Andre Frazer explains why seemingly simple questions on fees are tough to answer
Andre Frazer, a financial planner at Networth Financial Corp., shares his thoughts on advisor compensation and the myriad issues that surround the ongoing fee debate.
How has the ongoing pressure on fees for financial advisors affected your practice?
I have been selling mutual funds since 1989 and there were not many dramatic changes in the selling process over the decades until in the past year or two, when the paperwork involved became monumental. Increased regulation, combined with the already existing archaic procedures, has created an exponential increase in the documentation and time involved in initiating and completing transactions.
Fee questions have always arisen and the majority of clients, I believe, have always been aware that mutual funds have fees. For more than a decade, all clients of mutual funds have had to initial or sign indicating that they understand there are fees involved in mutual funds. Clients have always known that mutual funds, like anything else in life, are not free. It’s never been a secret. However, what has changed is that the amount of fees paid to the advisors' firm is now indicated in dollars in their statements, and not as a percentage buried in some paperwork somewhere.
In the end, I think my clients deal with me because they require my services and advice and are not "do-it-yourselfers". But they do care, very much, about their returns, which they seem to have always been adept at evaluating even before rates of return had to be listed on statements in addition to dollar fees.
It is still too early to determine if fees are putting pressure on my client's dealings with me. What is difficult to deal with is the reality that most financial planners recommend balanced portfolios for their clients with larger portfolios since capital protection is very important to them, and with current low interest rates, fees dramatically cut into the returns of those balanced portfolios. This is a far more difficult issue to deal with than exactly how fees are presented, and certainly will have an effect on the client/advisor relationship.
What are your thoughts on the current proposal to ban embedded commissions?
Eliminating embedded fees will create even more paperwork, which in the end reduces further the amount of time financial advisors have to deal with actual financial planning. I don't think continuing with the status quo will prevent clients from understanding that the standard advisory fee is approximately 1% of assets under administration regardless of how the fee is presented.
Do you have any ideas on what should be done to address conflicts of interest related to compensation for advice?
Conflicts of interest related to compensation are always going to occur, and I believe that the dominant solution – namely disclosure – is probably the best deterrent to abuses. Disclosure forces both the advisor and the client to think twice about the fees and the products being sold.
One issue I see brought up a lot is the suggestion that advisors will prefer to sell a product that pays more, simply for the higher commission. I don't believe this is true for most independent advisors; otherwise, wouldn't the higher trailer or commission products be more popular? In fact, I think most advisors know intuitively that products that have a high hurdle in terms of fees probably won't provide the best performance in the long term (although I could cite some funds that do have quite high fees but have outperformed their piers), ultimately leading to a dissatisfied client.
Most financial advisors are in it for the long term and want to build their business, so I do not believe they are that easily swayed by higher-than-average fees, and it is actually in their interests to see if they can provide the lowest-fee product to their client, other things being equal. Other professions have innate conflicts of interest too, but I don't hear much about them in the media.
There are of course other issues to do with fees. Regardless of qualification, advisors are not permitted to advise on or sell products for which they are not licenced. Not being permitted to assist the client with all their financial affairs is probably detrimental to the client, but how do we fix that problem?
For more of Wealth Professional's latest industry news, click here.
Related stories:
Active managers getting ready to earn their cut
Are mutual fund investors getting the protection they need?
How has the ongoing pressure on fees for financial advisors affected your practice?
I have been selling mutual funds since 1989 and there were not many dramatic changes in the selling process over the decades until in the past year or two, when the paperwork involved became monumental. Increased regulation, combined with the already existing archaic procedures, has created an exponential increase in the documentation and time involved in initiating and completing transactions.
Fee questions have always arisen and the majority of clients, I believe, have always been aware that mutual funds have fees. For more than a decade, all clients of mutual funds have had to initial or sign indicating that they understand there are fees involved in mutual funds. Clients have always known that mutual funds, like anything else in life, are not free. It’s never been a secret. However, what has changed is that the amount of fees paid to the advisors' firm is now indicated in dollars in their statements, and not as a percentage buried in some paperwork somewhere.
In the end, I think my clients deal with me because they require my services and advice and are not "do-it-yourselfers". But they do care, very much, about their returns, which they seem to have always been adept at evaluating even before rates of return had to be listed on statements in addition to dollar fees.
It is still too early to determine if fees are putting pressure on my client's dealings with me. What is difficult to deal with is the reality that most financial planners recommend balanced portfolios for their clients with larger portfolios since capital protection is very important to them, and with current low interest rates, fees dramatically cut into the returns of those balanced portfolios. This is a far more difficult issue to deal with than exactly how fees are presented, and certainly will have an effect on the client/advisor relationship.
What are your thoughts on the current proposal to ban embedded commissions?
Eliminating embedded fees will create even more paperwork, which in the end reduces further the amount of time financial advisors have to deal with actual financial planning. I don't think continuing with the status quo will prevent clients from understanding that the standard advisory fee is approximately 1% of assets under administration regardless of how the fee is presented.
Do you have any ideas on what should be done to address conflicts of interest related to compensation for advice?
Conflicts of interest related to compensation are always going to occur, and I believe that the dominant solution – namely disclosure – is probably the best deterrent to abuses. Disclosure forces both the advisor and the client to think twice about the fees and the products being sold.
One issue I see brought up a lot is the suggestion that advisors will prefer to sell a product that pays more, simply for the higher commission. I don't believe this is true for most independent advisors; otherwise, wouldn't the higher trailer or commission products be more popular? In fact, I think most advisors know intuitively that products that have a high hurdle in terms of fees probably won't provide the best performance in the long term (although I could cite some funds that do have quite high fees but have outperformed their piers), ultimately leading to a dissatisfied client.
Most financial advisors are in it for the long term and want to build their business, so I do not believe they are that easily swayed by higher-than-average fees, and it is actually in their interests to see if they can provide the lowest-fee product to their client, other things being equal. Other professions have innate conflicts of interest too, but I don't hear much about them in the media.
There are of course other issues to do with fees. Regardless of qualification, advisors are not permitted to advise on or sell products for which they are not licenced. Not being permitted to assist the client with all their financial affairs is probably detrimental to the client, but how do we fix that problem?
For more of Wealth Professional's latest industry news, click here.
Related stories:
Active managers getting ready to earn their cut
Are mutual fund investors getting the protection they need?
