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Paying For Investment Advice

April 1, 2020

Investment advisors may be compensated in several ways.  In some cases, they charge clients a fee for their advice. Sometimes they earn commissions from the investment products their clients buy based upon that advice—life insurance is sold on commission, for example. Sometimes the advisor may earn both fees and commissions.

Trust departments and trust companies earn their bread by charging fees determined by the size of the accounts that they manage.  As the account grows larger, so does the fee; the advisor prospers when the client does.  Trust departments are fiduciaries; that is, under the law they must put the interest of their clients ahead of their own.

“Fee only” financial advisors have become a major category, but there is no legal or regulatory definition of that term.  Writing in The Wall Street Journal, Jason Zweig reported that many discrepancies have cropped up in this area (“ ‘Fee Only’ May Not Be Only Just Fees,” October 21-22, 2017).  Among his observations:

            • An investigation by The Wall Street Journal in 2013 revealed that up to 11% of certified financial planners at major brokerage firms who described themselves as “fee only” were also eligible to receive commissions.

            • A more recent analysis of Securities and Exchange Commission filings reveal that some firms inconsistently claimed to be “fee only” on some forms but receiving commissions on others.

            • Marketing materials for some financial advisory firms also were found to be inconsistent on this point.

Zweig recommended asking questions before hiring a financial planner.  Perhaps the most important would be “Does anybody else ever pay you to advise me and, if so, do you earn more to recommend certain products or services?”  In his view, a yes on that score would be a disqualifier.


© 2020 M.A. Co. All rights reserved.

Any developments occurring after February 1, 2020, are not reflected in this article.

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