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What are the advantages of using a commission based financial advisor?

Jan 04, 2012 by BrightScope from San Diego, CA in  |  Flag
13 Answers  |  15 Followers
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11 votes

Some people might say that if you have a small amount of assets or if you are a buy and hold type of investor you might be better off with a commission based representative. I can only tell you that when I left the commission world and became a fee based advisor I had never felt so liberated in my life. I am free from the need to sell anything. I am a consultant not a salesman. Before I could say I am being fair now I can prove it in writing. In my opinion use a fee based advisor. They are the most objective and you will not have to worry ever again if your advisor has some hidden agenda.

1 Comment   |  Flag   |  Mar 17, 2012 from Loveland, OH
Gary Ray Duell

This industry has gone 'round and 'round in its pursuit, and refutation of, the myth that the way someone gets paid determines their level of honesty. It doesn't. So-call "fee-based" and even "fee only" advisers can still steal your money.
I sell advice as well as product and I see little difference between the two since I am a legal fiduciary. I already exercise BICE. Unless you are in the product sphere it is very difficult to keep up with the latest innovations. I am also biased toward action. The greatest plan not executed is still no plan. In many cases, insurance products are the best options. If not, I don't recommend them.
So I think the advantage of commission based advisers is that they are biased in favor of action. Having said that, I am wary of registered reps or captive insurance agents who claim to be unbiased fiduciaries.

Flag |  Jun 10, 2016

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9 votes

As Evan said, for a one time deal, it might make sense, but in that case, I'd probably look at using one of the discount brokers rather than someone trying to sell you an idea.

I recently had a reader of my blog, ask "Is There Such A Thing As A Good Stockbroker?" And I answered with this post.

http://iheartwallstreet.com/2012/04/20/reader-question-is-there-such-a-thing-as-a-good-stockbroker/

Comment   |  Flag   |  Apr 27, 2012 from Manhattan Beach, CA

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8 votes

Fifteen years ago there were advantages to working with a premier wirehouse in a commission-based relationship: access to products and services, liquidity, reporting, and support. Today the playing field has become level, and fee-only advisors generally have access to better investment products at a lower cost than wirehouse firms. Moreover, whatever supposed benefits may have existed with the commission model, the inherent conflicts of interest are insurmountable. Warren Buffet captured this truth in one of his many aphorisms: "Never ask a barber if you need a haircut."

Comment   |  Flag   |  Mar 17, 2012 from San Francisco, CA

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6 votes

Dan, If you are looking for isolated, one time, transaction based advice, it might make sense to use a commission based advisor to obtain and execute an idea. If, however, you are seeking a long term relationship with an objective advisor that you will meet and plan with on a regular basis, the commission model can't work because the only way the advisor is compensated is through changing your investments, which often is not in your best interest. In this case I would seek out an RIA who charges only fee's: either hourly or as a % of the assets he/she is supervising on your behalf. Best of luck!

Comment   |  Flag   |  Apr 27, 2012 from Port Washington, NY

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4 votes

Hi Dan,

Do a search for an article written for the "Journal of Financial Planning." The title is "Who's the Fairest of Them All? A Comparative Analysis of Financial Advisor Compensation Models" by Robinson (20 no 5, May 2007). You may be able to find copies on-line.

The article compares several compensation models, one of which is the commission model. For each model, the author covers the advantages and disadvantages of each type of compensation.

View all 5 Comments   |  Flag   |  Mar 17, 2012 from Permanente, CA
Gary Ray Duell

I am a hybrid fee/commission adviser. To the extent a product recommendation ends up paying me a commission, I reduce or eliminate my fee. This model is most advantageous to the consumer versus one or the other. Better advice, lower costs, better integrated plan implementation.

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Flag |  Jun 11, 2016
Gary Ray Duell

Contrast that with the advisers who [still!] charge planning fees, accept commissions (AUM or otherwise) and collect performance fees to boot.

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Flag |  Jun 11, 2016

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3 votes

You have to differentiate between "Advisor" and "Product Rep." Some countries are forcing this to happen legally. You never need a commissioned based "advisor", you may need a commissioned "product rep". Specifically commissions make sense for transactional work. Namely, insurance. You still have to be careful who you go through, but if you need help making insurance decisions it will be a commission based professional and that is ok.

There is no reason to use a commission based advisor any more. It used to be true you could not access a decent fee only advisor unless you had a certain level of assets, but now there are plenty of ways to find a fee only advisor who works with smaller accounts. The Garret Planning Network is one way.

1 Comment   |  Flag   |  May 13, 2014 from Tulsa, OK
Gary Ray Duell

Except that some of the best products can be sold only by insurance licensed agents. That's why I charge fees and also accept commissions, with the commissions offsetting fees dollar for dollar.

Flag |  Jun 11, 2016

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2 votes

None. A commission based advisor may be driven to recommend what pays he/she the most rather than what is best for you. Fee based or Fee only advisor typically provide more unbiased advice.

1 Comment   |  Flag   |  Jan 05, 2012 from Boston, MA
Gary Ray Duell

Key word is "may". From what I've read posted by fee-only advisers they seem rather sanctimoniously biased against insurance products over all and more accepting of risk.

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2 votes

I don't see any advantage to using a commission based financial advisor as they could be motivated to promote certain products not based on their suitability for you but because they receive a better payout. They are also inclined to change your investments more frequently driving up your expenses and eating away at your returns. Fee only advisors on the other hand are not compensated on a product basis. They are compensated by a negotiated percentage of the assets managed so there is no motivation to create turnover in your portfolio just to increase their profits. In summary, a fee only advisors goals are much more aligned with their clients goals, i.e. increasing your asset base increases their compensation.

Comment   |  Flag   |  Feb 26, 2014 from Catawba, NC

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2 votes

The advantage would be to the advisor, not to you. The difference between a commissioned and fee-only advisor is the standard in which they are held accountable. The commissioned advisor only needs to fill out suitability form which in essence removes the advisors liability. The fee-only advisor must abide by the fiduciary rule which states "they must do what's in the clients best interest regardless of suitability". In other words commissions "client beware" responsibility is yours, with fee-only "advisor beware" responsibility falls on them.

1 Comment   |  Flag   |  Feb 28, 2014 from State College, PA
Gary Ray Duell

And hybrid advisers must adhere to a fiduciary standard regardless of which hat we're wearing. I do anyway. I don't need laws an regulations to tell me that the client's interests come first. If an adviser does need external pressure, he'll find away around it.

Flag |  Jun 11, 2016

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2 votes
Layton Jacob Cox Level 11

I don't see a situation where using a commission based advisor would make sense.

If you want to "set it and forget it" open an etrade or scotttrade account.

If you need advice because you have zero investment experience, open an account at a robo-advisor.

If you want planning and a personalized portfolio, go to an RIA.

Comment   |  Flag   |  Aug 28, 2014 from Tucson, AZ

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