Will it be fees, commissions, fees plus commissions or something else altogether? The Wall Street Journal applauds the number of options now available for advisors to get paid, but the paper takes a hard look at each one, and evaluates the pros and cons for the investing public.
In an effort to ensure you’re prepared if the topic is raised in your next client meeting, we run through what it has to say.
“The advantages are easy to see,” the paper reports. “Advisers have a strong incentive to boost client returns, because their fees increase as the assets grow–and fall if the assets decline.”
But the Journal takes issue with what it calls “perhaps the most serious caveat,” which is “the many conflicts of interest.” It claims advisors may be “tempted to take undue risks to grow their clients’ accounts and thereby boost their own fees. They might also be tempted to discourage moves that benefit the client, but take assets out of the account. For instance, an advisor might be tempted to advise a client not to buy life insurance because that would mean less money to manage.”
Fee Plus Commission
The paper describes the perpetual fee-based versus fee-only debate in the following way:
“Fee advisors don’t take commissions on products they sell, so they won’t be swayed to recommend a product because it will pay them more. But many advisors combine some type of fee with commissions. This model has come under criticism and the scrutiny of regulators. Critics say it generally adds more costs and conflicts of interest–often without the client realizing it.”
They also wade into the fiduciary issue, noting that “while acting as a registered investment advisor, the advisor is a fiduciary, required to act in the client’s best interest. But the advisor isn’t a fiduciary when working as a broker … advisors juggle the two roles by giving only general planning advice as fiduciaries.”
Whether investors understand all this is the real question, the Journal says, adding that commissions aren’t always obvious. Brokers aren’t required to disclose the amount of their commission at the point of sale, though it is included in a confirmation letter sent to the client.