Advisor Compensation Models

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 ManagerMackenzie Financial Corporation

Advisor Compensation ModelsObservations

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 ModelsObservations

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 ModelsIndustry Trends – Series Purchased

Advisor Compensation ModelsIndustry Trends

MER’s peeked at 2.33%* in 2001

Decreased to 1.93%* in 2011

Reasons:

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 ModelsIndustry 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 OfficerSterling Mutuals Inc.

Advisor Compensation ModelsTraditional 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 ModelsTraditional 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 ModelsFee 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 ModelsFee 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 ModelsFee 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 OfficerCanfin Financial Group of Companies

Advisor Compensation ModelsTypes 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 ModelsKey Factors Impacting Compensation

Advisor Compensation ModelsGenerally Fee-Based is not for Small Clients

Advisor Compensation Models“Embedded Fees” Versus “Unbundled Fees”

Advisor Compensation ModelsCaveat Emptor (Buyer/Investor Beware)

Mutual Funds Cost of Ownership:

Questions & Answers?