On the surface, a broker and a fee-based adviser look exactly the same to most investors. In the investors mind the distance between the two is quite narrow, but in reality the structuring of their incentives are vastly different with significant implications. In a former post, “Ripped Off: Who is Paying Your Financial Advisor”, someone took issue with what I believed to be a fair assessment of industry practices. I appreciate all comments, agreeable or disagreeable, but I also realize sometimes the truth hurts.
How is your adviser being paid? To find out just ask some simple questions: Are you a fee-based or are you a commission-based adviser? Are you paid by me, the investor, or are you paid commissions by the mutual fund and annuity companies?
A fee-based arrangement does not guarantee profits or protection against losses, but the fee-based arrangement does a much better job of aligning both the investor’s and adviser’s goals. With the incentive to grow and protect the client’s assets, the fee-based arrangement places the adviser and client on the same side of the table.
This arrangement considerably reduces conflicts of interest; such as, “Is my adviser recommending this product to me because he will receive a larger commission on this product versus another equally suitable one that costs less?” In other words, there are no hidden agendas.
More financial advisors are leaving big Wall Street wirehouses to go to smaller firms or start their own firms. They have a number of reasons for making the change, but most say they are fed-up with continuous headlines that document company scams and deceptive sales practices. They can’t change their firms’ business practices so their only choice is to change firms.