Research suggests that investors might be advised to avoid fee based brokerage models!

According to a recent report by PriceMetrix, a Toronto based financial services consultancy:

Advisors who are more aggressive and move a significant percentage of their assets into fee-based accounts benefit more quickly from higher RoA, revenue, and assets. They also use the opportunity to part ways with small households and reawaken dormant ones.

“Investors appear to be willing to pay a premium for fee programs. One of the reasons the fee-based model tends to command a higher revenue on assets (RoA) is because it forces the advisor to define and clarify the value proposition that will be delivered1. The average fee-based account is 46% larger than the average transactional account and generates revenue that is more than three times higher (see Figure 4). Households that have one or more fee accounts generate an RoA that is 40-70 basis points higher, regardless of household size, than households that are purely transactional, across all household sizes examined (see Figure 5).

There are a couple of issues here, for the advisory client:

1 – The suitability rules that govern the relationship should be the same for both sets of accounts: advisory based services do not operate under fiduciary type or best interest regulatory models, so a fee based account does not necessarily imply better advice, and note that you need to differentiate between the word “service” and the word “advice”. 

2 – Secondly, a higher cost, with no improvement in investment outcome = a lower result for the investor.  

3 – There are of course those advisors who do act in their client’s best interests and who do offer good advice, irrespective of regulation, and for whom a fee based service is one better able to support the costs of the service, but this report discusses revenues and not costs and one must assume that the implication is cost and time change little, but revenue, and hence margins,  does. 

Nowhere in the report is there any comment on the benefits to clients of moving to a fee based account: you would have thought a client benefit would be an important selling point!   

What are the benefits for the investor? 

Well a recent guidance note from IIROC posits that that a decision to move to a fee based account should be one subject to suitability guidelines.  This report suggests that the move, all else being equal, would be unsuitable for investors. 

Do not get me wrong, I believe in fee based remuneration that is appropriate for the services offered and the value added, and that transaction remuneration is wholly unsuited to services advising and management clients’ assets in their best interests, but this smacks to me of having your cake and eat it with a big ++ on the end of it.  There is no mention of any costs of service transition, or of greater service obligations and responsibilities, or of a mutually beneficial outcome.  

An advisor rather than an “advisor” should be interested in outcomes that benefit their clients, that help them better organise and deliver their expertise and to improve both the quality and efficiency of the outcome.   This so called “recommended aggressive move” to a fee based model seems to me all about increasing the take and little else. 

I am still waiting for that breath of fresh air!

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