The Service Factor: Are You Getting What You Pay For?

A new client just came on board and as is the standard case on many occasions, we are amazed at what some advisors will put into client investment portfolios. 

Back in 2000, when I first began my adventure into the world of family wealth management (easily the oldest person in the advisor training class at a large bank), I was amazed by the fact that this was not about how to properly look after client needs and their future, but all about maximizing the level of assets one was expected to "gather" and the revenue that was necessary to be generated to graduate to advisor status.

Back in those days, the easiest way for an advisor to get there was to sell mutual funds with "deferred" sales charges (DSC) that paid a 5% commission up front to the selling advisor as well as a "trailer" fee of 1/2% for as long as the client owned the fund.

The client was not charged a fee for the fund up front, but there were enormous penalties for the client if they wanted to sell the fund before a certain period (usually about 7 years). The mutual fund management fees (MER), usually in the vicinity of about  2-3%, were hidden or embedded in the return of the mutual fund (and were not tax deductible). The unsuspecting client, on average, always wondered why they were never able to make any headway in growing their portfolio.

The mutual funds made tons of money, the advisors (sales force) and the institutions that they worked for made tons of money, but the client? Not so much. So many were taking their cut, that there was not much left.

I witnessed so many advisors parking clients in these DSC mutual funds, grabbing their commissions and moving on, pretty much abandoning their clients as they searched for the next batch of assets to "gather". I was dumbfounded. I was so naive. I was under the impression that I was supposed to be helping people build wealth, not robbing them of it.

As a "trainee", I was also required to get my license to sell life insurance. Why? Something called "seg funds". I had pretty much forgotten about these things, until one (a big one) showed up in our new client's portfolio (with an MER of something in the vicinity of 3.75%!).

To refresh myself on what these were all about I went to an internet search engine and came across a number of  interesting sites, one of which is called Get Smarter About Money.ca, which is sponsored by the Ontario Securities Commission and worth a visit.

"Segregated (or seg) funds are an investment product sold by life insurance companies. They are individual insurance contracts that invest in one or more underlying assets, such as a mutual fund".

"Unlike mutual funds, segregated funds provide a guarantee to protect part of the money you invest (75% to 100%). Even if the underlying fund loses money, you are guaranteed to get back some or all of your principal investment. But (very big but, here!) you have to hold your investment for a certain length of time (usually 10 years) to benefit from the guarantee. And (get ready...) you pay an additional fee for this protection". And it is not tax deductible.

Big fees and  big commissions for the advisor, the advisors institution, the insurance company and the mutual fund company. Guess why these funds rarely make any reasonable return for the end buyer?

If you need principal protection, you or your advisor has likely chosen the wrong manager/fund for your money.

In a study commissioned by provincial securities commissions  across Canada in 2015, it was suggested that advisors recommending mutual funds to clients were "clearly motivated" by the presence of trailer fees.

Obviously a conflict of interest and clearly not putting the client first.

Friends, the investing world is full of those who wish to take advantage of those that are in need of help (and commissions and revenue generation are at the heart of it). It is so important to know what you are paying for (the service) and what your advice giver is receiving in return. If they can't be transparent with you and offer up a lot of talk that does not get to the point, a warning flag should be raised.

We (at High Rock) are setting the bar higher with our Voluntary Code Of Conduct, transparent low fee structure, attention to personal service (when was the last time you talked to the guy who's name is on the wealth management practice that you deal with?) and legal fiduciary responsibility to our clients. It is because we passionately believe that we can do better for them and that is what they deserve.