Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Financial Planning > Behavioral Finance

Ethics vs. compensation

Your article was successfully shared with the contacts you provided.

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.

Who gets the commission?
How an advisor is compensated, in and of itself, is not the defining factor that ensures the client will have a more ethical, honest and trustworthy financial advisor.

For that, we would have to review how a company is paid when a consumer becomes a client of that firm or advisor.

Perhaps that company sells annuities and mutual funds and the issuing carrier pays the owners of the firm a commission, but the owners pay the advisor a salary. If the firm uses only those carriers that pay the highest commissions regardless of whether those products meet the needs of the client, then the client is better off working with a commissioned financial advisor who seeks to match the needs of the client with the features of the product—irrespective of the commission. A firm can state it has access to all company products but if its core business is consistently done with three of the highest commission-paying carriers, the consumer has their answer.

The bottom line is, did the advisor determine their client’s needs and objectives and match them with the most suitable product? If they did, does it really matter how they were paid? I think not.


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.