Who Pays Ya, Baby?

Despite his hyperbole, I’m sure Nigel is fully aware that NAPFA doesn’t ignore education, examination2, or ethics. But it does put “method of compensation” on a par with those other factors, when identifying a professional financial planner. And rightly so: Only a fool or a quibbler would argue that what someone is paid to do and by whom they are paid has no bearing on their job performance.

What Nigel and others who make the compensation-method-doesn’t-matter argument fail to mention, especially to their “clients” is that they aren’t paid by their clients: their pay checks come from their insurance company or broker/dealer. In fact, as an “insurance agent,” for whom are they legally an agent? That’s right, the insurance company. Not the client. Which means they are legally obligated to represent the interests of the company–again, not the client.

So why does compensation matter? Simple: if an advisor is paid directly by the client, then that advisor has a legal and fiduciary duty to represent the interest of that client. If the advisor’s compensation is paid by someone else, his loyalty legally belongs elsewhere as well. Sure, some enlightened commission-taking folks may break the law and put their clients’ interests first: but how can a client reasonably rely on them to do so?