How Trailer Fees Affect The Value of Financial Advice

If investors are suffering because of the financial industry’s longstanding practice of paying trailers fees to advisors, they really don’t appear to be showing it.

Credo polled more than 1,180 investors who know that they are paying trailers and we found that 94% of these investors feel that they are getting at least fair value for they money they pay for advice. Only 6% of trailer payers seriously question the value of the advice they are receiving.

18% of trailer fee payers feel that they get great value from their advisor. Another 59% indicated that they feel they get good value and 17% more feel that the value they get is fair.  Clearly, the vast majority of investors who knowingly pay trailer fees feel that the financial advice they are getting is valuable.

So, is the value that investors receive from advisors who DO use trailers fees less valuable than the value derived by to investors who DON’T pay embedded fees?  Let’s expand our exploration scope and have a look.

In the graphic below we analyze responses from more than 7,000 investors. In one line of questioning, we asked these investors what level of value they feel they are getting for the money they are paying their advisor. In a very separate line of questioning we determined whether or not they are paying trailer fees.

(Note that by separating the two lines of questioning within our larger study, we were able to eliminate the potential confounding of results that would almost certainly have occurred had we explicitly asked investors about the effect of embedded fees on the value of the advice they were receiving. Back to our story.)

When you compare investors’ perceptions of the value of advice in conjunction with the way they pay their advisor (i.e., with trailers or not) we see a clear difference between investors who do pay their advisors through trailers and those who don’t. Investors who think they don’t pay through trailers are more likely to indicate they feel their advisor delivers higher levels of value.  But don’t go rushing off with that lone finding/statement in hand!

Question: Does this basic difference justify the legislated elimination of embedded fees. Credo’s research has determined the true and correct answer! And we’re happy to provide that answer to anyone who is willing to help address the issue of financial literacy in Canada — the root cause of the fact that we actually need a third category in our analysis — a category for those investors who are uncertain whether or not they actually pay trailers. For anyone who’s counting… that would be about 25% of investors working with an advisor. Yes… 1 in 4 investors who work with an advisor is not certain about whether or not they pay trailers.

Let it be known that trailers aren’t the problem; ignorance is.

There’s a saying that has something to do with throwing babies out with bathwater; don’t do it, they say.  A very significant proportion of the Canadian investor population pays its advisors using trailers. And, a very significant proportion of these investors actually feel they are getting real value from their advisors. Yes, we can see that investors who think that they don’t pay their advisor by way of trailers are more likely to indicate that they are getting higher levels of value… but don’t forget that almost all investors who are paying trailers do feel they are getting value. Will disrupting the current, valued situation by summarily eliminating embedded fees actually improve the circumstance of investors who pay trailers? I think we all know the answer.

This is 2017.  We have perfectly good filters for cleaning and re-using bathwater. Why throw any of it out at all? Instead, address the root cause of the issue; work toward ensuring that people understand their options and make reasoned choices. Enable them to decide and select what fits well for them.  This flexibility is of value to investors, to their advisors and to the entire financial system.

Credo conducts The Financial Comfort Zone Study in cooperation with TC Media’s industry-leading publication Investment Executive.  Anyone interested in learning more about this ongoing study — or in having us review the data from a different perspective — should contact Hugh Murphy, Managing Director, Credo C0nsulting Inc. at (905) 919-1926.