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Dan's Reports
About Dan

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Product recommendations
Desire for advice has big impact

Last week, I wrote of the two dimensions of product evaluation - specifically that the underlying money management skill must be assessed separately from the structure within which such skills are packaged. This week, another dimension of that discussion looks at how the provision of advice impacts product recommendations.

General recommendations

I am often called upon as an independent source to offer specific fund recommendations. Sometimes I get e-mail challenges to my recommendations. Individual investors sometimes ask why I "recommended that fund with a 2.7 percent MER". Advisors, most of whom are compensated out of fund fees, sometimes ask why I recommend no load funds (and other products with no advisor compensation) when my research services are aimed at advisors.

The answer is that making recommendations in a broad reaching medium, like a newspaper article, must recognize that some readers are individual investors depending on the advice of a pro, while others are do-it-yourself investors looking to minimize fees. This relates to last week's article to the extent that a fund recommended for an investor dealing with an advisor paid by commission may not be a good choice for the investor going it alone.

The confusion, however, stems from the fact that the provision of financial advice is paid for by embedded product commissions. Logically, it makes no sense that people would pay for advice they neither want nor need.

The assessment of a product must be considered in the same context.

The advice factor

Since about 93 percent of financial advisors in Canada are licensed to sell products - and receive commission from such sales - it's safe to assume that most investors get advice from such advisors. However, it's also clear to me that more advisors are investigating becoming fee-based and that wealthy investors are increasingly looking to this minority group for advice.

The fact that products have a certain embedded compensation model (or none at all) means that fund recommendations will have to differ for each.

For instance, I was recently asked for selections in the Canadian equity class that would be strong 'one fund' decisions for the asset class. I chose Saxon Stock fund and Dynamic Value Fund of Canada. Clearly, thrifty do-it-yourself investors aren't going to break out in dance over the Dynamic fund's 2.73 percent MER. Similarly, advisors deserve to be paid a fair amount for the services provided to clients (the quality of which, admittedly, varies) and - in many cases - advisors will not be enthused about selling a fund to their client that provides little or no compensation (though most Saxon funds pay trailer fees of 0.5 percent annually).

Summary

Assessing the relative merits of one manager over another can only be done impartially by putting everybody on an even footing. That involves excluding all advice fees and - arguably - all fees to make a gross comparison. Sometimes, a fund is better suited to somebody - not because of its inherent superiority but - due to its strong investment merit and suitability with respect to the need, or lack of, advice.

Dan Hallett, CFA, CFP is the President of Dan Hallett & Associates Inc. in Windsor Ontario. DH&A is registered as Investment Counsel in Ontario and provides independent investment research to financial advisors. He can be reached at dha@danhallett.com
 
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