Today's most forward-thinking financial advisers are a bunch of zeroes.
That's zeroes as in advisers who sell mutual funds with a zero load, which means no purchase commissions and no deferred sales charge. This tiny minority makes a living from trailer fees, which are paid by fund companies out of the management expenses they take out of the returns of their funds.
From the point of view of the investor, the zero-load model rules. It's cost-free, it's transparent and it aligns the interests of client and adviser on one thing -- growing assets.
Chris Eynon of Vancouver is an example of a zero-load broker, and an interesting story in his own right because he's gradually taking over an advisory business built up over 25 years by his mother, Ann. The two decided to start selling funds with a zero load about four years ago.
"Our thinking was, No. 1, convenience for the client," said Mr. Eynon, who works at the respected firm Rogers Group Financial (he wants it said that his views are his own, and not the firm's). "Also, we feel that over the long run, front-end zero is where the business is going to go."
At the heart of all of this is Mr. Eynon's belief that selling funds with a deferred sales charge (DSC) is not the way for an adviser to go. DSC funds cost nothing to buy, but you can pay as much as 6 per cent to get out of them in the six or seven years you own them.
"There's nothing I hate more than having a client locked into an investment, for example, when a fund manager changes," he said in an interview. "I like my client to have the flexibility to make decisions based on the investment, not the charges attached to the investment."
Fund industry statistics show more and more advisers are selling funds with a front load, where an upfront commission of up to 5 per cent is charged and the client has complete freedom to sell at any time (short-term speculation is often penalized, though).
Of these front-load advisers, a very small number waive the commission altogether. These are the zero-load people.
Mr. Eynon describes the benefit to investors as follows: "If you put $10,000 into an investment, there's no commission taken off of that, and there are no fees to move out of that fund company at any time, so you're not locked in."
The benefit to advisers is a little more difficult to explain, in part because the zero-load model can be less lucrative.
Advisers and their firms who sell DSC equity funds get a commission from the fund company of up to 5 per cent, then continuing trailer fees of 0.5 per cent of assets each year. With front-load funds, they get whatever commission is negotiated with the client, plus trailer fees of as much as 1 per cent.
Zero-load advisers get only the trailer fee, which is to say they make up to 1 per cent of the client's equity fund assets in a year and about half of that for fixed-income assets.
Mr. Eynon and his mother have a book of business of about $85-million, which is very substantial by the profession's standards. Apply fund trailer fees against this amount and the income flow is enough to make a good living and pay admistrative costs, overhead, the salary of an assistant and so on.
It's a lot dicier for advisers with smaller businesses to sell funds with a zero load, Mr. Eynon says.
"If I was looking after $10-million on behalf of my clients, I don't think I could afford to live on zero-load with the increasing fees we constantly have to pay for regulation and administration," he said.
That means taking sales commissions, which in turn leads to the risk of a conflict in which transactions are recommended more to generate revenue for the adviser than to benefit the client.
If you'd like to do business with a zero-load adviser, start your search with established types who don't need the quick pop of a DSC fund sale to keep the lights on. That said, I've heard of zero-load advisers working at all types of firms.
Now for the catch. Many zero-load advisers won't want you as a client unless you have a reasonably large portfolio.
Mr. Eynon likes his clients to have at least $100,000 in investable assets, but this amount can include accounts for two spouses.
Some day, way off in the future, zero-load advisers are going to be a majority and not just the small band of innovators they are today. Investors can hasten the pace of change by seeking out the zero-load option now.
In Wednesday's column on mortgage refinancing, I mentioned a break on penalties applying to high-ratio mortgages that date back to 1999 or before and were insured by Canada Mortgage and Housing Corp. A high-ratio mortgage means you've borrowed more than 75 per cent of the price of your home, not 25 per cent as I said.
© 2007 The Globe and Mail. All rights reserved.
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