Follow the Money: How Your Financial Advisor Gets Paid Can Matter

Does Compensation Automatically Make Advice Unsuitable?

Professionals frequently have financial interests in the services they recommend. Lawyers charge fees. Investment professionals are paid. Insurance agents may receive commissions.

The existence of compensation does not by itself make advice unsuitable. But an investor should be able to understand in advance of all requests for instructions (and in advance of all trades):

• who pays the advisor;
• how much or how the compensation is calculated;
• whether different products compensate the advisor differently;
• whether the advisor earns more if you invest more money;
• whether borrowing to invest increases the advisor’s compensation; and
• whether the advisor has access to alternatives that may cost less.

Those questions can help identify incentives which may otherwise be invisible to the client.

Can Your Advisor Benefit From Keeping More Money Invested?

Consider debt. Sometimes paying down debt may form part of sensible financial planning. But if an advisor is compensated based upon the amount of money managed, reducing investments to repay debt could also reduce the advisor’s compensation. Similarly, borrowing money to invest can potentially increase the amount the advisor manages. That does not tell us whether either recommendation is right or wrong. It does tell us why the client’s interests and the advisor’s financial interests need to be considered separately. For example, borrowing to invest involves additional risk and may also create compensation conflicts when an advisor earns based upon assets being managed.

Does the Product Shelf Affect the Recommendation?

A second question is not just what did the advisor recommend? Ask: What was the advisor actually able to recommend? An advisor working within a particular product or licensing structure may not have every investment alternative available.

The investor may assume that the recommendation resulted from comparing the available universe of choices. That assumption may not always be justified.

The important issue is understanding the recommendation in context.

An advisor may recommend proprietary funds offered by their dealer or an affiliate. If the advisor can offer only proprietary funds, ask how the product range and compensation structure affected the recommendation, what alternatives were considered and why the investment fits your circumstances.

What Should You Ask About Fees and Commissions?

You do not need to be embarrassed about asking direct questions:

• How are you paid if I buy this?
• Would you be paid differently if you recommended something else?
• Are there less expensive alternatives?
• Can you recommend investments outside your firm’s own products?
• What happens to your compensation if I decide not to invest?
• Why is this product better for me than the alternatives?

A professional advisor should be able to discuss compensation and conflicts clearly.

Why Can Compensation Matter After a Loss?

Where an investor suffers a substantial loss, one question may be why a particular investment or strategy was recommended in the first place. Compensation records do not necessarily answer that question.

But they can be part of the evidence. The broader inquiry is whether the recommendation was based upon the client’s needs, circumstances and objectives, and whether important conflicts were appropriately addressed.

If you suffered a significant financial loss after receiving advice that you now question, the recommendation, compensation structure, KYC information and advisor’s records can be reviewed together.

For information about our services, see financial advisor misconduct.

You can also read about investment-loss recovery options.

Frequently Asked Questions