The Pros and Cons of Financial Advisers Paid in Commissions, Fees and Hourly Rates: Part 1
When looking for a financial adviser, look at how they are paid. That can determine how they select investments for you, and whether they are required to work in your best interest or not.
Financial advisors may be employees, independent contractors or self-employed. Many work for a bank, insurance company, brokerage or mutual fund company. Independent contractors can be also affiliated with any of these types of companies. Many financial advisers are self-employed and may or may not be affiliated with a broker/dealer or insurance company.
Why It Matters
It's important to consider two factors with regard to employment arrangements:
- First, someone who is an employee or an independent contractor owes a duty of loyalty to their employer. There may be a potential conflict between what the employer requires of this adviser and what you are looking for from them.
- Another consideration is the support staff a prospective adviser may have at their disposal. Working with an adviser who is part of a larger firm may mean that if your adviser is not available, you can work with someone else in their firm. Unfortunately, sometimes the adviser delegates responsibilities and contact with their clients to a junior associate. That may or may not be a good thing, and you'll want to find out when interviewing financial advisers if you will be working directly with that individual, their support staff, or combination of the two.
The Self-Employed Adviser
Many people are attracted to working with a self-employed financial adviser because the relationship is with that adviser and not with the firm.
However, will the self-employed adviser have the depth of resources available that would be available to an adviser who is part of a larger firm? These are all important considerations in selecting the right person for you.
Look at What Services are Offered
Most financial advisors are looking for clients who will provide them with continual and ongoing income. However, you may not be in need of continual and ongoing financial advice. So it's very important to inquire about the type and scope of services available.
Look at Compensation
This is the only vocation I can think of that is partially defined by how the adviser is compensated. There are three primary compensation structures and I’m going to discuss all three and the pros and cons of each; one here and the other two in Part 2 of The Pros and Cons of Financial Advisers Paid in Commissions, Fees and Hourly Rates:
Many providers of financial services are compensated strictly by commissions they generate selling certain investments or insurance products. For instance, an Allstate agent who provides auto and homeowners coverage is paid solely on commission.
The advantage of this type of compensation is that you will pay less out of pocket. The disadvantage is that you don’t really know why a product has been selected for you: is it the best product for your situation, or does it offer the adviser the best commission?
This type of adviser is not a fiduciary; that is, they are not required to work in your best interest.
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