Am I Really Getting Free Advice with a Commission-Based Advisor?
by Catherine Tansey
When it comes to managing money, cost is an important consideration. The prospect of only paying for the goods and services you’re purchasing is attractive, but may not be the wisest choice when you’re selecting financial advice. Commission-based financial advisors can work for some individuals, but their practices can be self-motivated and predatory.
Financial advisors are generally compensated in one of three ways.
Commission-based financial advisors earn their living through commissions, so they operate with their best interests in mind. This can make it difficult to be sure you’re getting unbiased advice, said Michael Pappis, CFP®, EU.
“If they are selling you financial products like insurance, annuities, or mutual funds, do you really need them? Or does the advisor just need to earn their commission that month?” he added.
Not sure if a financial advisor has your best interests at heart? This interview checklist makes it easy to find out.
They earn commissions from the sale of financial products and services — but commissions are tricky. Scoping out exactly how much you are paying your commission-based financial advisor is challenging because fees are paid directly to the advisor by the investment provider. As such, you, the investor, won’t see the dollar amount coming out on your account statement each month.
That’s because hidden fees are common with commission-based advisors, said Pappis. “Recent research from financial industry thought leader Bob Veres has shown that a client with a $1 million portfolio will pay at least $20,000 or more in various hidden costs to a commission-based financial advisor than to a fee-only financial advisor, even if both the commission-based advisor and fee-only advisor are charging the same fee amount for the planning and investment work,” Pappis noted.
Commission-based financial advisors can work for some people. If you’ve decided to go this route, make sure to ask a few simple questions.
“If you are thinking of working with a commission-based financial advisor, you should know exactly what you are paying them each year, preferably a dollar amount. If they are looking to sell you a financial product like a life insurance policy or mutual funds, ask them how much you are paying and how much they are receiving from the sale (the commission),” said Pappis.
Pappis reiterates the importance of asking for that figure as a dollar amount because commission-based financials are likely to quote you a 0.75-1.25% advisor fee — but this doesn’t include the hidden layers of fees that almost always accompany their services.
Fee-only financial advisors tend to be a better option for many people. Many of these individuals are CFPs®, meaning they’ve accumulated extensive experience and passed a rigorous exam. More importantly, CFP®s are bound by fiduciary responsibility that requires them to put their clients’ best interest first, which means you can trust them.
Peace of mind is not easy to come by in the work of financial goods and services, but with a fee-only financial advisor, you can rest easy knowing your needs and best interests are put first.
Pappis’ final word of advice? “Commission-based financial advisors tend to cost more and deliver less value in providing financial planning services compared to fee-only financial planners. Commissions are often well hidden and allow these ‘financial advisors’ to get by with charging more. Out of sight, out of mind,” he said.
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