Desire for advice has big impact
Last week, I wrote of the two dimensions of product evaluation – specifically
that the underlying money management skill must be assessed separately from the
structure within which such skills are packaged. This week, another dimension of
that discussion looks at how the provision of advice impacts product
I am often called upon as an independent source to offer specific fund
recommendations. Sometimes I get e-mail challenges to my recommendations.
Individual investors sometimes ask why I “…recommended that fund with a 2.7
percent MER”. Advisors, most of whom are compensated out of fund fees, sometimes
ask why I recommend no load funds (and other products with no advisor
compensation) when my research services are aimed at advisors.
The answer is that making recommendations in a broad reaching medium, like a
newspaper article, must recognize that some readers are individual investors
depending on the advice of a pro, while others are do-it-yourself investors
looking to minimize fees. This relates to last week’s article to the extent that
a fund recommended for an investor dealing with an advisor paid by commission
may not be a good choice for the investor going it alone.
The confusion, however, stems from the fact that the provision of financial
advice is paid for by embedded product commissions. Logically, it makes no sense
that people would pay for advice they neither want nor need.
The assessment of a product must be considered in the same context.
The advice factor
Since about 93 percent of financial advisors in Canada are licensed to sell
products – and receive commission from such sales – it’s safe to assume that
most investors get advice from such advisors. However, it’s also clear to me
that more advisors are investigating becoming fee-based and that wealthy
investors are increasingly looking to this minority group for advice.
The fact that products have a certain embedded compensation model (or none at
all) means that fund recommendations will have to differ for each.
For instance, I was recently asked for selections in the Canadian equity
class that would be strong ‘one fund’ decisions for the asset class. I chose
Saxon Stock fund and Dynamic Value Fund of Canada. Clearly, thrifty
do-it-yourself investors aren’t going to break out in dance over the Dynamic
fund’s 2.73 percent MER. Similarly, advisors deserve to be paid a fair amount
for the services provided to clients (the quality of which, admittedly, varies)
and – in many cases – advisors will not be enthused about selling a fund to
their client that provides little or no compensation (though most Saxon funds
pay trailer fees of 0.5 percent annually).
Assessing the relative merits of one manager over another can only be done
impartially by putting everybody on an even footing. That involves excluding all
advice fees and – arguably – all fees to make a gross comparison. Sometimes, a
fund is better suited to somebody – not because of its inherent superiority but
– due to its strong investment merit and suitability with respect to the need,
or lack of, advice.
Dan Hallett, CFA, CFP is the President of
Dan Hallett & Associates Inc. in Windsor Ontario. DH&A is registered as
Investment Counsel in Ontario and provides independent investment research to
financial advisors. He can be reached at