Advisors and planners often become embroiled in heated debates over their ethical standards as it relates to their compensation. If one earns commissions, one is inherently unethical. Yet if one is paid a fee, one is ethical. Nothing is further from the truth.
To be sure, unethical practices have been and will continue to be committed by some advisors, and those people need to be either fined or punished or both. But to think the root cause of such behavior is because one is paid a commission is foolish.
The largest portion of the blame is with the federal regulators and the supervisors within the financial companies (broker-dealers, mutual funds, insurance and/or investment banks) that approved of these business practices by their employees. If you want the unethical behavior to stop, fine those companies and punish those officers who have supervisory oversight.
How advisors are paid
Let’s review how a financial advisor is compensated. Those methods are: salary; salary plus bonus; commissions; fee for services; and fees for managing assets. It’s important to point out that commissions are determined by the company where the financial advisor is placing his business and varies by company. Further, commission schedules are approved by the regulators and cannot exceed specific maximums.
If we want to manage someone’s ethical behavior then begin with, as Steven Covey states, the end
in mind. And that end is the regulating bodies that
approve these products.