In “The Market for Financial Advice: An Audit Study” The authors share their findings that financial advisors who are paid on commission may color their recommendations to increase their compensation to the detriment of their clients. This is something that lead to the creation of the field of financial planning, that I played a small part of back in the eighties.
The original idea was that financial planners would be represent the client’s interests in executing a financial plan designed to achieve the client’s goals such as retirement, educating children, reducing taxes and preserving their estate for heirs and charitable beneficiaries. This was in opposition to the typical situation where a person seeking to secure their financial future was subjected to a series of unrelated salespeople including stock brokers, insurance agents and others.
The key to making financial planning deliver on its promise of representing the client’s interest was that the planners not be compensated by commission but by fee for services the same way attorneys and accountants typically were. Unfortunately once the big financial interests discovered the well rounded approach taken by financial planners they decided that this would be a perfect delivery system for selling lots of products from the ‘financial supermarkets’ they were constructing. As a consequence they muscled their way in to the financial planning organizations and made sure that their commissioned sales people could be called financial planners. Thus the beginning of the end of financial planning as a profession and of my time in that field.
Bottom line: If your ‘advisor’ is compensated in any other way than fee for service their ‘advice’ inevitably must be questioned as to who is really the beneficiary of said ‘advice’. To see the full report click here.