Investors see value in fee-based advice

By Marjo Johne

An advisor compensation model that has long been the norm in the United States is increasingly being embraced by Canadian advisers and their clients.

Fee-based compensation – where advisers are paid a set fee by their clients instead of earning commissions from buying or selling shares – is increasingly being embraced by advisers in Canada. Fee structures vary, from hourly rates and flat package fees to charges based on the total value of a client’s investment portfolio.

While there’s no hard data on the growth of fee-based advice in Canada, in North America fee-based assets increased from 21 per cent of all assets managed in 2009 to 31 per cent in 2013, according to research from PriceMetrix Inc., a Toronto-based provider of wealth management software.

“The investment industry has given advisers more options to structure their fees,” says Don Bennyhoff, a senior investment analyst at The Vanguard Group, Inc., in Valley Forge, Pa., the parent company of Vanguard Investments Canada Inc., in Toronto. “So far, we’ve seen a great uptake among advisers in Canada.”

The growing move towards fee-based advice is the result of a combination of factors that have come into play in recent years. Foremost among these factors are regulatory changes that will make it mandatory for investment advisers to provide full disclosure of all fees as well as details of their clients’ portfolio performance. These new rules, which are part of the Client Relationship Model introduced last year by the Canadian Securities Administrators, are set to take effect in July 2016.

Another driver behind fee-based advice is the popularity of ETFs among Canadian investors. With a greater awareness of their ability to access lost-cost products, today’s investors are keeping a closer eye on portfolio costs such as management expense ratios (MERs). Many advisors are responding by switching to a fee-based model, with some also choosing to focus their practice on ETFs.

“There's a very good alignment with clients wanting ETFs in their portfolio and an adviser who has the ability to run a fee-based model,” says Jason McIntyre, head of sales at Vanguard Canada. “It’s not surprising that the use of ETFs has gone up dramatically in countries where regulatory bodies are moving towards a transparent model for fees. It’s a trend that we've studied and it’s something we’re seeing here in Canada as we continue to shift from transactional to fee-based advice.”

Investment experts agree that fee-based advice brings benefits for both investors and advisers. Many investors will likely see better returns on their investment; numerous studies point to better portfolio performance when advisers or brokers are not paid transaction-based commissions.

Fee-based advice, which has also taken hold in the United Kingdom and Australia, will lead to an enhanced level of service from advisers, says McIntyre. Instead of acting as mere portfolio managers, many fee-based advisers are already taking on the role of behavioural coaches who work closely to guide clients, especially during tough times.

“Their focus becomes making sure the client stays invested at the right time, and rebalancing portfolios at the right time to stay constant with the client’s risk assessment,” says McIntyre. “This is clearly good for the client, but it’s also great for advisers because it opens up opportunities to build stronger relationships and overall makes their practice more rewarding.”

Advisers also stand to gain financially by switching to a fee-based model. PriceMetrix data shows that advisers who added fee-based accounts to their books saw revenue growth of up to almost 50 per cent over three years.

With fee-based advice, investors can stop wondering if their adviser’s decisions to buy and sell shares are influenced more by the prospect of earning commissions from the transactions rather than what's best for the portfolio, says Bennyhoff.

“If the markets go up and down, advisers can pick up the phone and make a transaction without a commission but still get paid,” says Bennyhoff. “And they won’t have to worry that their clients might be questioning their call.”

To learn more about Vanguard ETFs, visit www.vanguardcanada.ca/individual/etfs/etfs.htm.