Do You Know How Your Financial Adviser Gets Paid? Probably Not

financial advisorIf you keep a detailed household budget, you know how useful it is to be able to break down your expenses. Knowing precisely how and how much you pay for specific things can be a key first step on the road to personal financial health. But surprisingly few people are able to pinpoint how their financial advisers are paid, according to a survey released this week by research firm Cerulli Associates.

Nearly two-thirds of survey respondents -- 64% -- either believed their financial adviser was providing their services free of charge when engaging in transactions on their behalf, or they weren't sure how their financial adviser was compensated.

It's not a trivial issue: How your financial adviser is compensated -- whether via commissions or advisory fees -- affects the rules they must adhere to, and the degree to which fiduciary standards require them to put the client's interest first.

Investment brokers and dealers, who tend to work on commission based on securities or products sold, are required to recommend products to their clients under a suitability standard, which is generally designed to align a person's net worth with the degree of riskiness they can tolerate in a particular investment. They are also required to disclose that the firm's interests may not always be in sync with those of the investors. Meanwhile, investment advisers, who are often paid a fee for their advice, are required to adhere to a fiduciary standard that mandates they put their client's interests ahead of their own or their firms.

The study, however, found that 63% of survey respondents who work with a broker-dealer or wirehouses believe their adviser is bound by those fiduciary requirements all the time. In reality, that requirement applies to those advisers only part of the time, notes the survey.

"With a commission arrangement, there is always the temptation [for the broker dealer] to move product," says Scott Smith, Cerulli associate director. "I'm not saying this is what is happening with all commissioned advisers, but with a fee-based account, you don't have that worry because they get paid either way."

Broker-dealers and wirehouses say only 13% of their clients have a fiduciary-only, or strictly fee-based investment adviser, relationship with them. In roughly 82% of the cases, the relationship involves a combination of a commission-based brokerage and fee-based advisory service -- which means the fiduciary standard applies only part of the time and only to the work performed under the fee arrangement.

Commissions Vs. Fees: Investors Are Split

That may soon change. The Securities and Exchange Commission is weighing the implementation of new requirements designed to apply a uniform fiduciary standard to both broker-dealers and fee-based financial advisers, under the Dodd-Frank Wall Street Reform and Consumer Protection Act. And, according to a Bloomberg report, the SEC is expected to propose a new rule standard regarding uniform fiduciary duties during the second half of this year. That SEC proposal, the report notes, is expected to continue to allow broker-dealers the freedom to receive commissions.

The survey found that despite the potential conflict of interest that can arise with commission-based compensation, nearly half of investors prefer it over paying asset-based fees to financial advisers. Nearly half of survey respondents, 47%, say they prefer paying commissions, while 43% said they would opt for fee-only financial advice. A small slice of 8% of survey respondents said they would want a mix of commission and fee-based services.

"Paying fees in perpetuity seems less attractive, but investors don't consider the services that go into a fee-based arrangement," says Smith. "A commission account may cost them 5% up front, versus a 1% fee that they may pay every year or two, or three or five years. And if the investor is reallocating their account every couple years, they may actually break even compared with a commission account."

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So do you have problems with brokers/advisors getting paid for advice, or problems with them not explaining how they get paid? If its the latter, then i am in agreement. If its the former, then you are simply railing against someone for making a living by helping others. Of course there are examples of bad advisors giving bad advice, just like there are bad doctors, accountants, engineers and teachers.
I tell all of my clients how I get paid upfront. I don't just call to sell them the latest greatest item, i take the time to explain how an appropriate product or service can help them obtain their goals. I hold hands during times where the client might want to sell all and hide under the bed. I also help keep them in check when they want to place everything they have in one investment or another.
I help them educate their children about the importance of saving, i help business owners figure out how to make ends meet and stay liquid during good and bad times. I also help in times of grief and sorrow, when it can be easy to make a decision that could have lasting impact.
Most of all, I give my time to clients as they require it. I give back to my community with effort as well as funds. I admire all of my hard working clients that saved and scraped together a decent living, and I am proud to have shared the experiance along side them.
If you have had a bad experience, seek to make it right. If you prefer to have an advisor, know that there are great adisors who will help....and yes, this is how we make our living, so it can't be free. Best wishes to you and your families.

June 12 2011 at 10:01 PM Report abuse rate up rate down Reply
LEE Resolution

If you need someone to advise you on how to manage your money (or invest it), you're better off staying out of the 'game' and keeping your funds where they belong. In your bank...

June 12 2011 at 4:24 PM Report abuse rate up rate down Reply
Hey Scott :)


June 12 2011 at 3:21 PM Report abuse rate up rate down Reply

As the son in law of a party effected by this dilemma I will ask the SEC to implement stricter standards in a Financial Advisor fee basis. It began with a Financial Advisor that worked with the Investment Division of a Regional Bank. The sister of my Mother in Law who worked as a retail clerk for 43 years but fastidiously put money into what she called her Company's Profit Sharing Plan and later as a 401K. She had to retire at 76 years of age because of Macular Degeneration and was sold a Hartford "Outlook" Annuity by the Advisor. He put on her profile as her Investment Risk Tolerance as moderate instead of Conservative because of her age. I seem to remember that the average life expectancy for a female in the US is approimately 81 years. This was predatory Investment marketing at its best. Hartford's Prospectus states that the clients monies are put into "subaccounts". What it did not say was the information buried deep in the abstract of the vehicle presented to the Conneticut State Legislature and approved as a worthwhile Investment that the monies "became Hartford's Property." This let the Investment Advisor's sell mutual funds into the Annuity without consulting the client. We have filed the appropriate complaints with the DOJ and the SEC.

June 12 2011 at 3:09 PM Report abuse rate up rate down Reply

As a retired financial advisor I can tell you the biggest problem I faced on a daily basis was the dilemma of making a high commission or doing what's best for the customer. I like to think more often than not, I did the right thing. The problem was the pay plan....If I sold a tax free insured muni bond, which is very safe, my commission was very small, maybe 30 basis points. If I sold a BBB rated revenue bond from Peru I could make 300 basis points ( 3% ). I have to tell you, at the end of the month, needing a few extra dollars to make my bonus, the devil was always tugging at my shirtails!!!!!!!

June 12 2011 at 2:30 PM Report abuse -1 rate up rate down Reply

How to avoid credit card traps:

Don't apply for one; don't use the one the banks send you unsolicited through the mail; cut up the ones you have and pay them off.

June 12 2011 at 1:40 AM Report abuse -1 rate up rate down Reply
1 reply to JoanneVLavender's comment

Get the 1% cash back but pay them off in full.

June 12 2011 at 2:17 AM Report abuse -1 rate up rate down Reply

Dodd-Frank Wall Street Reform? After the bang up job done on Freddie and Fanny? Be afraid.

June 11 2011 at 7:36 AM Report abuse +2 rate up rate down Reply

If you're investing in mutual funds, find out if they are load or no load funds, class A or B etc. That will give you a clue as to how your advisor is getting paid. "Advisors" who set you up only in loaded funds are generally only in it for the commission!

June 10 2011 at 9:12 PM Report abuse rate up rate down Reply
Dean Parisian

Over the last decade as an arbitrator for both the New York Stock Exchange and the NASD I’ve had plenty of opportunity to look into the bowels of Wall Street brokerage firms. It’s not pretty. Every year I become more afraid for investors who don’t have the training to understand how brokerage firms operate. A stockbroker’s first worry is about generating income for themselves, before worrying about your results. If they don’t, they lose their job even if market conditions warrant doing nothing with your portfolio. Also, your stockbroker’s fancy title is not awarded for achieving great results for clients’, it is for generating big fees and commissions to his employer no matter how well your portfolio performed. A question I continually ask prospective clients’ of our firm, after being in the investment business for 25 years is, “do you think it is responsible to trust your retirement and life savings to a salesman rather than an investment management firm?

June 10 2011 at 9:01 PM Report abuse rate up rate down Reply
Dean Parisian

Don’t kid yourself. Beware the wolf in sheep’s clothing. Maybe you don’t know it, but your stockbroker or bank broker is a broker-salesman. Their first worry is their income, not your outcome. Sometimes, they go by the title of financial consultant, financial adviser or financial planner. Many of these sound quite similar to “investment advisor”, but there is a huge difference. Investment management firms which are Registered Investment Advisors, have a fiduciary duty to their clients. That means they have a legal obligation to place their clients interests ahead of their own, and to clearly identify all sources of compensation and any potential conflicts of interest. Brokers sell investments that generate huge fees and commissions and typically have an agenda other than your financial welfare. FINRA makes it very clear; investors should never let their guard down with brokers who have a sales agenda. Do you really want to trust your serious money and retirement to a salesman?

June 10 2011 at 8:59 PM Report abuse +2 rate up rate down Reply