Advisor Compensation Models Speakers: Laird Elliott Mackenzie Financial Corporation Nelson Cheng Sterling Mutuals Inc. Tony Mahabir Canfin Financial Group of Companies Moderator: Manny DaSilva

Advisor Compensation Models Manufacturer’s Viewpoint Laird Elliott, Executive Projects Manager Mackenzie Financial Corporation

Advisor Compensation Models Observations  A manufacturer has no control over advisor compensation and no particular bias towards one model over another.  The ‘trailing commission’ embedded in the MER acts as an estimate of the cost of distributing the product through a distribution network. The amount is completely market driven and standardized by product type.  Various Series have been created over time to accommodate the various distribution models that have been developed – some containing embedded distribution fees, others not.

Advisor Compensation Models Observations  Distribution organizations take many forms and deploy many different models – from full service brokerage firms, to discount brokerage firms and organizations licensed to sell specific products such as mutual funds, or exempt products.  Each organization is free to select the product series that best fits its model – High embedded fee, low embedded fee or no embedded fee.  Freedom of choice and a variety of choices is key to our market driven models – whether it is a distributor choosing product for its shelf, an advisor or an investor.

Advisor Compensation Models Industry Trends – Series Purchased

Advisor Compensation Models Industry Trends MER’s peeked at 2.33%* in 2001 Decreased to 1.93%* in 2011 Reasons:  Asset allocation shift from Equity to FI  Competition from smaller manufacturers looking for shelf space  Introduction of no load funds  Introduction of fixed administration fees  Despite the introduction of GST/HST in 2010 * Asset Weighted average inclusive of trailing commission – taken from CSA paper ‘mutual fund fees’

Advisor Compensation Models Industry Trends  Trailing commissions as a percentage of total MER have remained constant at 35%.  Distributors revenue base shifted away from transaction based compensation (POS – 73% in 1996) to asset based compensation (64% in 2011).  Advisor recommendations shifted away from Mutual Fund Sales to portfolio selection (asset allocation).  The cost of ownership is totally transparent by components across the industry for mutual fund products – regulatory requirement.

Advisor Compensation Models Dealer’s Viewpoint Nelson Cheng, Chief Executive Officer Sterling Mutuals Inc.

Advisor Compensation Models Traditional Models  Criticized by media and investor advocates.  Embedded compensation.  Proposed Changes to NI  Subsection (3) – an advisor must deliver statements on a monthly basis if requested by client.  New section requires annual summary of charges and all other compensation received.  Performance reports. Account based vs. Consolidated.

Advisor Compensation Models Traditional Models  How will this affect the value of your business?  What effect will rising costs have on compensation grids?  End of Trailer Fees? CSA says it is neutral. “Trailing commissions are the dominant form of compensation for selling mutual funds today.”  Main theme is BETTER DISCLOSURE.  Are traditional models still viable?

Advisor Compensation Models Fee For Service Model  NI requirements still apply.  New business model for most dealers and advisors.  What is the cost of adopting this model?  Does your back office system support this?  How will clients and advisors react?  Consumer behaviour- never ideal.  Good for large accounts only?  An alternative, or a new tool?

Advisor Compensation Models Fee For Service Model - Options  Outsourcing.  Operational issues when dealing with an intermediary.  Loss of control over the account.  Higher cost to the client?  Loss of revenue.  Self-Administered.

Advisor Compensation Models Fee For Service Model - Options  Cost of systems to support this.  Level 4 dealers only.  Increased compliance requirements in a nominee environment.  Higher Capital Requirements.  Greater control of accounts.  Another source of revenue. Or losses.  BONUS!- Raises the bar for back office operations.

Advisor Compensation Models Investor’s Viewpoint Tony Mahabir, Chief Executive Officer Canfin Financial Group of Companies

Advisor Compensation Models Types of Compensation Models 1.Salary Only 2.Salary Plus Bonus 3.Commission Based 4.Fee-Based (A.U.A) 5. Fee-Only (Planning)

Advisor Compensation Models Key Factors Impacting Compensation

Advisor Compensation Models Generally Fee-Based is not for Small Clients

Advisor Compensation Models “Embedded Fees” Versus “Unbundled Fees”

Advisor Compensation Models Caveat Emptor (Buyer/Investor Beware) Mutual Funds Cost of Ownership: 2.38% - Advisor Based 2.27% - Broker Based 2.10% - Average Fee 1.89%- Branch Based

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