I often educate new clients that there are two types of accounts with different cost structures. There are fee-based accounts and there are commission-based accounts. Back in the “old days”, when a client wanted to purchase stocks directly from the exchange, most accounts were commission-based. This means advisors are paid for each transaction that is executed. Therefore, the greater the size and volume of transactions, the greater the compensation received. When investors made a purchase, the initial gains would go towards recouping the transaction costs. When investors sold an investment, part of the proceeds would be deducted in the form of a selling commission. When this cost structure was the norm, investment advisors were perceived as “stock brokers”. The main criticism of commission-based accounts is whether advisors are keeping the clients’ interests at heart, when they are incentivized to encourage more trading transactions. 

Fast forward to today, investment advisors, especially those from large financial institutions, are no longer perceived as “stock brokers” that charge for every transaction. Some are licensed portfolio managers who manage investment portfolios on a discretionary basis; others may be wealth managers, if they provide financial planning along with investment advice. These accounts are typically under a fee-based model, where a fixed percentage fee is charged on the market value of the account regardless of the number of transactions. In this arrangement, the client no longer has to worry about paying a commission every time their account is adjusted.

Under a fee-based model, the nature of the services that are offered have broadened to encompass wealth management services, including retirement planning, estate planning, business owner planning and insurance planning. Most of the time, firms also have in-house specialists like accountants, lawyers and business valuators whose role is to provide planning consultations for clients. Implicitly, a fee based account covers the costs of these other services.

I believe that fee-based accounts are better suited for investors that require long-term investment management and advice for their overall wealth. Portfolios should be adjusted according to the changes in an investor’s risk profile and needs. Rebalancing should also occur to match asset allocations and holdings to the prevailing investment environment. In this scenario, a fee-based account would ensure that the advisor is working alongside the client’s best interests. Here, the advisor’s compensation will grow if the appropriate investment decisions are made that lead to gains and a rise in portfolio value. Rather than being incentivized to generate more transactions, the advisor is incentivized to mitigate volatility, grow the account, and only perform transactions that are expected to benefit the client.

With that said, a commission-based account could still be appropriate under specific circumstances. For example, investments that do not require adjustments and follow a long-term “buy and hold” strategy may be better suited for a commission based account.  The same applies for clients that have decided to purchase GICs, bonds, and structured notes with the expectation of holding until the maturity date. In these cases, it is possible that an annual management fee may not be necessary.

To conclude, the account of best fit always depends on the client’s needs. We specialize in the management of different fee-based accounts which include Private Investment Management (PIM), A+, and our TFSA. Please contact us to find out how you can benefit from our expertise in fee-based investment and planning solutions.