Do you know how much your advisor and their firm collected on your behalf last year? Was it 1% of the assets they manage for you? Perhaps it was 5%? Can you tell from looking at a copy of your current statement? If you’re paying your advisor on a fee-for-service basis, you’ll be able to answer this question, as the fee is disclosed on your account statement. Otherwise, you would have to rely on your advisor discussing Trailer Commissions with you in the past.
However, if you’re primarily invested in mutual funds, you likely have little or no idea of what you paid for advice, and the services your Advisor provided; you may even have thought someone else was paying his fee to provide your advice. Perhaps if your advisor explained how he or she was paid, you could estimate the annual cost for advice, but generally they don’t and, you would simply be guessing.
You see, commission on most mutual funds are included in the Management Expense Ratio (MER) of a mutual fund. The MER is expressed for all mutual funds as a percentage; in Canada an average of more than 2% per year. Now out of this MER, a commission is typically paid to the Broker/Dealer and some portion to your advisor. The commission can range from 0.5% to 5.0%, but it depend s on the type of fund. Like I said, you might be able to estimate the fee, but never know the actual amount. In addition, the growth or decline in your fund is always after the MER has been collected, so the mutual fund provider and advisor get paid before you do.
So you may have thought you were not paying for advice as the actual commissions have never been disclosed in a dollar amount. But come this month (July), all of that’s about to change as CRMII (Client Relationship Model II) is implemented by the financial services industry. Over the next year, clients of financial advisory firms will begin to see more and more changes to the reports and the information they receive on their investments.
One of the key features clients will have presented on their statements is the actual amount of the commissions paid to the dealer/broker by the mutual fund companies. This amount will be prominent in the new reporting format that all financial advisory firms must adhere to as of July 2016; although the Broker/dealers have one year from this date to implement this requirement.
The good news is you will now see what advice is costing you. The question you need to ask in the future? Based on the fees I am paying, am I getting value for the service?
By Colleen Barker, CFP®