How is your financial advisor paid?

This month's issue of "Protegez-Vous", Quebec's highly reputable consumer advocacy magazine, reports that 50% of financial advisors (conseillers financiers) that were questioned as part of a "mystery shopper" survey, failed to interview the "client" and provide advice per the norms of Quebec's Financial Planning designation. This number does not surprise me, nor do I think it is unique to Quebec. I believe the problem is Canada-wide at all levels of the financial services industry because most advisors are far more motivated by how they are paid, rather than by the ethics of their professional designation.

Think about it. At one time, most Canadians had very little surplus funds (and were granted very little credit) and they did whatever business they had at the same local bank whose staff was paid the same salary day in day out, regardless of whether you were there to buy a Canada Savings Bond or request a personal loan. The only Canadians who even needed a financial advisor were those who had ample wealth to invest in the stock market, and they were happy enough to pay a broker commissions to buy and sell stock because it would be the unwise broker who would risk losing a wealthy client by recommending poor stocks or multiple transactions just to fatten his payout. In fact, the wealthy often had accountants and lawyers on their payroll as well, in order to provide alternate viewpoints in financial affairs.

With the advent of many smaller investors entering the marketplace in the last 25 years, the level of competition for this larger volume business became more intense, with providers understanding very quickly that small investors were more "sticker-price" adverse: they would not pay a fee for "advice" up front but could be influenced to buy an investment if it was provided as part of an "advice" model, such as "financial planning" and as long as the costs were hidden for obvious view.

Hence the phenomenal growth of the mutual fund industry, from a few hundred funds in the early nineties to more than five thousand today in Canada alone. Because mutual funds are baskets of securities with unit values changing daily and requiring a complex accounting and reporting system, it was relatively easy for a mutual fund company to include a myriad of expenses and fees (Management Expense Ratio, or MER)that must be deducted from the return of the fund before calculating the net return to the client. Added to the MER is the dizzying array of sales commission charges "Front-load", Deferred Sales Charge" or "Back-load",all of which ensure that the customer pays for the privilege of having a mutual fund sold to him/her- and in fact will be still required to pay the sales charges even if he/she wants out of the investment sooner rather than later.

Many people still have enormous trust in financial institutions, not realizing that the "girl at the bank" who used to admit candidly if rates were actually better across the street, was now a "financial advisor" and paid in part by commissions on any and all bank investments she sells. As the mystery shoppers in the the Protegez-Vous survey found out, many so-called financial planners, advisors or counsellors, did not bother to find out what course of action was in the client's best financial interest: they only succeeded in offering the type of advice that was in their best interest. So, my friends, when it comes to seeking financial advice, " Caveat Emptor" or "Let the Buyer Beware"