Pay­ing for fi­nan­cial ad­vice? Pros and cons of fees ver­sus com­mis­sion

The Hamilton Spectator - - BUSINESS - CRAIG WONG

OT­TAWA — There’s a scene in “The Wolf of Wall Street” where the co­caine-fu­elled char­ac­ter of Mark Hanna, played by Matthew McConaughey, lays out the No. 1 rule about the stock mar­kets. No­body knows where they’ll go. “But you and me, the bro­kers? We’re tak­ing cold hard cash via com­mis­sion,” he tells Leonardo DiCaprio, who stars as stock­bro­ker Jor­dan Belfort.

The over-the-top ex­change il­lus­trates why com­mis­sion-based fi­nan­cial ad­vis­ers may not serve one’s in­ter­ests.

The choice be­tween a fee-based ad­viser or one who gets paid through a com­mis­sion is an im­por­tant de­ci­sion for in­vestors.

An­drey Pavlov, a fi­nance pro­fes­sor at the Beedie School of Busi­ness at Simon Fraser Uni­ver­sity, says he prefers the fee-based sys­tem.

“I think it is the right model be­cause then the ad­viser is clearly work­ing for you and they have your best in­ter­ests in mind,” he said.

“When some­one is work­ing based on com­mis­sion, they can be hon­est and they can very much care about you, but still they’re get­ting paid based on the mu­tual funds they sell you and I don’t like those in­cen­tives.”

Fee-based ad­vis­ers may charge an hourly rate, a flat fee or a per­cent­age of the as­sets un­der man­age­ment, while com­mis­sioned-based ad­vis­ers earn a com­mis­sion when you buy or sell an in­vest­ment. Pavlov says while “99.9 per cent” of ad­vis­ers will act in your best in­ter­est, com­mis­sions cre­ate a po­ten­tial con­flict of in­ter­est.

“With fee-based, it is very clear what you’re pay­ing and the in­cen­tives are aligned,” he says.

Pavlov says the fee-based model is go­ing to be more ef­fi­cient for larger ac­counts, but he likes it for smaller in­vest­ments too be­cause he says it aligns the in­cen­tives.

“I want to pay for the time and ef­fort that the ad­viser (puts in) rather than some sort of sales job that I’m not even aware of,” he said.

A fee-based ad­viser, how­ever, isn’t for ev­ery­one. Sy­bil Verch, na­tional di­rec­tor of wealth man­age­ment at Ray­mond James, says the vast ma­jor­ity of her clients are fee­based. But Verch said a com­mis­sion-based ac­count may be cheaper for clients who don’t trade much and don’t need the fi­nan­cial plan­ning ser­vices an ad­viser may of­fer. One ex­am­ple, Verch says is a client with just a lad­dered GIC port­fo­lio that doesn’t do any trad­ing.

“They’re re­tired; they don’t need any more plan­ning; they’ve got ad­e­quate pen­sion in­come. They don’t need any of the other added ser­vices,” she said. “They just re­new their GICs ev­ery time it comes due.”

Fee-based fi­nan­cial ad­vis­ers also aren’t with­out their po­ten­tial con­flicts. For in­stance, if you re­ceive a wind­fall in­her­i­tance, fee-based ad­vis­ers who earn a per­cent­age of the as­sets un­der man­age­ment would be paid more if you in­vested the money with them than if you used it to pay off a mort­gage or other debt.

In ad­di­tion, there are lim­i­ta­tions to fee-based ac­counts. Most firms limit the num­ber of trades one can make in a year and charge more if clients go over that num­ber.

Newspapers in English

Newspapers from Canada

© PressReader. All rights reserved.