Are Commission Based Financial Advisors Good or Bad?

Many people go into their search for financial help convinced that the one thing they know for sure is that they do not ever want to pay commissions, where the advisor gets a cut of the action, because that encourages the broker (typically) to make moves that generate fees. As a result of that public backlash at commissions, the financial services industry has moved toward flat fees, which it pitches as a safe, conflict-free way to do business.

Wrong.

The most important thing to remember about paying for advice is: No matter the fee structure, there are potential conflicts of interest in virtually every type of advisory relationship.

While there is no question that commissions encourage an advisor to be a pushy salesman, the issue is right out in the open, easy for you to recognize and understand.
If your advisor buys you a portfolio of mutual funds and earns a commission on the purchases, but comes to you a month later saying it's time for a change, selling one fund to buy a new one -- a transaction that generates a fresh commission -- your guard goes right up. After all, if the fund was worth buying a month ago, and you weren't timing the market, something strange or bad must have happened to justify the change so quickly. If you sense that the problem is less about the mutual funds and more that the guy has a car payment coming due, you'll quickly take steps to stop the problem.

Smart Investor Tip

No matter the fee structure, there are potential conflicts of interest in virtually every type of advisory relationship.

Investors worry about "churning," trades made more to generate commissions than for real strategic reasons, but the attention paid to the issue and the step-ups in disclosure requirements over the years have made churning a much less significant concern.

According to the latest statistics from the National Association of Securities Dealers, churning is a problem in roughly 2 percent of the complaints filed against advisors. By comparison, breach of fiduciary duty -- where an advisor fails to put your best interests ahead of his own -- is involved in roughly one of every four complaints. That problem can arise no matter how you pay an advisor (there's much more on fiduciary responsibility in Chapter ).
By Chuck Jaffe
Chuck Jaffe is a senior columnist and host of two weekly podcasts at MarkWatch. He has also been a guest speaker on several television and radio shows.

Copyrighted 2016. Content published with author's permission.

Posted in ...