Mutual Funds And Scholarship Plans
Requirements to receive compensation
Only a natural person registered as a mutual fund or scholarship plan dealer representative (advisor) can act on behalf of such a dealer and be paid for conducting business requiring this registration or receive a client referral () commission associated with their business.
The advisor’s compensation must usually go through the dealer before being paid to them. It cannot be paid to an unregistered company, such as the dealer’s personal company.
The report on fees and compensation specifies the amounts paid to the dealer, not the advisor. In return, the dealer compensates its advisor, normally as commission or salary.
The report does not specify the fund fees, which is the ratio of management fees and the ratio of fund transaction fees. Although the client doesn’t pay these fees directly, they have consequences for them because they reduce the fund’s return. The advisor must consult the prospectus, information booklet, or Fund overview, which include this information.
The advisor should address the question of their compensation and fees with their clients before they receive their end-of-year statement and see how much their investments paid their advisor and the dealer. They should explain this concept upon first meeting their clients, not only because it is of interest to them, but also because these clients may not be comfortable asking them about it.
Also, a potential client may believe that they don’t have the means to work with an advisor, but if informed, they will realize the opposite is true.
Taking initiative allows the advisor to:
- show the client the value of advice
- eliminate all concerns by clarifying the role of each player
- explain the difference between management fees, trailer fees, and other amounts charged to the client
- give the client the necessary information to fully evaluate what portion of their money is used to compensate for the advisor and dealer’s work
- reinforce the consumer’s trust in the professionalism of their advisor
Explaining the advisor’s compensation allows the client to:
- evaluate the different fee options
- talk to the advisor about the value of their services
- make an informed decision about their investment choices
- realize that nothing can be done about market decreases and that the fluctuation of their investments does not at all affect the value of the services they receive
The question of compensation and fees may also be considered an item related to suitability. The fee structure that must be applied is closely linked to the client’s needs and objectives, as well as their financial situation.
The advisor may feel uncomfortable explaining to a client that, in order for them to earn a sales commission without it being paid directly by the client, the client must agree for an amount to be deducted from the amount invested upon purchase, or pay redemption fees if they want to withdraw their money before maturity, upon which the redemption fees will be null.
The question of sales charges must be discussed and agreed upon with the client at the time of purchasing mutual funds.
It’s better for the client to be aware of it right away rather than having an unwelcome surprise, such as when they want to withdraw funds because they need money, because they want to invest their money elsewhere, or because they intend to change dealers or advisors.
- Recommending funds with deferred sales charges to clients with temporal objectives that are uncertain or shorter than the fee due date
- Creating new deferred sales charges by recommending that a client make changes in their portfolio while the due date for the redemption fees for the funds has been reached
- Take the time to explain to clients the different compensation structures in the industry, their advantages and disadvantages, and the reasons for which the recommended structure is more appropriate than another for their situation and goals
- Communicate transparently about fees and compensation, and explain to clients that the dealer will receive the stated compensation and then pay them a salary