­light was undoubt­edly Her­mann F. Leinin­gen with RBC Global Asset Man­age­ment. Leinin­gen was very funny, and he man­aged to walk the audi­ence through sev­eral com­plex eco­nomic sce­nar­ios and sus­tain their interest!

Take away: Expect U.S. inter­est rates to stay low for at least the next nine months or until there is a jobs recov­ery, stocks are still trad­ing at the lower end of the band due to con­tin­ued global eco­nomic uncer­tainty, and the demand for oil from China and India has barely scratched the surface.

Like any con­fer­ence there were a few mutual fund com­pany “talk­ing heads,” although the more inter­est­ing mate­r­ial came from indus­try par­tic­i­pants such as Cary List, Pres­i­dent and CEO of the Finan­cial Plan­ners Stan­dards Coun­cil. List pre­sented some of the find­ings of their recent con­sumer sur­vey on the ben­e­fits of finan­cial plan­ning. This is news that all CFP pro­fes­sion­als will want to share with their clients and prospects. Shawn Bray­man, Pres­i­dent of Plan­Plus, offered us an overview of the top aca­d­e­mic and indus­try research in the field of finan­cial plan­ning. How­ever, he had so many fas­ci­nat­ing papers to dis­cuss, it was unfor­tu­nate he had only an hour to cover his mate­r­ial.  And yours truly gave a short pre­sen­ta­tion on the recent 2010 Advi­sor Sur­vey Report, con­clud­ing that the deliv­ery of finan­cial advice is not that dif­fer­ent between fee and com­mis­sion models.

Susan Wol­burg Jenah, Pres­i­dent & CEO of IIROC, pro­vided an update on the Client Rela­tion­ship Model (CRM) pro­pos­als that will impose greater dis­clo­sure on the indus­try in order to increase investor pro­tec­tion. How­ever, the CRM has dragged on for so long and mor­phed so many times, it is hard to believe it will ever mate­ri­al­ize. Asked by an attendee how the devel­op­ments on com­pen­sa­tion in the U.K. and Aus­tralia might affect us here, Wol­burg Jenah said that IIROC was keep­ing a close eye on devel­op­ments that could poten­tially influ­ence com­pen­sa­tion mod­els in Canada, although it is prefer­able that indus­try par­tic­i­pants “vol­un­tar­ily” assess how to bet­ter align the inter­ests of clients and advisors.

The final day ended at noon, but the morn­ing still had sev­eral excel­lent speak­ers such as Dr. Dale Orr, Jamie Golombek, and Kevin O’Brien, who filled the morn­ing with great nuggets of wisdom.

Take away: Dr. Orr from Eco­nomic Insight pro­vided his short-term pre­dic­tions for Canada’s econ­omy: neg­li­gi­ble infla­tion, the dol­lar will trade close to par or maybe even higher if the price of oil increases, short-term rates will be higher in Canada than the U.S. (again putting upward pres­sure on our dol­lar), expect the Bank of Canada pol­icy rate to increase by 25 basis-points at every fixed announce­ment date for the next three years until it reaches the tar­get of 4% to 4.5%, and finally, don’t expect to see a bal­anced fed­eral bud­get until 2014–2015.

Jamie Golombek from CIBC Pri­vate Wealth Man­age­ment, who always stages a grand show, regaled the audi­ence with sto­ries of cre­ative bro­kers who sup­pos­edly found loop­holes in the TFSA con­tri­bu­tion rules. He also offered sev­eral use­ful tax strate­gies, updates, and sug­ges­tions on advis­ing your clients based on recent tax court decisions.

Take away: Advi­sors should be rec­om­mend­ing to almost every client that they top up their TFSA con­tri­bu­tion room prior to mak­ing RRSP contributions.

And finally, cer­ti­fied finan­cial plan­ner Kevin O’Brien from Kevin O’Brien & Asso­ciates told the audi­ence his some­times funny, some­times heart­felt story of man­ag­ing his parent’s messy estate before he became an advi­sor. It affected his cur­rent approach to estate plan­ning so much that he pub­lished his story for other advi­sors to read in Where There’s a Will….There’s a Way.

Over­all, it was an excel­lent con­fer­ence, and I would highly rec­om­mend attend­ing CIFP 2011 to be held in Ottawa from June 5 to 8. Media arti­cles from some of the pre­sen­ta­tions are avail­able on the CIFP website.

Fall Con­fer­ence Alert!

There are two first-rate con­fer­ences com­ing up in the fall that I will attend and rec­om­mend as well worth the investment.

The first is the IAFP Annual Sym­po­sium in Banff from Sep­tem­ber 23 to 25, 2010. This one is par­tic­u­larly enjoy­able; it is more sym­po­sium than con­fer­ence because it is anchored by a sin­gle finan­cial plan­ning case study. All speak­ers are required to ref­er­ence this case study in their pre­sen­ta­tions and are encour­aged to pub­lish papers from their spe­cialty per­spec­tive. This cer­tainly elim­i­nates the dis­ori­en­ta­tion one can some­times feel lis­ten­ing to mul­ti­ple talk­ing heads on sev­eral diverse sub­jects at other con­fer­ences. This year the case study is about a retir­ing busi­ness owner who also hap­pens to be a finan­cial plan­ner (is this a coin­ci­dence?). The sym­po­sium cul­mi­nates with a half-day dis­cus­sion on the case study by the 125+ attendees.

The sec­ond is the Knowl­edge Bureau’s (KB) Dis­tin­guished Advi­sor Con­fer­ence in Orlando from Novem­ber 14 to 17, 2010. Knowl­edge Bureau fac­ulty speak­ers such as Richard Croft and Doug Nel­son are top notch and KB Pres­i­dent Eve­lyn Jacks obvi­ously used her time wisely recruit­ing the likes of Don Stew­art, CEO Sun Life Finan­cial, while she was a fel­low mem­ber of the Fed­eral Task Force on Finan­cial Lit­er­acy. The other com­pelling rea­son to attend is this: each day ends at the utterly civ­i­lized time of 1:30 pm, giv­ing atten­dees ample time to enjoy the sun and nearby ameni­ties with col­leagues and family.

Marc Lam­on­tagne, CFP, R.F.P., FMA is a fee-based finan­cial plan­ner with Ryan Lam­on­tagne Inc., fee-model prac­tice man­age­ment trainer, and author of To Fee or Not to Fee II — How to design a fee finan­cial advi­sory prac­tice.  www​.tofee​ornot​tofee​.com

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