More on the Mutual Fund vs. ETF Debate: Part III

A reader sent in an email with an interesting supplementary to the claim that trailer fees represent the cost of financial advice (in Part I). As you may recall, MacKenzie Financial’s publication claimed that an apples-to-apples comparison of ETFs to mutual funds required that the ETF orange be converted into an apple by adding in the cost of financial advice (i.e. trailer fees).

I pointed out that several academic studies had found mutual-fund advisers added no value to the selection of funds (indeed, likely subtracted it). So why did ETFs need to be adjusted for trailer fees when doing comparisons with mutual funds? Reader John De Goey (a fee-only financial advisor) took this a little further. He noted:

Call virtually any discount brokerage in Canada … you will find that they all require their investor clients to use A-Class funds. In other words, investors are obligated to pay the trailing commission on a product for advice that is neither received nor requested. This is scandalous! Imagine if Canadian Tire charged people for a muffler and installation if they simply bought a muffler! The Competition Bureau would step in.

This arrangement further raises questions concerning the view that trailer fees are the cost of financial advice. In this context, it appears to be more part of the cost structure of the mutual fund company. No financial advice or service is provided to the buyer.

In the discussion of trailer fees in Part I, attention had also been drawn to a survey that found a minority of financial planners did financial plans for their clients – again raising questions about the value of services obtained through trailer fees. Since then I have come across a post by a financial advisor who paints an even bleaker picture. To quote:

While many financial planners claim to do financial planning and provide holistic advice, very few actually provide comprehensive planning with written financial plans, as taught in the CFP courses.

The poor level of service provided by financial advisors remunerated through trailer fees and other embedded commissions suggests that financial plans are performed at even lower rates than what was indicated in a Canadian Institute of Financial Planners survey of financial planners. So I asked the author (a certified financial planner remunerated by embedded commissions, as I understand) what he thought of that survey.

His name, by the way, is Ed Rempel (CMA, CFP, C.H.F.S.), with Ed Rempel & Associates. Here is his response:

I don’t believe those numbers [in the survey]. It is like the “dirty little secret” of financial planners — that everyone wants to CLAIM they do planning.

When we talk with advisors we meet at the CFP [Chartered Financial Planners] Conference and ask them about their practice, nearly all claim to do holistic advice and planning. However, if I ask them any details about it, they look at me like I’m speaking Greek.

I often ask: “What nest egg are you finding that your clients typically need at retirement to have the retirement they want?” I usually get dumb-founded responses or they change the topic. If they actually had done any planning, they would be able to recall a detail from some recent plan.

[A participant said] they often see what he calls “fake plans”. Often they are just a questionnaire to determine a need so they can sell a product, an investment projection, or a quick plan based on a rule of thumb.

In our opinion, most of the financial planning software is designed for a quick plan. You can enter a few facts, put in that the client wants to retire on 75% of today’s income, and hit a button. You get a nice plan, with pretty graphs, sometimes complete with generic commentary.

I’ve had people tell me they got a nice, printed financial plan after a 15 minute meeting at the bank, which included time to sell investments.

The same [survey says that 70% of people have worked with a financial advisor, but “fewer than 10% claimed to have actually used these other services” (services other than investments). If so many advisors do planning, then why would less than 10% of the public claim to have used any other advice from a financial planner?

We’ve also found the same tendency among the public, where many people want to CLAIM they have a financial plan. However, after I ask them about it, they don’t know where it is, don’t know what it says, and don’t know what the goals in the plan are.

It takes work to make a plan real for clients, which is what a REAL plan needs. Early in my career, I used to do plans that I thought were thorough, but the client did not understand them or believe them.

In the end, a plan is only a REAL plan if the client understands it, believes it, and accepts that the goals are what they want to achieve.

Read: More on the Mutual Fund vs. ETF Debate: Part I, II

Comments

[Old Trader:]

I suspect that the story is much the same, here in the US.

Oct 25 02:39 PM