Being a financial planner is not always fun. I often find myself between a rock and a hard place: the best interests of my client and the target of the hand that feeds. Unfortunately, our profession leads us to a continuous conflict of interest. Even though I always disclose if I get a better commission from one investing solution than another, I am still in the middle of a conflict of interest between the client and my pocket.

During the 63rd CFA institute congress in Boston, MA, Ariely mentioned that a financial advisor is always in a losing position if he is in a conflict of interest while doing his job. I was surprised to read this since I had thought that by disclosing the way I am compensated decreases the potential conflict greatly since the client had all the information to make the best decision possible. However, he made a very interesting point.

When you disclose that you make more on one product than another (which I do), there are 2 possible conflicts of interest that may arise:

#1 The client may ignore or give less attention to the solution with the higher commission attached since he may think it’s only good for the advisor.

#2  The advisor may reinforce his arguments in the favour of the higher paid solution thinking he’s right since he disclosed his conflict of interest upfront.

No matter what you do, no matter how ethical you are; there is always a conflict of interest when money is related to your actions.

However, I still think that it is important to discuss with your advisor on the manner by which he gets paid. Depending on which company he works for, his income can be determined by a lot of things:

#1 100% commission

#2 100% salary

#3 Salary + commission (based on revenues, growth, objectives, etc.).

Therefore, if you spend enough time knowing how your financial advisor is paid, you will be in a better position to understand if he is trying to work for your best interests or if he is only working for himself.

The main problem with this issue is that financial advisors must be paid (like any other worker). However, a 100% salaried approach will encourage people to slack off and not try to give the best service possible (they will end-up with the same pay check anyway, so why bother?). On the other hand, having a 100% commission pay check will push the advisors to sell as many products as possible in order to have a big fat pay check at the end of the month. This doesn’t sound ethical either!

In my opinion, I prefer the mix between base salary plus a variable commission. Where I work for example, I have a bonus based on the net growth of my book. Therefore, if I sell a lot of things but I don’t do my job right, my clients will withdraw their money sooner or later and this will affect the net growth of my book. This is how this system pushes a financial advisor to keep a higher level of service. While not being perfect, I think we have an interesting way of compensating financial advisors.

How do you feel about commissions? Do you think financial advisors should be only be paid a base salary?

Mike

Mike

Mike, aka The Dividend Guy, authors The Dividend Guy Blog since 2010 and manages portfolios at Dividend Stocks Rock. He is a passionate investor.