Do Not Be Afraid to Talk about Fees, SpectremAdvisors, 2008, At the beginning of this decade, there was an effort made by some financial institutions to move from a transaction-based to a fee-based business model to protect consumers from baseless transactions made only to generate sales commissions. Because nearly six in ten affluent investors have a primary financial advisor, (someone whom they rely upon for financial advice and counsel) this change in fee structure affected most affluent investors and most advisors to the affluent. 

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Moving FEE-LY, Clients seeking quality are leaning toward customized fee-based service, by Warren Balwin, CFP, R.F.P., CIM, Advisor's Edge Report, June 2008, As a fee-only personal financial advisor and investment counsellor who’s kept the faith, I’m pleased that during the past 10 years the investment and advisory industry has shown a strong trend toward fees. At first, it was exploratory, but now many advisors in Canada have started moving seriously toward relationships that include a platform featuring fees as a way for clients to engage services.

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MDRT: Switching over to a fee-based practice is a marathon, not a sprint, By Neil Acharya, Investment Executive, June 2008, For financial advisors considering a move to a fee-based business practice, David Wingar’s message is blunt. “You have to work smarter, not harder,” he said at the Million Dollar Round Table annual meeting in Toronto on Wednesday.

Wingar, an independent financial advisor who runs Future Asset Management LLP in Bridgend, Wales, was motivated to switch to a fee-based system after he got fed up with not getting remunerated for everything he did.

“It’s not about commissions or fees, it is about getting paid. As a professional person, if I give advice, I expect to get paid. A lot of the advice I give might not end up with a product, which is the old way of getting being remunerated in financial services.”

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High-Quality Financial Advice Wanted! by Ralph Bluethgen, Steffen Meyer, Andreas Hackethal, February 2008, The crucial finding of this paper is that when seeking high-quality financial advice, private investors should pay great attention to advisors' compensation scheme and their sophistication/ rationality as these two variables prove to be highly predictive in terms of the quality measures analyzed in this paper. In contrast, solely focusing on advisor experience or advisor education might lead to adverse results.

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F-class mutual funds -- why now is a good time to take a second look
By Marc Lamontagne, CFP, R.F.P., FMA, CSA Quick, what dubious distinction does Canada’s mutual fund industry have compared to the rest of the planet? If you said we have the highest Management Expense Ratios (MER) in the world, then you would be absolutely right (according to the Tufano study Mutual Fund Fees Around the World (May 2007)!

Now imagine, if you can, explaining that to a client. Not fun. But what if you could offer a way to reduce their cost without negatively affecting their rate of return, or severely limiting their investment options, or even affecting your compensation? What would your client say to that? Probably, “Tell me more.”

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In 1999, a somewhat unwelcome research paper published by Undiscovered Managers predicted that the industry’s benign existence was about to change. The study asserted that the current business environment was due primarily to an excess supply of clients relative to industry participants’ ability to capture and service them. And a combination of factors including new competitors, greater capacity of existing participants and the expanded use of technology would correct this imbalance and force the industry to rationalize over the next decade.

The structure of the industry would likewise change and from a highly fragmented industry made up of competitors of all sizes would emerge a small group (40 to 50 organizations) of dominant competitors: highly profitable, large firms that would “look like multi-user family offices for the semi-affluent.” These firms would have at least $15 billion — $20 billion in assets under management and some would be much larger.

While there would still be numerous smaller firms, only one type — mid-sized niche competitors — would flourish. These high-profit specialist firms would provide sophisticated services that solve complex problems for select groups of individuals. Thousands of other small firms would continue to exist, but their owners would find that they had to work much harder, would earn far less than they did in 1999 and their businesses would possess little enterprise value.

Given that it is now just after the midpoint of the advisory business’ predicted decade-long evolution, we decided to revisit the issue of the industry’s future. A joint JPMorgan / Undiscovered Managers team of researchers spent twelve months studying its current state and those forces that now confront it.

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Commission-based model undervalues advice, Investment Executive, November 2007, Defenders of the status quo in the Canadian retail financial services industry must be either hopelessly naïve or utterly disingenuous.

In a recent editorial, Investment Executive argued that commission-based compensation structures may not be in the best interests of either clients or advisors over the long run.

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To fee or not to fee? Ageing clientele will impose new demands, by Jonathan Chevreau, Financial Post, October 16, 2007, The dilemma facing advisors is a variant of what Shakespeare's Hamlet agonized over: "To fee or not to fee." Brayman says the industry is in transition from a product focus to selling products with advice on request and ultimately making advice preeminent. Mutual fund sales people are in the middle category: If clients ask for financial plans, advisors generate them but they're still stuck in the commission mode. Most advisors are stuck there, Brayman said in an interview, "They started out to become financial planners but never really got out of product mode."

Ultimately, "advice makes more money," Brayman says. The ideal is a compensation model where advisors are paid a fee for their time or on client assets under management. Five years after this transition, fee-only or fee-based advisors can make four times more revenue and 60% more profits. They also attract larger clients: the same well-heeled clientele mentioned by Sjogren.

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Bridging the Trust Divide: Advisor Best Practices for Communicating Value and
Discussing Fees, State Street and Knowledge@Wharton, At one time, financial advice usually came folded into another service, sometimes in the form of suggestions from a tax accountant, more frequently in the form of stock tips offered by a broker-dealer. Often, it was good advice. At times, however, it was conflicted, because moving particular products sometimes took precedence over doing what was right for the client.

Over the last 15 years, that model has changed. First, advances in technology and regulatory reforms led to the rise of discount brokers, making it difficult for the old-fashioned stockbroker to sustain the same fee structure. Later, partly in response to that assault, the financial services industry looked to develop a more stable and less cyclical revenue stream. This fit in neatly with consumer concerns about conflicts of interest and has led to a new paradigm in financial
advice—the movement toward offering consultative services instead of product pushes and straightforward fee structures rather than complex or opaque ones.

In this report, State Street and Knowledge@Wharton look at how financial advisors are negotiating the boundaries of this evolving relationship. Specifically, the report examines how advisors can:
1. Strengthen relationships by engendering trust;
2. Best communicate the value they bring to their clients given how clients generally perceive value; and
3. Successfully discuss fees with clients.

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Mutual Fund Fees - Are we paying too much? by Dave Paterson, CFA, June 2007, If you ever want to see Personal Finance columnists from the various media outlets
froth at the mouth, bring up the topic of mutual fund fees. They will climb on top of
their pulpits and shout about the evils of the MER to any and all that would listen. While
I poke fun at them, they do have an extremely valid point. Fund fees in Canada are
high. In fact, according to a recent study released by Peter Tufano, Ajay Khorana, and
Henri Servaes, Canada’s mutual fund fees are the highest in the world.

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Factory-gate pricing 'brings advice transparency', by Emily Perryman, ifaonline.co.uk, March 2007, A move to factory-gate pricing¹ could answer the (UK) Financial Services Authority's (FSA) concerns about the transparency and sustainability of financial advice, suggests the ABI.