BY: FAZAAD BACCHUS
If you look at your 2016 year end statement you will notice something that you have never seen before.
Beginning 2017 the MFDA has mandated that all statements must disclose the fees and commissions charged to a client’s account. This doesn’t mean that the fees were not there before; it only means that it was not properly disclosed as it was in the form of embedded commissions. If you look closely at the breakdown of fees you may notice two sets of commissions. One being a sales commission and the next being a trailing commission, the first being what the advisor charges to take on your account and the trailing commission is what the advisor is paid for ongoing service and advice.
Let’s deal with the sales commission first: Advisors have an option on whether to charge a client a deferred sales charge – DSC, an upfront sales charge – FEL, no sales charge – NL or more recently fee for service -F. The deferred sales charge has been a common option for many advisors, this is typically 3% to 5% of your total investment paid to the investment dealer and then split between the dealer and advisor anywhere from a 50/50 split to a 25/75 for the advisor. The client is not charged any of these commissions so their investment portfolio remains intact and it only becomes an issue if the client wishes to withdraw as that’s when the charges apply.
If the client has a long-time horizon a DSC would not affect the client as usually by the time the client is ready to withdraw the penalty period of three to seven years is typically over. Many clients prefer this option over the FEL method of charging a commission upfront which is deducted from the client’s total investment. Many clients would be happy with the idea of a NL arrangement where there is no sales charged by the advisor but it might be unfair to ask an advisor to take over your account, spend time to research the funds etc and then expect not to pay for it. So, it’s up to you what you would like to pay your advisor: deferred, upfront, or nothing. This will also determine whether the advisor will assume responsibility of your account.
Secondly is the trailing commission: Let’s assume a mutual fund charges you for example 2.5 MER (Management Expense Ratio) annually, 1.5% will go to the investment company for their management expenses and 1% will go to the dealer and advisor which again will be split by differing ratios. Some funds in the low risk profile pay lower than 1% so less goes to the dealer and the advisor. However, this trailer commission is paid to your advisor for ongoing service and advice. A new and innovative method is charging the client a fee for service where you both decide on the amount.
You cannot invest without incurring fees, no one will work at making money for you without making money for themselves, but the main thing is to ask yourself: Am I getting the advice and service that I am paying for? Is my advisor, whether at the bank of finance company really seeking my interest or only providing lip service? Has my advisor worked out a financial roadmap or planned my retirement for me? Does my advisor contact me to do reviews? If the answers are a sure NO then you need to find someone who will take care of you, don’t be paying fees for nothing.