What’s the difference between a commission-based advisor and a fee-only advisor? One is selling an investment product while the other is providing advice. Say what you will, but when the option of receiving four to five years worth of commissions up front is present, it’s a tremendous temptation.

Several years ago, a friend of mine told me how excited he was about a new client who was looking to invest several hundred thousand dollars. What did the advisor recommend? An annuity. Why? He was brimming over about the prospect of a fat commission check. Assuming an 80% payout, an investment of $300,000, and a 6% commission, his take would have been in the neighborhood of $14,400! That’s a lot of money! That’s also far too common.

Very recently, a new client of mine relayed the story of a bank advisor who sold her elderly father a rather large annuity. She was not happy about it, but by the time she found out, it was too late to change it.

Let’s be clear. An advisor working on commission is not an advisor at all. He is a salesperson. I realize this may ruffle some feathers, but consider this. Would any business owner in their right mind hire a new employee and pay them a year’s worth of wages upfront? Of course not! They would pay them as they earn it, which is the essence of an advisor working on a fee basis.

Why does this type of behavior exist? It’s really very simple. This is a business where you can earn a physician’s wage with only a fraction of the educational commitment. Moreover, if the commissioned salesperson works for a bank or brokerage firm as an employee, the expectation is clear. Sell or be replaced. And who wants to be replaced? So they sell, sell, sell!

I’ve been in more sales meetings over the years than I care to count. In each meeting, the focus was on selling. That’s why they call them sales meetings!

Because of the egregious sales practices of some brokers, Congress is trying to place them under the same fiduciary umbrella as investment advisors. Will this work? My optimism meter runs low. As long as we have structures where the production of revenue is the primary focus, enforcing a fiduciary standard is unrealistic. This is because the interests of the client would have to come first which is diametrically opposite to a commissioned-based world. Even if this new standard were passed, it would be impossible to catch all of the abuses. The suitability standard is much more lenient and allows for this type of behavior.

What we need is client education. Clients need to know the difference between a broker and an investment advisor.

As long as we have large companies spending billions of dollars on fictitious ad campaigns, the public will remain confused.

So I will try and save as many clients as possible. I know many of you will do the same!

Thanks for reading!