Building wealth is essential to achieving important financial goals, whether it’s funding a child’s education, buying a home or enjoying a comfortable and happy retirement. Working with an investment advisor is often a good way to save more money, achieve greater tax efficiency and grow wealth over the long term through investments.

However, investing for the future can be very complex and typically requires specialized skills, experience and discipline to be successful. The same is true for retirement and estate planning, which is why many people seek professional advice. If you’re working with an investment advisor (or considering doing so), it’s important to understand how advisors are compensated. Since the issue of fees can be complicated, we’ll stick to the basics.

There are three main forms of advisor compensation: a commission-based model, a fee-based model, or a salary-based model.

Commission-based model . Advisors who work in this structure receive compensation when their clients buy or sell an investment (for example, mutual funds, exchange-traded funds, or stocks). The commission they receive may depend on the type of investment, the dollar value of a transaction, or other variables. Advisors may also receive ongoing compensation from fund companies based on the funds held by their clients (more on this later).

Fee-based model . Advisors working under this structure are paid fees that are based on the value of the assets they manage on behalf of a client. Even if a client makes many transactions and uses certain advisory services frequently, the fee charged remains a predetermined percentage (e.g., 1%) of the value of the assets under management. Sometimes, the fee percentage decreases as the client’s assets increase.

Salary-based model . An advisor working for a bank or credit union often earns an annual salary plus a performance-related bonus. Salaried advisors provide value to clients, but they may not hold the same licensing as commission- or fee-based advisors, which can limit the range of services they can offer.

Management Expense Ratio (MER)

If you invest in mutual funds, segregated funds or exchange-traded funds, you’ve probably heard of MERs. They’re calculated as a percentage (e.g., 2%) of a fund’s assets and are deducted from the value of your investment. MERs are used to compensate fund managers and brokers, and to pay related taxes.

Fund manager . This is the firm that looks after the fund you’ve invested in. They set the fund’s strategy and objectives and employ portfolio managers who decide what (and when) to buy or sell, helping to improve the fund’s returns and manage risk. They also handle administrative tasks such as recordkeeping, as well as legal, accounting, auditing and custodial services. For these important tasks, fund managers earn a portion of the MER.

Broker . This is the firm where your advisor is registered. Brokers maintain account records, produce and deliver account statements, and provide technology for online account access. Brokers also ensure that their investment advisors meet all regulatory requirements. A portion of a broker’s MER allocation (also called a “trailer commission”) is typically paid to advisors responsible for client-facing tasks such as portfolio construction and monitoring and trade execution.

Taxes . A portion of the RFG is used to cover federal and provincial taxes charged on fees and services related to the fund manager and the broker.

Phase 2 of the Advisor-Client Relationship Model (MRCC2)

In 2009, CRM1 was launched to standardize written disclosure requirements for brokers across the industry to help clients understand key issues in the relationship, such as how brokers determine product suitability, how they address compensation issues and potential conflicts of interest, the dispute resolution process they follow, and more.

Building on CRM1 and implemented in 2017, MRCC2 requires brokers to provide clients with a personalized annual report that summarizes the fees and compensation related to a client’s account. This report is intended to be transparent and written in plain language. To better understand fees (for example, what you pay and where the fees go), review your personalized annual report.

Over the coming years, MRCC3 will come into force and provide even more comprehensive information about investment funds. For example, the annual total cost reporting requirements will allow for the disclosure of all costs inherent in owning a fund, including MERs and MERs (i.e. transaction expense ratios), to provide investors with greater clarity on the expenses incurred as part of the investment process.

Great advisors earn their compensation by providing significant value to their clients. To learn more about the costs of investing and the benefits of professional advice, please contact an iA Private Wealth Investment Advisor .

This article is intended to provide general information on certain topics only and should not be considered tax, legal or investment advice. Please obtain independent professional advice tailored to your specific circumstances. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Regulatory Organization of Canada. iA Private Wealth is a trademark and other name under which iA Private Wealth Inc. operates.