Who pays your financial advisor?

Illustration: Catherine Ocelot

One of the pleasures of Jean Dupriez, a financial planner for 30 years, is being asked how much he earns. Question to which he answers without shame, long and wide. But he does not often have the opportunity: “Less than one person out of 50 dare to discuss the subject”, says the author of the book. Know how to choose your financial advisor (Edival, 2010).

Almost all books on financial planning and even the Autorité des marchés financiers (AMF) encourage you to ask the question: “How is it paid?” “And for good reason. “The answer helps determine whether the council works for you or for yourself,” explains Jean Dupriez.

Even more, this information helps you understand what you pay, directly or indirectly, to your advisor. The amount sometimes deducted from your investments that, in the long run, can reduce the return by tens of thousands of dollars.

Everyone needs to make a living, and financial advisors are no exception. However, the type of remuneration varies from one expert to another, and from one product to another. Hence the importance of taking the time to understand the nuances.

Some advisors are salaried. Those who work for a large financial institution, in particular. Their annual compensation is usually supplemented by sales bonuses paid by their employer. Not surprisingly, these employees only offer the products of the latter. Too bad if securities with higher yields or with lower fees exist elsewhere in the market.

A salaried adviser generally suits the needs of small savers, believes Jean Dupriez. “At this stage, the most important thing is to save money. When your savings exceed $ 30,000, think that it is better to deal with a professional outside the banks.

Most of these are paid on commission. “For many people, the commission equals a conflict of interest,” says Robert Frances, CEO of Peak Financial Group, an independent brokerage firm. In fact, the equation is not so simple!

In the case of mutual funds, the adviser generally receives two commissions, which he shares with the company to which he is attached. The percentages vary according to the type of fund (equities or bonds) and the fees – that is, payable both on entry (on purchase, in the jargon) and on exit (on redemption).

When you buy funds with an exit charge, the advisor receives a commission of up to 5% of the investment, paid by the fund manager (the company that manages the investment). To this is added an annual trailing commission, also paid by the fund manager, of a maximum of 0.5% of the asset value, as long as the investment is held.

In the short term, this formula is attractive to the advisor…but less so to the client. Because if he withdraws his marbles before a certain number of years – generally six or seven years – he pays a significant penalty on the sum withdrawn. “On average, it is 6% and gradually decreases over time,” explains Jean Dupriez.

In the case of funds with an entry fee, the customer himself pays, at the time of the transaction, a commission of 0% to 5%. Who chooses the rate? The broker! “Most charge 0%,” says Léon Lemoine, financial planner at Gestion Ethik. So don’t hesitate to negotiate… or look elsewhere.

With this product, the customer is not captive. Advisors also benefit from this, since the annual trailing commission, paid by the fund manager, is higher and can reach 1% of the asset value.

An advisor that offers 0% entry fee funds is clearly here for the long haul. With this formula, everyone’s interests come together, says Jacques Lépine, Managing Director of Manulife Securities in Quebec: “If the client receives good advice, the value of his portfolio will increase, as will the advice’s compensation . »

All mutual funds come with these two fee structures (and sometimes even a third, blended one). So do not hesitate to insist on having the formula with 0% income tax.

Whatever you choose, all funds have management fees (1% to 2%), which the fund manager deducts from the annual return. Since July 2014, the council is legally obliged to inform its client of management fees.

For those who hate the very concept of commissions, there are advisors paid by fees. They take an annual percentage – usually less than 1.75% – from the assets under their management, regardless of whether their value increases or decreases. This is not a commission, since the money comes out of your pocket instead of the coffers of the company offering the product. The higher the value of your portfolio, the greater your bargaining power. But your assets must be at least $100,000.

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To know who we are dealing with

To ensure that an adviser has the right to sell the investments he proposes: the Register of companies and persons who are authorized to exercise, on the website of the Autorité des marchés financiers (AMF ). To find out how to check your disciplinary history: the website of the Chambre de la sécurité financier. However, it is impossible to ensure that an adviser who claims to be independent really is. “The term is not regulated,” explains Robert Frances, CEO of Peak Financial Group. Anyone can put it on their card. »

From July 2016

The investment statements must clearly show the fees paid during the year, as well as the return, which you can compare with a benchmark. Then you will know if your advice is giving you value for your money.

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