Contents
Advisor quits big bank in disgust
Readers cheer honest advisor
Does your advisor eat his own cooking?
Advisors speak their minds
Another honest broker quits
Is Joe the tip of the iceberg?
How much is investment advice worth?
We'll pay, but don't call it advice

'Perverse incentives' incompatible with helping customers

This column takes the occasional shot at unscrupulous financial advisors. Today's is about one who demonstrated expertise and integrity.

"Stan" recently resigned from a major bank-owned full-service brokerage we'll call BBB, for Big Bank Brokerage. Stan is not his real name but I've met and correspond with him. He's in his mid 40s and well known on the Internet, where he often dispenses free financial advice.

Through a combination of frugality and eating his own cooking, Stan and his spouse achieved financial independence in British Columbia.

This gave him the freedom to resist being seduced by high fees and commissions. As he explains in the abridged resignation letter below, "I live well below my means. Most of my income comes from a low cost, well diversified and tax efficient portfolio."

He constructed similar portfolios for clients, whose annual costs average 0.65% of assets -- well below what investment counselors, mutual funds or wrap accounts charge.

Stan admits his sales production was lower than the firm would have liked. He found it impossible to "peddle" high-fee investment products such as wrap accounts.

Even if they were of reasonable quality, he couldn't reconcile the 2.5% annual cost to his clients when "I could do it for them myself for much less."

Nor is BBB unique. "As with every other firm on the Street, all manner of perverse incentives are in place. All manner of investment pornography is on hand to distract not just clients but advisors too."

"The most striking thing is not the pilferage of clients' wealth, but how otherwise honest and well meaning people can be seduced into doing the wrong thing by careful systems design."

The firm's compensation system "multiplies greatly the chance clients will be ill served." It requires multiple, redundant levels of monitoring, "all at great cost, to prevent the system's perverse incentives from having perverse results."

Here's Stan's resignation letter to his boss, whom we'll call John.

Dear John,

I have decided to retire, at least temporarily.

I had prepared a list of gripes and think it important that you understand my frustrations. These things also drive every advisor I've spoken to crazy. Most don't live in my circumstances. They have mortgages, car payments, alimony, tuition bills and lifestyles that keep them scrambling every day. The firm is ignoring their complaints. It should not.

BBB is slowly and subtly going off the rails. The change since 2000 has been awful. It has nothing to do with the psychological pressure of a bear market or holding clients' hands when they (and we) have our faces ground into the mud every week. That comes with the profession. All advisors can do is keep focused on the investment process and not the temporarily awful results. Most are handling the bear. The problems are more subtle.

I have sought to be an effective steward of my clients' portfolios. BBB's public position is that all its advisors also have this function, that each possesses a deep reserve of character, conscience, and competence to be good stewards of client funds and still make an honest living.

But increasingly the firm is sending the message that making money for clients comes second to making money from clients.

What has gone wrong is the attempt to shore up revenues by nickel-and-diming clients and even advisors. I know the market is lousy and the firm needs revenue. Investment banking is dead. But if the bear continues and Toronto keeps dreaming up new ways of picking clients' pockets to shore up the top line, clients will walk away. No one can blame them.

Advisors have spent the last few years excusing what the firm is doing to clients. Not explaining -- excusing.

Our inactivity fee sends the wrong message to clients and advisors. For inactive accounts charged this fee, costs amount to printing and mailing of four statements and a year-end tax summary. Clients derive no benefit from the overhead of compliance and research departments and executive salaries. It's no surprise they balk at paying. The message BBB is sending is, "Your advisor has set up a low-cost low-maintenance portfolio for you. It may be good for you, but it's doing us no good. We know you know you're being taken to the cleaners but we don't much care."

A second problem is the commission grid. In two years, BBB has almost doubled the effective minimum commission. The payout on small tickets is so low advisors routinely spend time looking for ways to make sure a certain gross is reached. For small clients and small trades, the long-term message is, "Get rid of this client."

BBB has set up an incentive system that begs its employees to do the wrong thing. This is a recipe for disaster.

Clients need help with investments. They aren't helped when service fees are created and levied willy-nilly. They are not helped if managed-account fees swallow a a third of gross returns in a world of single-digit returns. Even if returns were higher, clients are not helped when BBB charges them four times what competent advisors should charge.

I will not sell overpriced, sexy-looking trash to people who have placed their finances in my hands. My paycheque means less to me than my integrity. Not everyone can be in so fortunate a position.

Sincerely,

Stan

Many want to hire 'Stan,' who quit a big bank in disgust

Last week's column on Stan, the advisor who quit a big bank in disgust, sparked dozens of queries from readers wanting to use his services or those of someone similar.

Typical is J.V. in Calgary: "We need more people like Stan who have integrity. Congratulations, Stan."

Reader R.M. is "one of those BBB clients" and nicely summarized Stan's dilemma as "resigning over the moral and ethical issue of peddling investment packages to investors where the BBB was getting rich and the investors were getting poor."

Or as Fred Schwed Jr. said in a classic book cited by Stan, Where are the Customers' Yachts? "The firm made money and the broker made money. Two out of three ain't bad."

That always gets a chuckle, Stan says, but adds part of his despair comes from the fact "no one really cares that it's true."

However, many other advisors do see the world like Stan.

A senior portfolio manager at one BBB says Stan "poses some questions I have been quietly asking myself for some time now."

Another "did exactly the same thing for exactly the same reasons. I know other advisors who did the same."

Jack Singer of Vancouver-based Global Securities Corp. says the crux of the issue was this line from Stan's resignation letter: "to be a good steward of client funds and still make an honest living." Singer adds "Making a living, let alone an honest living, is tough for a financial planner."

Like Stan, advisor S.R. can walk away from the business. He would rather recommend bonds and ETFs because of their low cost and tax efficiency. But his clients can't execute the strategy he himself follows because he's licensed only to sell "higher cost, non-tax efficient pooled products such as mutual funds or segregated funds." Universal Life is in the same category, he adds.

Qualifying to sell these " less desirable products was less onerous than obtaining a drivers license," he says. "By giving most of the cards to the IDA, the regulatory regime has effectively forced Stan and I and other honest brokers out of the business of giving the best available advice and executing the necessary trades."

One veteran recalls years "where the firm didn't care about clients. They were only interested in themselves." He regrets winning trips to the Caribbean for reaching sales quotas at a BBB. "The talk was always how much money brokers made in commissions. Not once was there any mention of how much they made for clients or the annualized return they produced for them. It made me sick."

Senior bankers have no feel for advisors in the trenches of small town Canada. "They want to get rid of the little guy because it's not profitable." But small clients have friends and relatives with significant amounts to invest. "The bank will never see their money."

I also heard from clients happy with independent brokers. Frank in B.C. uses Edward Jones and believes "good service is well worth paying for." Broker David Chapman of Union Securities Ltd. says his shop is "the opposite of what you describe. There is a grid but it is reasonable. No product shoved down your throat. No push for wrap accounts, mutual funds or anything else."

BBB advisor Joni says "Each of us runs a business within a business. We are held accountable. What we charge is out of our hands when it comes to 'minimum' commissions and mutual fund MERs." Charges for fee-based accounts must be fully disclosed so "nothing is hidden."

But Joni admits fees are too high. "Each must make a conscious decision every day to do the right thing for the client." She closes with a poignant message for Stan and advisors like him: "We need people like you to STAY in this business to continue helping those who put their trust in us."

- - -

The original piece is online at www.canada.com and www.bylo.org. Stan says his "provision of independent advice tailored to individuals is temporarily on hold." He now posts as "Stan is not for sale" at www.wealthyboomer.com (which I moderate).

If not, why let him serve financial advice to you?

Not all big bank brokerages are evil.

April's columns on Stan, who quit a big bank brokerage (BBB), in disgust, sparked much controversy in the financial advisory business.

But there's an interesting model in one BBB which I call the "eat your own cooking" brand of advice. And unlike the Stan pieces, this column is able to name both the advisor and the firm: Dr. Jon Kanitz, first vice-president of CIBC Wood Gundy.

Dr. Kanitz [his PhD is in philosophy] has a high profile through columns in The MoneyLetter and The FundLetter.

What sets him apart from his peers is every single stock recommendation in his articles is something he owns in his personal portfolio.

When I first read this revelation, I thought "So what, doesn't every advisor do that?" After all, I naively reasoned, if an advisor believes enough in a product to recommend its purchase, surely she would also be a purchaser for her own account?

But as has been noted of common sense, the practice of eating your own cooking "ain't that common."

True, it should be common. You might even argue it should be required. Imagine how much better the investment industry would be if this simple principle were adhered to by all providers of financial advice. Would Henry Blodget have made his cavalier recommendations on any stock with a "dot-com" after it, had he been obliged to purchase those stocks himself? Instead of the absurd situation where investors followed his advice to financial ruin while he himself made millions ignoring his own advice, Blodget would by now be down and out with his customers, rather than writing his memoirs in luxury and leisure.

Back to Dr. Kanitz, who in a series of four articles, outlined his approach. He believes his approach is unique, since the vast majority of brokers in BBBs and elsewhere do not eat their own cooking. If there are other brokers who take a similar approach, please email me.

The first MoneyLetter of February features a front page Kanitz article entitled "Follow my Lead." The first sentence establishes his stance: "My prime directive is to align our interests. Our interests are aligned because we have an identical interest in the same stocks ... I will continue to take all of my own advice... I will not ask you to invest according to my recommendations and then put my money elsewhere ... if you suffer, I will suffer. If I prosper, so will you."

Dr. Kanitz says he has "taken the concept of full, true and plain disclosure to a new and higher level."

This is so stunningly simple and straight-forward, you have to wonder why the industry isn't full of Jon Kanitzs. Could it be that after more than 20 years in the business, Dr. Kanitz believes in his own abilities, while many others do not?

As evidence, Dr. Kanitz reveals in the articles that he has become a multi-millionaire by taking his own advice. As I have written in previous years, he achieved this by investing 100% in stocks. He believes neither in market timing nor asset allocation. He quips "my idea of a balanced portfolio is 50% Canadian stocks and 50% U.S. stocks." (He's American by birth but has lived in Canada since 1975. )

Apart from valuation -- a recent piece counselled several fund switches from growth to value -- Dr. Kanitz pays close attention to insider buying and selling, preferring to follow what corporate insiders are doing with their own money. There's the theme again: practising what they preach.

One thing he shares with "Stan" is his personal financial independence. Like myself, Dr. Kanitz recently turned 50. Stan is a few years younger but stated in his resignation letter that his personal frugality and policy of eating his own cooking had brought him financial independence. Stan is more of a believer in asset allocation and low-cost investing but the portfolios he created for clients (chiefly exchange-traded funds and bond ladders) mimicked his own.

From these cases, investors seeking a financial advisor [or wishing to replace a poor one] would do well to insist the candidate resembles Stan and Dr. Kanitz in certain crucial respects. Eating their own cooking should be criterion No. 1 -- financial independence would be a bonus.

Why? If you were looking for spiritual advice, would you not seek a guru of advanced years who has demonstrated wisdom over a long time? Why should financial advice be any different?

An investing tyro starting out lacks experience, wisdom and a sense of history. If they've never experienced a bear market themselves, how are they supposed to advise you on how to weather one? And, according to Martin Weiss, at 40 months the bear market is now the longest in history and showing no signs of imminent retreat.

The best teachers and preachers are often those who first experienced success in another career. I wonder whether the same might be true of financial advice. Wouldn't the advice of a self-made businessman who sold his company and turned to dispensing financial advice as a lucrative hobby be more valuable than that of a rookie whose only accomplishment was getting a Mickey Mouse mutual fund licence?

Worse, if the latter is still trying to establish financial independence for herself, won't she be more subject to the pressures experienced by Stan at the BBB?

Stan's case reveals an advisor's lifestyle is relevant to the investor he proposes to serve.

Imagine you're choosing between two advisors at the same firm. The first pays alimony to two former wives, is deeply indebted on a monster home and vacation property, is on the hook for private school fees for five children from various marriages, and has large monthly payments on a new luxury car. Can you imagine the pressure this advisor is under to generate fees and commissions? How likely is it the advice he dispenses will be truly in the client's best interests and not his own?

The second advisor is frugal, financially independent and eats his own cooking. Aren't the odds considerably improved that his advice will be the best possible for the investor?

The choice is, as they say, a "no brainer."

No cookie-cutter solution to 'eating their own cooking'

While hardly ubiquitous, many financial advisors have stepped up to the plate to say they "eat their own cooking" or at least sample it.

Saturday's piece on advisors owning investments they recommend generated dozens of e-mails. What follows is tightly edited.

Many agree with the thesis but raised two main objections. One is advisors owning stocks may be open to accusations of conflicts of interest or "front-running." Owning stocks you recommend is no proof against "pump-and-dump" schemes, says Montreal-based advisor Jeff Joseph. "Clients need to gauge whether their advisor is operating as a money manager or a salesman. If your advisor contacts you three days before the end of the month, he's thinking more about his commissions/quotas regardless of what product he is promoting."

Secondly, portfolios suitable for knowledgeable older advisors may not be suitable for clients of different ages, risk appetite or wealth. "I agree if my client's situation is exactly the same as my own, the investment advice I recommend should mirror my own portfolio," says Vancouver-based advisor Jim Rogers, but it's illogical to expect a 30-year-old client in the accumulation phase of his economic life cycle will have the same portfolio as a 75-year-old client generating regular income from his investments."

Financial planner Gary Newby agrees it's "naive to believe every client has the same investment objectives, risk tolerance, goals and financial position as the advisor." Planners who own everything they recommend may have a "huge smorgasbord of unmanageable investments."

Robert Abboud of Ottawa-based IPC says he and his family eat his cooking. Clients choose from hourly, fee-based or commission, but the investments are the same. Most choose commission.

Bob Ewen, vice-president of Toronto-based MMI Group, warns eating your cooking can be "simplistic and misleading." He recalls a top producer from the 1970s who didn't invest in stocks because he felt it would bias his advice and he had enough market exposure as a broker.

"My 'deal' with clients is if I buy or sell a stock they hold, they receive a real-time e-mail to this effect," Ewen says. "Clients know my turnover ratio, my lifestyle, normal expenditures and my philosophy. They have a right to know if I own or no longer own a stock in common with them. They have no right to know my detailed portfolio holdings."

Advisor DJ says he shows his statements to prove "I have as much skin in the game as they do. My recommendations have nothing to do with commissions or mythical quotas." But many peers don't reveal their portfolios, he says. "When I'm pitched by product salespeople, I ask if they own segregated funds or universal life or whatever. Rarely do they say yes."

Markham, Ont.-based planner Daniel Roy says advisors should practise what they preach and participate fully in client gains and losses. But he shows only the names of funds he owns, not dollar amounts.

Brad Brain of Berkshire Securities owns "what my clients own. But not all clients own what I own. I don't mind telling people what I'm invested in, but that doesn't mean it's right for the client."

Veteran advisor Ian Cubitt, of Vancouver-based Odlum Brown, says "common sense suggests you pick an older broker who has experienced several ups and downs in market cycles. Like airline pilots, there are old brokers and bold brokers but no old bold brokers."

Toronto investor Loren Spigelman listed several reasons why he hopes his big bank broker does NOT own the same products he recommends. "If what's good for the goose were always good for the gander, we wouldn't need financial advisors in the first place. We would all have identical portfolios. My advisor has developed a plan right for me. I expect his portfolio will vastly differ; otherwise, he wouldn't be earning his keep."

Victoria advisor Paul Holmes left a firm which pushed in-house bond funds and "now I run my business like your friend Stan's model of low-cost fee-based portfolio management with costs commensurate with investment counseling services."

Still, readers complain how hard it is to find advisors like those mentioned here. "I've been struggling a long time to find an advisor whose interests are aligned with mine and in whom I can trust," says investor G.G. "To date I have had no real success. The concept of an advisor making money with me and not just off me is refreshing."

Based on my mail, there's hope. Keep looking.

"Joe" says his bank should get out of the brokerage business

Stan is not alone. The following is another resignation letter from an advisor formerly employed by a big bank brokerage.

"Joe" worked at the firm 15 years and has left the retail brokerage industry entirely. The names have been disguised to protect the guilty. The original letter runs 5,000 words so it has been edited and condensed to fit this space. I've agreed not to pass the original to anyone.

Dear Fred,

Consider this my letter of resignation, effective immediately.

This is my observation of our subset of the world as I have seen it the past 15 years. Some is indisputable fact, some admittedly hearsay. But I challenge anyone to disprove any of it. Seldom are we in a position to say exactly what we think. I've bitten my tongue on more than one occasion. Today, I hold nothing back.

Here are some of the reasons for my resignation:

• Cumulative negative goodwill built up over many years by the company, its policies and select employees;
• chipping away of broker payout levels, which individually don't have much impact, but year after year cumulatively do;
• a growing unnecessary compliance burden;
• branch incompetence; and
• numerous conflicts of interest which make it impossible to do the best possible job for our clients.

The company has gotten too big and cumbersome. Much of the blame can be laid at the bank's feet. The degree of bureaucracy is astounding. There are so many conflicting agendas that it's the advisor or clients who usually get caught in the crossfire.

There is no universal feeling of doing what's right for clients or the long-term goodwill of the firm. To take a blatant example, countless times I've placed market orders on stocks only to see our own traders cross that stock to themselves and immediately trade it back into the market at a nickel or dime better, which they pocket.

Every time I see it, I get on the phone until I find the trader who did it. Every single time, they have reversed the trade and given my client the extra nickel or dime to which they were originally entitled, but only because they were caught red-handed.

How often does this happen when it's not noticed? These are fellow employees trying to steal from our clients to line their own pockets or the pockets of their departments. Only because of the trade disclosure by the Exchanges have I even caught it. How often does this happen in the bond market where there's no disclosure?

When I started, anyone at a lower or mid-level production level could do okay. Now, the bank's implied objective is to force lower and middle producers out of the business and shift their accounts and assets to the top producers.

They do this by ratcheting down payouts, directly by changing percentages, or indirectly by increasing ticket sizes, clawbacks and minimum commissions, and adding columns and grid levels, thereby shifting higher payouts "out and down" on the grid.

In the old days, it was easier to move to another firm. I feel sorry for rookies getting into the business. They are practically brainwashed into the fee and managed product angle, yet these are precisely the clients who become most difficult to move.

If you don't make it, the firm doesn't care; they move your assets to a producer and go on to the next rookie. They're not out training costs because whatever assets you had generate revenues long after you're gone. The bank's agenda is to squeeze all brokers from the bottom out while keeping as many of their assets as possible.

The commission structure is ridiculous and antiquated. It should be simple enough to be explained in a sentence or two as a percentage of value in a few tiers. You buy x worth of stock, you pay y%. Period. Not "it depends" on the number of shares and share price, which is impossible to figure out manually.

The Bank just doesn't get it. It's trying to take a cyclical business and turn it into an annuity generator, with wonderful paper targets for return on equity, earnings and other statistics the accountants think is important. They think every quarter of every year, it should generate those pie-in-the-sky numbers.

When business is good, it's better than imagined; when it's bad, it's worse. In a bear market, with the ever more unattainable goal of reaching the artificial numbers which are dreamt up and become projections, the squeeze happens.

With every day that passes, this firm acts less like a brokerage and more like a bank branch, the universally accepted kings of nickel-and-diming. In a bear market, firms, like clients, must take their lumps, live to play another day and pray the good times aren't far off.

The push into fees and managed products will end badly, like the mutual fund business collapse in the vicious '70s bear market. The bank should do what it should have done years ago: sell the brokerage and let it be independent.

It would give me great pleasure if my fellow brokers stood up and said (to steal a famous line), "I'm mad as hell and not going to take it any more."

Good night and good-bye.

Joe

Advisors square off over their industry

Tuesday's column on a second resignation letter from a big bank brokerage sparked another flurry of mail suggesting "Joe" is just the tip of the iceberg.

The article was passed around one bank brokerage, one broker reports, and "most, if not all, would agree with every point made by Joe." [This bank was not the employer of either Joe or the earlier case of Stan.]

The bank advisor cites the "Merrill" legacy, saying he still has copies of "strong buy" recommendations it issued at the top of the bubble on AOL, Nortel and its top pick, Tyco.

He watched in dismay as such "analyst" reports dissuaded one pensioner from selling, and whose RRIF then plummeted from $1-million to under $50,000.

He says clients and the public "would be surprised how sympathetic their brokers are to their woes. Nothing makes our job harder than poor management decisions internally. It's almost a nightmare when you add in a bear market."

Another example he cites is foreign exchange rates.

"The bank just refuses to be competitive. Their rationale, as explained by senior management, is they don't need to be. In other words, there are enough 'dolts' who will willingly pay the egregious spreads that they just don't need to be competitive."

Similar responses came from other big bank brokerages but I also want to give space to BBB defenders.

Les Sherman, a top producer with National Bank Financial, concedes Joe's point about insiders grabbing a nickel on trades is "not appropriate and shouldn't be done." But, he adds, "there are a lot of good, honest brokers who do a good job; I don't feel they have to quit the business." Nor does he feel sorry for young brokers.

"They have an enormous opportunity. If they handle themselves properly, they have the opportunity to do very well and be respected."

Another BBB defender works at Joe's former employer and must be anonymous. We'll call him Alvin. He believes in fee-based "managed money" and opposes stock picking.

"That business is close to dead."

He compares selling "used stocks" to flogging used cars. But he disagrees broker morale is low.

"It's only brutal for the stock trading junkies. The wealth management biz is pretty good and a lot of people are looking for help who weren't a few years ago. Advisors who do real planning and use fee-based managed accounts are in great shape and so are their clients."

He also defended compensation grids which Joe and Stan complained were used to weed out "low producers."

"This is a good thing. This is the part of the business that causes most of the problems. I'll take any bank balanced mutual fund -- higher MER [management expense ratio] and all -- over a stock trader."

When disgruntled brokers leave, most of their assets go with them, Alvin says. "Most of us don't even want that kind of client. If all the small, uneconomic advisors and the small, uneconomic clients leave, there is a meaningful enhancement of service for the remainder."

Financial planner Jane Baker, who will open a Toronto office for PWL Capital Inc. in June, suggests the Stans and Joes of the world could do more good for their clients if they sought "good solutions in an ethical and client-centric environment."

She admits clients and advisors have "pathetically few" alternatives to BBBs but independent firms which put clients first still exist.

Another financial planner, Montreal-based Sara Gooderham of Peak Investment Services, also encourages other "Stans" and "Joes" not to leave the business altogether.

"Goodness knows we need more of the honest ones! Re-frame is all these well-intentioned people need to do. Resign yes, but take their practices elsewhere."

Independent brokerage firms offer an alternative to the banker mentality and the BBB's "scandalously low payouts," Gooderham says. That's where the Stans and Joes can build prosperous and ethical practices, but only if they understand one important principle: "In order to serve clients well and avoid any real or perceived conflict of interest, advisors have to start being paid to advise, not to sell."

Gooderham agrees fee-based managed money may be one way to achieve this, but it can also be done through fee-only arrangements and even commission-based product sales.

"I believe the financial plan itself is the real 'product' advisors have to offer and we should expect to be remunerated first and foremost for that essential advice. Clients who then choose to purchase stocks, bonds, mutual funds, insurance policies or any other financial instruments from us should do so with the understanding these are the tools needed to realize their goals, as laid out in the plan."

Honest advisors will naturally take into account any commission earned in the process when calculating fees. "This way, it becomes possible to offer low-cost, high quality financial instruments to clients, and not go hungry. The conflict of interest is eliminated."

She closes with another excellent point. These advisors will need to work with equally honest clients who understand "good advice is worth paying for."

'Value added' worth little if it ends up in advisor's pocket

The "Stan" series of columns drew an interesting response from an Ottawa-based Assante rep we'll call Phil. He begged anonymity on the grounds Stan got the same treatment.

Phil's e-mail came in with what was evidently intended to be an impressive string of credentials: B.Sc., MA, CFP, ChFC, CLU.

Stan, who doesn't bother to highlight his own similar credentials, guffawed "at people who think a long string of initials after their name somehow connotes astonishing skill at anything more than writing exams."

The Stan view of running a passively managed portfolio at 65 basis points [0.65%] a year is the polar opposite of Assante's, whose senior executives freely admit their fees are higher than most [about five times the Stan guideline]. They would argue you get what you pay for: added value, rebalancing and all that.

If so, then Assante, fine upstanding company that it is, clearly gives investors plenty. Just this week many of the firm's top producers were in Monte Carlo, presumably seeking new investment insights for their clients.

What fascinated Stan and I[sic] was Phil's insistence no advisor could possibly live on 65 basis points in annual fees. Or to use Phil's words: "How did Stan reach the financial independence that allows him to be so pious? Certainly not by building a practice from dollar one with a 0.65% fee."

Phil reasons $10-million in client assets would generate $65,000 gross and that such a low fee could only be generated at a securities-licensed firm. Assuming a top payout of 50%, the net to the advisor is $32,500 a year, before business costs.

Phil further assumes a reasonable salary would be $100,000, "taking into account the fact most brokers do not get pension plans or employee benefits paid for by their employer." Therefore, Phil continued, the advisor needs $30-million in assets to start making a "living wage."

"In practice, no brokerage would pay out 50% to a broker grossing $180,000. The payout would be closer to 35%, meaning a gross income before any expenses of $65,000, plus a broker with a $30-million book would be looking at around $30,000 a year in general business expenses," Phil said.

I bounced this line of thought off Stan.

"I'll give Phil his due," Stan said. "He is perfectly capable of making the mathematical calculations required to figure out how to get paid a reasonable wage.

"The question is whether he is similarly capable of doing the math that would tell his client, himself or a neutral observer how much of the client's wealth evaporates as fees during a lifetime. I look forward to his making the case to anyone that he deserves 10% of his client's ending portfolio and the fund companies another 20%."

The second thing that struck Stan was the overall tone of Phil's outlook on the advice business: the flat declaration that "I'm doing a job and I deserve to get paid for it."

Stan concedes people deserve to be paid for doing work but "there is a general principle behind all economic activity. Both parties to a transaction are supposed to get some value added out of it.

"It's not hard to see where the value added is for Phil, who's getting paid hard cash. But for his clients, it's harder to see."

If, as is usual at Assante, Cartier Partners and indeed the in-house "wrap" mutual funds at most big banks, Phil's clients are invested in funds with Management Expense Ratios exceeding 2.5%, then " it is almost impossible for such clients to collect any of the value added by investing in the first place," Stan says.

"There are gains from asset allocation and investment management. Unfortunately, they do not accrue to the investor with fees at those levels. They all end up in someone else's pocket."

Stan challenges the Phils of the world to justify 2.5% in fees (ie. $5,000 annually on a $200,000 account) as payment for the value they claim to add to clients' portfolios.

"I don't think he can come close. On the $50,000 account, with decent financial planning thrown in, sure. On $200,000 or $1-million, he's dreaming. I regret to inform Phil that clients are getting ripped off by mutual funds. The math is incontrovertible."

Few clients understand the math of MERs. Stan says Phil's math betrays his self-interest over that of clients.

"Which is more important? The math he has done -- the math of putting food in his children's mouths and paying his car lease? Or the math he can't be bothered with -- the math of having clients' retirement portfolios 50% larger, the math of better food and nicer cars for clients, if they just stop doing things the Assante/Phil way."

At the end of his diatribe, Phil posed an intriguing question: "Should only the super-rich have financial advisors [which is what happens if only brokers with $100-million in assets can earn a reasonable income]?"

Here, Stan concedes that clients with less than $100,000 cannot be well served under any business model.

"Either the fee is too low to compensate the advisor for his valuable time or it's such a high percentage of assets that no investment model can make up for the fee."

Even then, though, Stan doesn't let Phil off the hook. Such an advisor should tell the client to come back when it is worthwhile. In the meantime, he could suggest they borrow a copy of The Wealthy Barber and put the money in GICs or Phillips, Hager & North Balanced fund.

Finally, Stan fends off Phil's charge he is "pious."

"Is piety a worse sin than venality? It's a sad commentary on the entire industry that it is seen as a plausible argument that, given a choice between charging 0.65% and 2.65%, it is somehow justifiable to charge the higher amount because some advisors can't survive at the lower fee level; that it is somehow reasonable to suck the entire value added from the investment process out of the pocket of the person who puts up the capital in order that someone else can be paid."

Norbert Schlenker offers unbiased opinions for a fee

Fee for service is a hard concept for Canadian investors to grasp. They don't mind paying thousands of dollars a year in fees as long as they're "hidden" as mutual fund or wrap account MERs. But if you present them with an invoice for a lesser amount for financial plans or unvarnished investment advice, they run.

As a result, many overpay for investment management, bulging the coffers of fund companies and bank wrap programs but putting a serious crimp in their own net worth.

Norbert Schlenker used to work for a big bank brokerage firm in Victoria, B.C. and has built up a following on the Internet under various aliases. Now posting under his real name, he often dispenses useful financial advice and makes pointed criticisms of the fees and sales practices of Canada's wealth management industry.

Schlenker is setting up shop as Libra Investment Management. It's a fee-for-service firm which will provide unbiased financial advice to individuals, private corporations, and non-profit societies. It bills directly for its time and accepts no commissions from product or service providers.

Libra intends to become registered as a portfolio manager with the British Columbia Securities Commission. As an alternative to billing for its time, Libra may consider client requests to manage discretionary portfolios for an asset-based fee which will not exceed 0.75% a year.

What follows is an edited interview:

Q: Is this in British Columbia only? Are there minimum investment levels?

A: Only in B.C. to begin with. Planning services are unregulated in most of Canada so there is no real bar to providing sound financial advice in other provinces as long as specific products are not recommended.

There is no minimum portfolio size per se. The minimum fee is $1,500 in the first year and $1,000 in subsequent years. At those fee levels, it's hard to justify using Libra's services with a portfolio smaller than $100,000. Note the average Canadian with just $50,000 in mutual funds is paying similar dollar fees, usually unwittingly. Larger portfolios pay much more.

Q: That fee is tax deductible?

A: The part of the fee relating to investment counselling is tax deductible for taxable investors.

Q: You're skeptical managers of wrap accounts and similar services can justify annual fees of 2.5% or more?

A: My opinion is it's impossible to make up for that level of fees through investment management. It's not that there is anything wrong with the investment philosophy behind wraps. They are built using a process that works and works well. The problem is applying a fee of 2.5% to 3% per year to this process cannot serve any but the tiniest portfolios.

There is much hand waving about the superior performance of chosen professional money managers. The long-term evidence is no such superiority exists, nor can it be identified in advance. Collectively, professionals are the entire market and will achieve the collective return of the market before fees. Take 3% a year in expenses off the market's return, and more in taxable accounts, and an investor will end up way behind.

An argument can be made that advisors provide other valuable financial advice. The difficulty is the advice is often decoupled from the mechanism which pays for the advice. Clients should be careful if they think they are paying for one thing but the person supplying it is being paid for something else entirely.

Q: Is a frugal advisor more likely to give objective advice?

A: I caution anyone making judgments based on external indications of an advisor's personal financial standing. It's not clear whether one is better off taking financial advice from the driver of the Beemer or the "beater."

Q: What are the minimum qualifications for financial advisors?

A: Qualifications are not irrelevant but investors should be careful judging anyone's qualifications from a set of initials following a name. Passing exams is a different skill than providing professional advice. Exams tell you nothing about a person's ethics or what they will do when in a conflict of interest.

Don't be fooled by designations either. The current regulatory system for registration of salespeople is minimal. Don't be fooled by job titles. "Advisors" at IDA members are salespeople under the Securities Acts. "Vice-presidents" are big producers. "Planners" at MFDA members often don't provide plans.

Caveat investor.

Q: How well have regulators protected investors in the bear market?

A: It's not the regulators' function to protect people from market fluctuations. They are there to protect people from being abused by the system. The occasional fraud aside, bear markets do not abuse investors. The average well-informed or well-advised investor should pay little attention to normal fluctuations in the prices of securities.

Q: Should banks get out of the brokerage business?

A: It's not an issue. There are problems which arise from flaws in the business model. Clients go to banks, bank-owned brokerages, independent brokers or mutual fund dealers for one thing: advice. As long as clients won't pay directly for advice, the industry must find a way of getting paid indirectly.

Once payment is divorced from the real product being provided, many abuses are possible: "financial planners" whose clients have no financial plans, unsuitable recommendations, account churning, high fee levels, layers upon layers of high-priced minders.

By their unwillingness to pay directly for advice, investors force advisors to collect through two intermediaries: the employer and the fund company, which adds two sets of overheads. Worse, it obscures where the advisor's pay comes from.

It's not easy for anyone to strike the right balance between corporate profitability and client interests.