The landscape of the financial industry is quite a patch work, and there are different compensation schemes used.  But the basic thing to understand is 

1.       Mutual Funds Reps

2.       Life insurance reps

3.       Securities brokers

All of the above state that they are qualified to offer financial advice.  It is important to understand the limitations of the advice they offer and their own motivation in guiding their clients and prospects towards taking certain actions.

In this post, I will attempt to discuss the compensation of mutual fund reps and therefore their motivation for selling products, and what the buyer must beware of in dealing with these folks.

Mutual Fund Reps are compensated for selling mutual funds.  They work for companies such as Desjardin’s and Investors Group.  During the course of their training they learn to use a simulation software such as Naviplan, and this qualifies them to offer financial advice!  Mutual fund companies put these “advisors” through a two week study program after clearing their licensing exam.  Then they work under the supervision of a senior agent for a couple of weeks.

Their work is one hundred percent commission based, and they are classified as self-employed.  In some cases they may be on a draw, meaning that the company will pay them a minimum guaranteed payout that will be clawed back from the commissions they earn.

There compensation is based on the type of mutual fund they sell.  Basically, they can sell one of two types of funds: no load (NL) and deferred sales charge (DSC).  Mutual fund companies offer a 5% average commission on the sale of their mutual fund. The Investment company will keep a portion of this and pass the rest on to the sales person/advisor based on the production level of this person.  On average, Investors Group consultants can earn upwards of 3% of the size of the account as a one time commission.  That’s $3,000 for every $100,000 invested.  Pretty cool deal.  The question is what did this person do to earn $3,000?  Even at $100 per hour rate, that’s 30 hours of work! At $300 per hour, that’s ten hours of work.  Did they put in this sort of work into helping you get a plan together?  Or did they provide the sort of quality that commands a $300 per hour rate?

The biggest downside to it is the fact that if your advisor invested you in DSC mutual funds, and you needed the money the next day, you would have to pay a “redemption fees” of 5% or more in somecases in order to get your money out.

This is a wonderful mechanism for mutual fund companies to ensure that once they have the business it cannot go anywhere.  Such investment companies hire fleets of advisors or consultants every year, and ask them to procure the accounts of friends and families – really the poor guys have no choice for there is no other way for them to earn a living selling mutual funds.  Very few of them survive in the business, and these companies typically replace a third of their sales force every year.

No load funds don’t pay the advisor any up-front commission and therefore it is not interesting for mutual fund reps to sell these.  Of course, their principal companies tell them to do what’s best for the client, and hang the axe of the regulator over their heads.  However, the only way these sales people can put food on their tables is by hunting the ill informed investor.

On top of the up-front commission, mutual fund companies pay out a 1% average “trailer” for servicing the clients. This trailer is split between the investment company and it’s salesforce depending upon the performance of the sales person.  Even if the sales person were to receive an even split or 0.5% annually, they would need to have $30 million under their management in order to bring home a gross income of $150,000.  It takes a long time for that to happen on $100 per month per client RRSP contributions!

The other type of mutual fund sales rep is your friendly Financial Planner working at a bank branch.  These guys don’t have to hunt for business, their prey walks in through the branch doors and offers itself up for sacrifice.  Mutual fund reps are paid a guaranteed salary, average in the industry is about $50,000 per year.  In addition, they are paid bonuses for spotting business for the bank and referring this business to other sales people within the bank.  They also earn bonuses based on their sales of the bank’s proprietary mutual funds.  Most financial planners at bank branches will not invest clients in DSC product.  First, because they are told not to, second because they don’t need to as they don’t share the commission, and third it makes it easier for them to refer the business to wealth management teams with in the bank.  So these guys really don’t care about your investment performance or financial planning – Oh they’ll run the software for you and churn out a beautifully printed copy of a plan, but more often than not this plan doesn’t really answer any of your questions and doesn’t really add any value to your planning for retirement.

It’s quite obvious that I do not like mutual fund investment companies and mutual fund reps, however, I will say this, they do a better job of looking after their client’s needs compared to the financial planners at bank branches.   I have a lot more to say about MERs charged by mutual fund companies, but that is a subject for another blog post.  For this week, I want to continue the discussion about compensation.

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