One man has issued a radical challenge to tie together fees and performance
Aiming to better protect investors, regulators have required advisors to make their reports to clients more transparent, particularly with regards to fees and performance. One professor is taking the idea further with a provocative but pointed proposal.
“Here are my terms,” said Bruce Pardy, who teaches law at Queen’s University, in a piece contributed to the Financial Post. “With half of my investment funds, I will buy a basic exchange-traded fund (ETF) that tracks the market. The management fee: a mere 0.2%.
“The rest of my money I will put in the hands of my adviser,” Pardy continued, “who will have the authority to invest as he sees fit.”
The professor then said that if his adviser were to outdo the ETF, he would pay the man half the difference. Should the adviser match the market’s performance, he would be paid 0.2%.
The final condition: if the adviser does worse than the market, he would pay Pardy half the difference.
“Under Rule 1300.16 of the Investment Industry Regulatory Organization of Canada, fees contingent on performance are permitted for managed accounts with the written consent of the client,” Pardy said. He then claimed that advisers will not embrace the model because they rarely beat the market.
He went on to weigh in on financial advisers’ other functions. He said the industry defines their role as being clients’ guide through financial matters such as budgeting, establishing a savings scheme, determining risk tolerance, obtaining insurance, and estate planning.
“Allow me to translate: If you are financially illiterate, then an adviser can tell you things you should already know,” he said. “For this I should pay two per cent of my portfolio each year?”
Citing disruptions such as the push for fee transparency and the challenge of low-cost robo-advisors, Pardy said that the industry has to compete by taking on a new compensation model.
“Of course, that’s up to the financial advisers. If none of them is willing to embrace my terms, why would I want to hire one?”
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“Here are my terms,” said Bruce Pardy, who teaches law at Queen’s University, in a piece contributed to the Financial Post. “With half of my investment funds, I will buy a basic exchange-traded fund (ETF) that tracks the market. The management fee: a mere 0.2%.
“The rest of my money I will put in the hands of my adviser,” Pardy continued, “who will have the authority to invest as he sees fit.”
The professor then said that if his adviser were to outdo the ETF, he would pay the man half the difference. Should the adviser match the market’s performance, he would be paid 0.2%.
The final condition: if the adviser does worse than the market, he would pay Pardy half the difference.
“Under Rule 1300.16 of the Investment Industry Regulatory Organization of Canada, fees contingent on performance are permitted for managed accounts with the written consent of the client,” Pardy said. He then claimed that advisers will not embrace the model because they rarely beat the market.
He went on to weigh in on financial advisers’ other functions. He said the industry defines their role as being clients’ guide through financial matters such as budgeting, establishing a savings scheme, determining risk tolerance, obtaining insurance, and estate planning.
“Allow me to translate: If you are financially illiterate, then an adviser can tell you things you should already know,” he said. “For this I should pay two per cent of my portfolio each year?”
Citing disruptions such as the push for fee transparency and the challenge of low-cost robo-advisors, Pardy said that the industry has to compete by taking on a new compensation model.
“Of course, that’s up to the financial advisers. If none of them is willing to embrace my terms, why would I want to hire one?”
For more of Wealth Professional's latest industry news, click here.
Related stories:
Poll: Retirees want ‘best-interest’ standard for advisors
Investor rights group: High time for a higher standard
