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Letter to the Editor: The embedded compensation issue

By La rédaction | September 20 2013 09:00AM

Dear Editor,As one of the participants of the June 7 Roundtable that Susan Yellin wrote about in the August edition of The Insurance and Investment Journal, I wanted to point out a couple of things that strike me as ‘leaps of logic’ by some of the people who were suggesting that the cost of advice would be going up if embedded compensation was removed.

Anyway, that’s not my concern. My concern is in regard to logic.

The proponents of embedded compensation (including, but not limited to: Peter Intraligi, Joanne De Laurentiis, Greg Pollock and Sian Burgess) insisted that small retail clients would be largely left without advisors if embedded compensation was eradicated.  They insisted that the cost of advice would go up (Peter’s guess of 0.25% to 1.5% seems representative) if this were to come to pass.  They never explained how/ why.  If clients with $2,500 to $2,800 in annual investments will be too small for advisors in the future, then why do advisors take those clients now?  Stated differently, if we were to hold advisor compensation constant, total client cost (assuming no product arbitrage) would be constant, too.  In fact, since an opportunity for product arbitrage (getting rid of expensive products and using cheaper ones since you’re billing the client separately, anyway) should actually lower total client cost, ceteris paribus.

The people listed in parentheses above all suggest that advisors will charge more because they have to in order to make ends meet.  That simply makes no sense.  If those clients that would allegedly be out of luck in finding an advisor had to pay more in order to make a living in the future, it logically follows that it must be impossible for that same advisor to make a living serving those sorts of clients in the present.  Yet many thousands of advisors make a very good living indeed, thank you very much, while serving predominantly (sometimes almost exclusively) small clients.

People simply cannot have it both ways.

If advisors can earn a good living now, then they can charge the same and still earn a good living in the future while serving the same clients.

Conversely, if those advisors will be unable to serve small clients in the future because it would be uneconomical to do so, it stands to reason that they should refuse to take those clients in the present.

Seeing as advisors continue to take small accounts in the present, I call BS.

My greatest regret about the format of the roundtable is that it did not allow panelists to cross-examine other panelists.

John J. De Goey, CFP, Fellow of FPSC ™
Vice President, Associate Portfolio Manager
Burgeonvest Bick Securities Ltd
Toronto


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