Some musings on my business, and the KYA Quiz

This week, thanks to the Globe & Mail, I became aware of the existence of a prototype “Know Your Advisor” quiz being developed by a pretty neat blogsite,, run by a mutual fund executive by the name of Preet Banerjee.  The idea is a takeoff of the Know Your Client form, which in the investment industry is ideally the final product of a fairly thorough discovery session in which an advisor/planner helps a prospective client gauge their understanding of their objectives, their attitude toward risk, and so on. 

If you’ve not noticed, or I’ve neglected to say it before – my primary occupation is working as a financial planner for one of Canada’s Big Five banks.  The financial planner term sometimes isn’t accurate because a large number of the clients I see are neither seeking nor require complex financial planning, and in the role I have, if they are really complex needs I really just play a sort of quarterback role to get them to the right relationship manager.  What I really get paid for is consolidating investment business, and building the foundation for some manner of financial planning.

I took a look with great interest at Mr. Banerjee’s quiz.  As the Globe writeup (it’s here if you’re interested in seeing it) says, Banerjee’s a cynic of sorts.  But I think his quiz, despite supposdly being “food for thought”, isn’t entirely helpful to those who are trying to gauge the investment advisor they’re meeting.  First, the term is not well defined, nor is the target audience.  In my experience of about 10 years in the industry, the term investment advisor refers to a full-service broker.  These people will generally have no interest in talking to anyone with investible assets of less than $250,000.  Not ones worth paying for, anyhow.  Even at that level, it’s mainly rookies trolling the market to build their books.  The reason is simple.  There’s no way to make a decent living from this type of client building portfolios other than with mutual funds – or charging higher than necessary fees.

If the quiz, however, is meant to discuss financial advice providers in general, then I have some insight.

I took a look at the quiz itself and the scoring key and I wondered how useful it was from what I’ve seen in my own practice, and here’s what I think.  The quiz puts an incredibly high weighting on certain designations and capabilities that do not apply to most investors.  For example, it favours holders of the Chartered Financial Analyst designation quite heavily.  Few of them are actually involved in selling investments, those who are generally are found only in the discretionary management side of the business, the realm of $1million+ investors.  Expecting that the average family would need or be able to expect the services of a CFA directly is sort of silly to me.  The CFAs are to be found managing funds they buy more like.

It seems since I read it, there’s been some changes.  One of the biggest issues that comes up in a lot of articles on advisors is about compensation, in particular commissions, something that I think is often misunderstood and often problematic.  In my last job I was paid by salary plus a variable compensation system that was calculated in a way so complicated I barely understood it.  In my current role, I’m compensated almost entirely by commissions – or more strictly, advances on commissions which are not payable until the investment has been on my employer’s books for a year.  If the money goes inside a year, I don’t wind up getting paid, basically, they claw it back from me.

When I was on salary I used to hype this fact to my clients because my interests and theirs didn’t necessarily conflict – I didn’t have any incentive to advise them to take risk they shouldn’t, I didn’t really have any incentive to advise them on anything as a means of making more money, save that I’d really like to consolidate their assets, because the arcane variable compensation structure favoured making my book bigger, obviously.

The thing is I do not think commission is a bad thing – and it seems like Mr. Banerjee sort of agrees – like me, he thinks the compensation structure isn’t the problem, it’s the unwillingness to discuss it that is.  I don’t proactively discuss how I get paid with any clients – but at the same time, I don’t refuse to answer if I get asked – though not to the level of detail that the first iteration of the quiz I saw suggested I should.  I won’t go into amounts or anything like that.  Even the people I work with at the branch, who send me lots of referrals, don’t know that, and we don’t share it.  Ultimately, I don’t deal in the great evil of the mutual fund world, deferred sales charges, so the impact on the client really isn’t there anyhow.

It’s DSCs that really piss me off in the industry, because they give a license to an advisor to be lazy or negligent.  They get paid a huge commission (far more than I’d get, even after the house takes its share), and the funds stay on their book likely for a long time, because it costs too much to get away from the advisor.  This is particularly true when it’s a company like Investors Group, Assante, the insurance companies generally, anyone who uses proprietary products that can’t be moved to another dealer.  IG I particularly despite, because in addition to these DSCs they charge atrociously high MERs and most of their reps deliver virtually no service to clients.

Contrast this with me, who has to present a good strategy to a client, match them with a good relationship, and make sure it stays strong for a year so I don’t wind up getting my pay clawed back.  I’m still on commission, but who has the incentive to really look after the client?

Right now I’m working to get employees of a company set up with a group plan with my employer because the previous holder treated them so shabbily.  They had a captive audience and basically ignored them, just collected their commissions and trailers.  I’m trying very hard to make sure that at least for the people I met with that doesn’t happen with us.

The quiz also maligns anyone who can’t deal in insurance, something that I agree with Mr. Banerjee is a vital component of a financial plan.  This is the thing about being in the bank that sucks.  Because of the ridiculous Bank Act regulation that bars our banks from promoting their insurance arms in the bank to ridiculous lengths, while I happen to hold a leading financial planning designation, I can discuss insurance only in the most general of terms and cannot make any concrete recommendations.  Not only that, I cannot refer a client for whom I identify a need to an insurance advisor from my company, unless they ask me in just the right way, in which case I can provide them a “contact card”.  I think it’s probably easier to get into a Mason’s Lodge than for me to follow the letter of the law!

The quiz oversimplifies this issue.  Someone who comes to me will get insurance advice from me and I’ll have nothing at all to gain from it – I can’t make a dime from it, can’t win a barbecue, can’t get anything.  Interestingly enough, though, some of the worse client experience nightmares I hear come from when insurance folks get involved with the financial plan, particular on the investment product side.  They will push more lucrative insurance-based products, even when they don’t make sense for the clients.  I’ve seen some true horror shows – clients with massive Universal Life policies I don’t see any need for.  Clients sold on segregated funds to enable them to avoid probate – where the cost of the segs far exceeded the cost of the probate!

In all, it looks like the quiz is a work in progress, and I have to say, I like the concept.  I’ve never had a problem with presenting who I am, what I do, and what my qualifications are to anyone who asked – I figure I owe that to them.  I have to applaud the effort on it, and the fact that it seems like Mr. Banerjee has taken a lot of constructive criticism to heart.  I think he’s on to something good, and I’ll keep an eye on it as it develops.

The great irony is that the guy promoting it, Rob Carrick, isn’t exactly my favourite financial writer, mainly because he seems to bash a lot of things undeservedly.  He loves things like index funds, ETFs, etc, bemoans mutual funds in general because of the cost – but for most investors, they lack the expertise to manage their own portfolio, and once they hire an advisor, they’re not getting the supposed cost benefits of these products anyhow!  He doesn’t have, to my knowledge, any background or education in the industry either, in comparison to several great writers to be found in Canadian papers like James Daw, Ellen Roseman (actually, I don’t know if she does – but she writes about basic issues and presents them really quite well) , and Tim Cestnick.  Of course, counterbalancing that, there’s people like Gordon Pape and Brian Costello, who wrote a lot about investing but mainly were fueling their own efforts to manipulate markets or pump up junk products.

I guess it’s hard to choose someone to read on the subject effectively, so you need a lot of sources.  I think overall I can defend myself handily against any criticisms leveled against my business as a whole well, it’s why I work where I do.  My livelihood, after all, depends on it.


1 comment so far

  1. hari on

    Like your blog I will check your site later again.

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