The heart of the debate is the question of sales commissions. Broker-dealers argue it is possible to collect sales commissions and also give trustworthy advice. Other advisors and regulators in the industry believe an advisor’s vision is clouded once the investment choices include products paying large sales commissions, and that clients pay a heavy cost when dealing with a broker-dealer. Sales commissions are attached to most products utilized by broker-dealers, including load mutual funds, unit investment trusts, and most insurance products.
When determining the impact of sales commissions on investment advice, consider these questions:
• Can a financial advisor recommend that a client invest in a mutual fund that pays a 5.75% commission to the advisor and still say that he/she is looking out for the client’s best interest?
• What if the financial advisor knows the client can purchase the same mutual fund without a 5.75% sales commission? Can the advisor still sell the product, collect the commission, and say he/she is looking out for the client’s best interest?
• Does not the charging of even a disclosed sales commission disqualify an advisor from acting in the client’s best interest if the sales commission alters the advice of the advisor?
The holy grail of sales commissions for many broker-dealers is the variable annuity. An upfront commission of 5% or more is regularly paid to advisors selling these products. Even though these expensive products don’t make sense for most people, they are aggressively sold.
The fashionable trend for advisors working at a broker-dealer is to distance themselves from the entire sales commission debate by stating they are “fee-based”
Similarly, smaller broker-dealers are increasingly attempting to separate themselves from larger broker-dealers such as Merrill Lynch and Morgan Stanley by utilizing the word “independent”
So do “independent, fee-based” advisors really avoid sales commission products?
Unfortunately, the reality is quite different from the public marketing campaign of these broker-dealers. The fact is that even the independent broker-dealers rely on sales commissions for a large part of their revenue. In fact, in the June 2011 Financial Planning magazine cover article highlighting the top 50 independent firms, 48 of the 50 generate the majority of their revenue from commissions!
The Fee-Only Advisor
There is a major distinction between a “fee-based”
About Net Worth Advisory Group
Net Worth Advisory Group is a fee-only financial planning firm in Salt Lake City, Utah. They are a member of the National Association of Personal Financial Advisors (NAPFA) and their advisors are Certified Financial Planners. All Net Worth Advisory Group advisors accept a fiduciary responsibility to always act in their client's best interest. Learn more at http://www.networthadvice.com. Their office can be phoned at (801) 566-0740.