Do you know how your adviser gets paid?

Again, this is NOT his real name.

Before I turn the page on John I thought it might be a good idea to get some expert commentary on what happened that day. Had I been too hasty? After all, financial advisers are salespeople, and John was doing exactly what he was trained to do.

I spoke with Rob Kelland, director of wealth management and portfolio manager with ScotiaMcLeod in London, Ontario. Rob is a 27-year industry veteran who was gracious enough to provide his perspective on my breakup with John, and he does not mince his words when it comes to his profession.

“This is a relationship business and you’d better treat people properly,” he says. “It’s got to be transparent and people need to know what the fees are and what their options are.
Regarding the bond (that John Doe tried to sell me), I would not personally offer that to someone walking into my office like that. It’s not prudent, not responsible and not in keeping with what you came there for.”

Unlike John Doe, Kelland is able to provide any investment product for his clients, not just the ones his company sells. This is obviously a huge advantage for an adviser, as it raises their credibility. Unfortunately for John, he was limited by his company’s product line and was required to attempt to keep as much of my money as he could.

So how exactly do advisers get paid? And how do you know what type of adviser you have? Kelland breaks down the industry in the following way:

The advisers who work in bank branches typically work on salary, possibly with a small bonus structure (not the Wall Street kind). In general they can only offer their own products. Kelland explains that they offer good advice with little bias, and you can open an investing account with whatever amount you like.

The next step up consists of mutual fund planners such as Investors Group and Dundee Wealth. Their product offerings are limited to mutual funds and possibly GICs, but depending upon licensing some are able to offer additional investments. This group is generally remunerated through commission either on the sale of an investment or as part of the MER of a mutual fund.

Next are the full service shops such as Edward Jones, RBC Dominion Securities, BMO Nesbitt Burns, etc. These shops have a very wide selection of products, including securities, mutual funds, ETFs, and GICs. There are also several fee platforms available to you.

The first is “traditional” in that if you buy a product (from RBC, for example) you pay a commission of some nature which goes to the adviser.

If you buy a mutual fund, some advisers still charge a DSC (deferred sales charge) where they get a fee up front. However, increasing numbers of advisers are charging no fee, but are taking part of the MER (management expense ratio) that is paid to the managers of the mutual fund. In this scenario, you’re paying a fee on a hidden basis to the adviser through the mutual fund.

The final option involves fee based-accounts, which are aimed at clients with at least $100,000 to invest. These advisers usually have access to just about any investment product under the sun, and charge a set annual fee which covers all your trading, advice, planning and services.

“In many cases, that all-inclusive fee is lower than what you’d pay in a mutual fund at the bank,” says Kelland.

The upside of this type of arrangement is that the fee issue is out of the way at the beginning. If your adviser calls and recommends moving out of equities and into bonds, you know the call isn’t a way for him or her to drum up some additional business.

However, regardless of the fee structure, the key issue for any investor should be transparency. “The adviser should be offering information on how they’re being paid and what your choices of payment are,” says Kelland.

And if they’re not, it’s up to you to find out. Don’t just sit there and expect a flood of information. Ask questions. Lots of them. And if you don’t like the answers, keep looking.