An investor asked this question on the Watchdog website today. He was told a financial advisor’s services were free because the advisor was paid by third parties. This is a false sales claim that is designed to make this investor believe he will get something for nothing.
First, the advisor is not an advisor if his only method of compensation is a commission. Real advisors are paid fees for their knowledge, advice, and services. Based on compensation, this “advisor” is really a sales rep masquerading as an advisor.
Second, the third parties are the advisor’s broker/dealer, mutual fund companies, annuity companies, and others. They pay commissions to sales representatives to motivate them to sell their products. Does this investor really want a sales rep investing his assets? I don’t think so.
Third, these companies mark-up their fees to investors to recover the commissions they paid the sales rep. Consequently, the rep’s sales recommendations are NOT FREE! In fact, this investor may pay inflated fees for the next several years because he thought the sales pitch was financial advice.
Fourth, if the investor bought annuities, there will penalties of 7% of asset value, for early withdrawal. This declining penalty may last seven years. The annuity company wants investors locked in until they recover their commissions.
Advisors who are compensated with commissions do not work for free! And, by the way, their “work” is selling investments to investors. Their licensing does not permit them to provide advice and ongoing financial services.