Worried about advisor’s compensation

Q – My wife and I currently have about $250,000 in our RRSPs, all of it in actively managed DSC mutual funds from AGF, C.I., Dynamic, and Trimark. We have a financial advisor (who works for Dundee Wealth Management) with whom we have had an excellent relationship for 15 years. He is compensated entirely by the fund companies (loads, trailer fees).

I am considering transferring a portion (perhaps half) of our RRSP assets into index mutual funds (TSE 300, S&P 500, Morgan Stanley EAFE) and my question is whether this move will impact our financial advisor’s earnings/commissions. While I would like to save a couple of percent in MERs, I would prefer that our advisor not lose income as well.

Could you please let me know if, generally speaking, index funds pay the same commissions to advisors that actively-managed funds do? Thank you very much for your help. – J.C.

A – When you speak of index funds, I’m not sure whether you are referring to exchange-traded funds (ETFs) or mutual funds. Either way, however, your advisor will get less money.

Financial advisors earn most of their income through “trailer fs”. These are commissions that are paid annually by fund companies as long as your account continues to hold their funds. They usually range from 0.5% to 1% of the value of the units, depending on the type of fund and the company.

The principle is similar to that used to compensate life insurance agents. As long as the policy remains in force, they can an annual commission from the company.

If you buy ETFs, your advisor will receive a one-time sales commission, if he has a brokerage license. Otherwise, he will get nothing.

If you buy index mutual funds, whether he would be compensated depends on what funds you buy. The most efficient index funds from an MER perspective are those sold by the banks, plus they are no-load. Your advisor would probably receive nothing if you go that route.

You might want to try this approach. Sit down with the advisor and tell him frankly you would like to reduce the expenses associated with your portfolio. Mention the options you are considering and ask him if he has some alternative suggestions that will produce the same result but not cut deeply into his income. If he is as good as you say he is, he should come up with some answers. – G.P.