Try as they might to deny it, financial advisors must face the fact that the industry’s prevailing compensation structures are hurting, not helping, their ascent to professional status.
The sales commission system works well for financial services firms because it gives them leverage over advisors. Both manufacturers and dealers can use commission rates to drive advisors in whatever direction they desire.
Advisors may genuinely believe that they are independent and always act only in the best interests of their clients, but there is plenty of evidence against them. Somehow, new products of dubious value rapidly manage to attract millions of client dollars. And billions in assets crowd into overpriced, underperforming funds while low-cost alternatives remain underutilized.
Advisors’ intentions may be good and their hearts pure, but the fact is that financial incentives work. To date, regulators have been reluctant to interfere with compensation structures, although they did recognize the perverting effect of financial incentives on advice when they crafted the mutual fund sales practices rule. And their own research found that advisor compensation sometimes overrides clients’ best interests in asset-allocation decisions. Yet regulators have been content to rely on disclosure — which they concede isn’t particularly effective — to protect clients.
Even then, firms have resisted enhanced disclosure, arguing that clients really don’t want to hear about it. All of this works fine for firms: it allows them to retain a powerful lever over advisors, and it conditions clients to believe that advice is free (read: worthless). But for clients and advisors, the outcome is less appealing.
Advisors remain shackled to a system that rewards quantity over quality. More important, clients can’t be assured of receiving the unbiased advice they need. And they are the ones who will suffer when they realize they have squandered precious savings on expensive products, overpaid for worthless guarantees or languished in underperforming funds for far too long.
Abandoning commissions won’t solve everything. But a more progressive approach to compensation would at least eliminate inherent bias, mute the influence of firms over the client/advi-sor relationship and allow both sides to put a value on advice.
Current commission structure hurts professionalism
- By: IE Staff
- July 31, 2007 October 29, 2019
- 11:58
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