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The latest thing in fee-based investment accounts is to dock an adviser's pay if he or she fails to monitor your portfolio and financial plan properly.

The brokerage firm Edward Jones incorporated this feature into the fee-based Guided Portfolios program it introduced in October. Advisers are required to meet semi-annually with clients to discuss their investments and annually to discuss their financial plans. "If the adviser is not doing that, there are alerts that go off and, after a short period of time, the adviser stops getting paid," said Derrick Strizic, a principal with the Canadian arm of the U.S.-based firm.

The majority of Canadian investors pay their advisers through fees and commissions embedded into the cost of owning investments like mutual funds and wrap products, which are prefab bundles of funds. Fee-based advice is an alternative that warrants a fresh look because of some potential regulatory changes in the advice business.

The Ontario Securities Commission is considering the idea that, in the interest of greater transparency, embedded commissions for advisers should be eliminated. The natural alternative to commission-based compensation for advisers is the fee-based account, where clients pay their adviser and firm directly.

A typical arrangement would have a client paying 1 to 2 per cent of the assets in his or her account annually. Billing is done monthly or quarterly and the money is usually withdrawn from cash sitting in the client's account. A large block of trades for buying and selling stocks or exchange-traded funds is included in the price.

Fee-based accounts are reliable revenue producers for investment firms, and they offer benefits to clients that go beyond cost transparency. For example, a fee-based adviser has no incentive to skew recommendations or encourage trading just to generate commissions.

But there are two questions investors must address if they're considering a fee-based account, and both can be applied to Edward Jones's Guided Portfolios. One is whether clients receive service that justifies the fees, and the other is whether clients are paying more in a fee-based account than they would to an adviser compensated through commissions.

Edward Jones is unusual in the investment industry because of its Main Street approach. Small accounts are welcomed, advisers are encouraged to work weekends, and offices are located in strip malls and other locales where people can easily park their cars. Guided Portfolios was created for people with a minimum of $50,000 to invest, which is a lower minimum than many other firms would apply. This account is designed for clients who want the flexibility to have stocks, bonds, ETFs and mutual funds in their accounts. Fees start at 1.8 per cent and decline gradually as assets increase.

Clients in commission-based accounts also pay their advisers fees, but fund companies act as intermediaries. Basically, a portion of the fees investors pay to own funds are routed by fund companies to advisers and their firms. The fee is out in the open in a fee-based account, and that puts an onus on advisers to deliver service that is similarly conspicuous.

Mr. Strizic says that if one of Edward Jones's 700 or so Canadian advisers sets up a Guided Portfolio for a client, he or she is bound to follow a particular process. To start with, the adviser must analyze a client's needs and produce a financial plan. A portfolio is then assembled and clients begin receiving detailed quarterly performance reports.

As well, there are annual meetings and semi-annual portfolio updates in person. Mr. Strizic says that if an adviser does not log these meetings with the firm and cannot offer an explanation why, he or she stops receiving the monthly account fee payments from the client (yes, the client keeps paying them, regardless).

Edward Jones has clearly done some thinking on how to demonstrate value to Guided Portfolios clients. But those fees are high – is there enough value in the account to make it worthwhile?

Mr. Strizic said his firm consulted a pair of investment industry data providers, Investor Economics and PriceMetrix, to find out what other fee-based accounts cost in order to gauge the market. He believes the Guided Portfolio is competitive both on the basis of what other firms charge, and on what it delivers to clients. "I would put the financial plan up against any fee-for-service financial plan that's out there," Mr. Strizic said. Fee-for-service is the third way to pay for financial advice. You either pay hourly or a flat rate, and a full financial plan can easily cost upwards of $2,000.

The median Guided Portfolios account has $150,000 in it, so the 1.7-per-cent fee that would apply on an account of that size means $2,550. "If you're getting financial planning, regular updates, regular contact, that $2,550 doesn't sound unreasonable," said Dan Richards, a consultant to financial advisory firms.

One final note on fees and value: Clients have to be willing partners with their advisers in the planning and investing process. Not following a plan or neglecting to invest makes the fees pointless.

Most of the financial industry opposes the idea of doing away with embedded commissions for advisers because of fears that clients will flee if asked to pay for advice directly. One of the arguments the industry is doing to preserve the status quo is arguing that fee-based accounts, the alternative to commission-based advice, would cost more.

Mr. Richards said it's tough to generalize about which model is more expensive, and the Guided Portfolios example shows why. If you own just stocks and bonds in the account, the starting 1.8-per-cent fee would be all inclusive and most likely cheaper than a portfolio of mainstream mutual funds.

According to Mr. Strizic, stocks and bonds account for about 85 per cent of the assets in Guided Portfolios, with another 15 per cent in mutual funds. Those would be F-class funds, where embedded commissions for advisers have been removed. Still, if you add the reduced fees for F-class funds to the Guided Portfolio fee, you could conceivably have an all-in cost of close to 3 per cent, which is too high.

Low-cost ETFs would put the total cost of a Guided Portfolios account in the very low 2-per-cent range, but Mr. Strizic said ETFs have hardly been used in these accounts thus far.

We're still many months away from a decision by regulators on whether to end embedded commissions for advisers and thereby push fee-based accounts into the mainstream. Investors who want to pay for advice in a transparent, business-like way should give them some thought, regardless of what regulators do. As Guided Portfolios from Edward Jones show, there's some interesting thinking going on in this area.

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