Advisor Compensation Models - Federation of Mutual Fund Dealers

Advisor Compensation
Speakers: Laird Elliott
Mackenzie Financial Corporation
Nelson Cheng
Sterling Mutuals Inc.
Tony Mahabir
Canfin Financial Group of Companies
Moderator: Manny DaSilva
Advisor Compensation Models
Manufacturer’s Viewpoint
Laird Elliott, Executive Projects Manager
Mackenzie Financial Corporation
Advisor Compensation Models
 A manufacturer has no control over advisor compensation and
no particular bias towards one model over another.
 The ‘trailing commission’ embedded in the MER acts as an
estimate of the cost of distributing the product through a
distribution network. The amount is completely market driven and
standardized by product type.
 Various Series have been created over time to accommodate
the various distribution models that have been developed – some
containing embedded distribution fees, others not.
Advisor Compensation Models
 Distribution organizations take many forms and deploy many
different models – from full service brokerage firms, to discount
brokerage firms and organizations licensed to sell specific
products such as mutual funds, or exempt products.
 Each organization is free to select the product series that best
fits its model – High embedded fee, low embedded fee or no
embedded fee.
 Freedom of choice and a variety of choices is key to our market
driven models – whether it is a distributor choosing product for its
shelf, an advisor or an investor.
Advisor Compensation Models
Industry Trends – Series Purchased
Advisor Compensation Models
Industry Trends
MER’s peeked at 2.33%* in 2001
Decreased to 1.93%* in 2011
Asset allocation shift from Equity to FI
Competition from smaller manufacturers looking for shelf space
Introduction of no load funds
Introduction of fixed administration fees
Despite the introduction of GST/HST in 2010
* Asset Weighted average inclusive of trailing commission – taken from CSA paper
‘mutual fund fees’
Advisor Compensation Models
Industry Trends
 Trailing commissions as a percentage of total MER have remained
constant at 35%.
 Distributors revenue base shifted away from transaction based
compensation (POS – 73% in 1996) to asset based compensation
(64% in 2011).
 Advisor recommendations shifted away from Mutual Fund Sales to
portfolio selection (asset allocation).
 The cost of ownership is totally transparent by components across
the industry for mutual fund products – regulatory requirement.
Advisor Compensation Models
Dealer’s Viewpoint
Nelson Cheng, Chief Executive Officer
Sterling Mutuals Inc.
Advisor Compensation Models
Traditional Models
 Criticized by media and investor advocates.
 Embedded compensation.
 Proposed Changes to NI 31-103.
 Subsection 14.14.1(3) – an advisor must deliver statements on
a monthly basis if requested by client.
 New section 14.17 requires annual summary of charges and all
other compensation received.
 Performance reports. Account based vs. Consolidated.
Advisor Compensation Models
Traditional Models
 How will this affect the value of your business?
 What effect will rising costs have on compensation grids?
 End of Trailer Fees? CSA says it is neutral. “Trailing
commissions are the dominant form of compensation for selling
mutual funds today.”
 Main theme is BETTER DISCLOSURE.
 Are traditional models still viable?
Advisor Compensation Models
Fee For Service Model
 NI 31-103 requirements still apply.
 New business model for most dealers and advisors.
 What is the cost of adopting this model?
 Does your back office system support this?
 How will clients and advisors react?
 Consumer behaviour- never ideal.
 Good for large accounts only?
 An alternative, or a new tool?
Advisor Compensation Models
Fee For Service Model - Options
 Outsourcing.
 Operational issues when dealing with an intermediary.
 Loss of control over the account.
 Higher cost to the client?
 Loss of revenue.
 Self-Administered.
Advisor Compensation Models
Fee For Service Model - Options
 Cost of systems to support this.
 Level 4 dealers only.
 Increased compliance requirements in a nominee environment.
 Higher Capital Requirements.
 Greater control of accounts.
 Another source of revenue. Or losses.
 BONUS!- Raises the bar for back office operations.
Advisor Compensation Models
Investor’s Viewpoint
Tony Mahabir, Chief Executive Officer
Canfin Financial Group of Companies
Advisor Compensation Models
Types of Compensation Models
1. Salary Only
2. Salary Plus Bonus
3. Commission Based
4. Fee-Based (A.U.A)
5. Fee-Only (Planning)
Advisor Compensation Models
Key Factors Impacting Compensation
Advisor Compensation Models
Generally Fee-Based is not for Small Clients
Advisor Compensation Models
“Embedded Fees” Versus “Unbundled Fees”
Advisor Compensation Models
Caveat Emptor (Buyer/Investor Beware)
Mutual Funds Cost of Ownership:
2.38% - Advisor Based
2.27% - Broker
2.10% - Average Fee
1.89%- Branch Based
Questions & Answers?