Paying for advice? Pros and cons of fees versus commission

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 fee-based. 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. 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. They just renew their GICs every time it comes due.”