Monday, May 7, 2007

Compensation of Financial Advisors – A Middle Class Rant V

Here is my submissions for the Canadian Tour of Personal Finance Blogs:

There are many posts out there on the high commissions/fees charged by both financial advisors and mutual fund companies. Almost all of these posts slam the high fees charged with no mention of the benefits that financial advisors do offer for some. Personally, I have mixed feelings on the compensation of financial advisors. For knowledgeable amateur investors like you and me their fees do seem ridiculous. Many amateur investors (myself included) shudder at the thought of paying 2% annually to a financial advisor or mutual fund manager. However, I would argue that isn’t the case for the majority of society. We shudder at the 2% fees in the same way a plumber would shudder at paying $80 an hour for someone to replace his faucets. There are many, many people out there who have absolutely no interest in finance or investing and as a result don’t find 2% to be an unreasonable fee to pay for advice on a subject that they know nothing about and have no interest in learning. The mere mention of a P/E ratio or dividend yield is enough to make many peoples eyes instantly glaze over and roll back in their head. If you don’t believe me start talking about the fundamentals of the stocks on your watch list at your next social event or family dinner and see how many people are just sitting there trying their best to be polite and seem interested. As further proof many people I talk to think that an RSP is an actual product. When I’m talking to them I say “that’s great you’ve started an RSP what did you buy?” and in 99% of the cases they respond with a funny look on their face and say “what do you mean what did I buy? I bought an RSP” and most of the time they aren’t interested in hearing that an RSP is basically just a sheltered investing account.

I have friends with zero interest in investing and they think that the fees they pay on their mutual funds and to their advisors are very reasonable as their returns handily beat the savings rate of banks, which is where their money would be if it were not for the advisors. Many of my same friends find it absurd that I’d pay $30 for an oil change or $80 and hour for the services of a plumber. I think the fees argument can be made for almost every profession. If you are in a profession be it amateur or professional you are going to have a hard time paying for something you can do yourself.

Personally, I have the biggest problem with real estate fees... 5% commission to basically just get my house listed on MLS?! that’s $10,000 on an average $200,000 home. Most people that I know who have purchased a house in the last 5 years found it themselves on MLS and then called their agent to simply arrange the viewing. Upon purchase some generic stock forms are filled out at the real estate office and then the lawyers take if from there. Now that was $10,000 well spent...To me that’s absurd!

Disclosure - I’m not a Financial Advisor.



JSan said...

With regard to Real Estate fees what alternative does a person have to list their home other than MLS? It seems to me that MLS has such a following that a person would be missing out on a very large market if they are not listed on MLS.

I am very interested in saving the 5% on the sale of my home in the next couple of years.

Thicken My Wallet said...

I have to agree with you about real estate commission. At least with advisors, there is a DIY solution.

Read this link and tell me that there isn't something wrong with the MLS system (or read the real estate industries reaction to

Great blog. Keep posting.

Arjun Rudra said...

Very True...most of the people i know are also disinterested in investing and think investing their RRSP money in GIC's is the best way to grow capital. MCM what do you think of Fee based advisors?

Anonymous said...

Personally, I’m a big fan of fee based advisors and I think that an hourly fee structure makes sense for financial planning as:

1. advice is unbiased.
2. the client will probably save money in the long run on fees and commissions. (presumably the advisor will guide away from high expense products)
3. advisor has no restrictions on the products they can offer.

One of the major drawbacks for many people of the hourly fee structure is that most people who are not do-it-yourselvers start investing with a relatively small amount of money and as such can’t justify paying $80/hr for advice on how to invest $1000 (at least that’s how they see it). Others simply wouldn’t invest if they had to pay an expensive hourly fee. Personally, if I wasn’t a do-it-yourselver I would opt for an advisor who charges and hourly wage or I would go with a broker. However, I think both types of advisors (hourly and commission) have their place in the market.

Anonymous said...

The disclosure (lack of) of the fees of managed funds is even worse. The fact that they make it so hard to understand and find the costs speaks volumes. If all clients knew what they were really paying I don't think managed funds would be as popular.

Anonymous said...

Great post - RE fees make my blood boil.

I agree about the commission investment types - for people who can't or won't shop around or learn a bit themselves, they are the best choice.

If I was an investment advisor and I had my own company, I would still use the normal mutual fund system since I would need to get paid but I would make an effort to provide some service for the money I'm getting paid ie annual checkups etc. I would also work on getting the management fees reduced for clients with larger assets (>$100k). All the big MF companies will reduce the management fees if the account is big enough.

Promod said...

Interesting post. MCM. Real estate fees cover more than a listing on MLS. They pay for your agent's expertise in helping you decide on the right home (e.g., info on the neighborhoods, appropriateness of the price, suggestions, suggestions, suggestions). A guide during a very emotional process can be very valuable --- if you find the right one.

We found our agent earned his keep by being strong negotiator.

Over the years, I've seen a few "For Sale By Owner" signs. Invariably, there's soon a sign for a regular real estate firm. As a buyer, I avoid 'by owner' sales because the owner looks like a cheapskate and wonder where else corners were cut. Who wants surprises after the purchase?

Anonymous said...

Good post - I recently blogged about this topic with respect to financial advisors (albeit indirectly) here.

I don't know if ComFree is in your area yet or not, but they're raising hell in Alberta. The establishment is fighting with all the rhetoric they can muster about providing value for their clients. I suspect if more fee-based middle class financial advisors would sprout up, you'd see the same stuff out of commission-based advisors.

Anonymous said...

I, like I think many of the comment-leavers, do my own investing. I'm a nerd that way - plus, had some really positive experience right off the bat (thanks, WestJet and Starbucks in the late 90's) that made DIY investing pretty interesting!

Now, I notice a few things with my clients (I'm NOT a F.Planner, but I do help people take charge of their money).

1. They simply don't have the time and interest to devote to investing themselves. So the only other mass-produced option that beats GICs is cookie-cutter mutual funds.
Is having this option, via financial planners, worth 2 or whatever %? I think so.
Having worked for a financial planner for a brief (and rather boring) while, I also have to say, planners are squeezed every which way, and while 2% may sound a lot, it covers ... office space, admin assistants, insurance, regulatory body membership etc.

2. Value added - could be offered simply by creating easy-to-read statements! Statements are usually painful to read, even by an experienced person. So no wonder my clients' eyes glaze over. Could someone start a business helping financial planners create statements as user-friendly as the ING Direct interface? (and no, I'm not ready to believe that investment firms deliberately make them confusing)

Anonymous said...

This is a controversial subject. :D

MER – This can’t be financially healthy for you since most actively managed funds under-perform the respective index, unless you’re talking about MER of index funds and ETFs.

Commission-Based Advice – Advisor’s interests will dictate the products she’ll sell to you, whether it’s a high MER balanced fund or a whole life insurance.

Fee-Based Advice – This is the money well spent if you aren’t willing to do the work yourself, and have enough net worth.

No money?
- Buy index funds. They're cheap, tax-efficient and they beat most actively managed mutual funds.
- Buy term insurance. They're cheaper than whole or universal life, and you can terminate the policy without costs as soon as you have no more dependents
- Buy Personal Finance For Dummies.

Anonymous said...

Regarding RE commissions, if you live in BC or Alberta, try One Percent Realty. I'm a happy client who paid 1.2% to sell my home.

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