Should You Use a Commission Based Advisor?
September 25, 2014When it comes to getting advice with your money, are you suspicious of financial advisors? How can you find one that you trust? We received another question from our Ask a Planner campaign on Facebook last week asking “Is Edward Jones looking out for the best interest of clients? Is it best to rather use a fee based CFP®?”
I actually started my financial career at Edward Jones back in 2000 so let me share my personal experiences with you. I really enjoyed helping people with their finances but at the end of the day, it was a sales position. We were compensated primarily by selling investment and insurance products.
Not only that, but the firm focused on 7 “preferred” mutual fund families as if they were the only mutual funds that existed. We were trained to sell those funds and awarded special rewards and company-paid vacation trips for selling them. Selling other funds was frowned upon.
This all played a lot into my decision to leave. (After I left, Edward Jones later settled regulatory charges for steering investors towards those funds without disclosing that they were receiving hundreds of millions of dollars from those fund companies.) This is exactly the kind of conflict of interest that people are and should be concerned about.
But even if the firm did disclose the compensation or even if regular commissions were the only compensation received, there’s always an inherent bias from this business model. That’s because your financial advisor won’t be paid if you use your money towards something other than buying a fund they sell (called a “load fund”) such as adding to an emergency fund, contributing to your retirement plan at work, paying off debt, buying real estate, or investing in a fund that the advisor doesn’t sell (called a “no-load” fund). This doesn’t mean the advisor won’t recommend that you do those things but there is a strong incentive not to.
Don’t get me wrong. I’m not saying that commisioned advisors are bad people. Sometimes they literally don’t know any better because brokerage training programs mostly consists of understanding securities laws and how to sell the firm’s products and services rather than more comprehensive financial planning. When they do learn financial planning, it’s often used as a sales tool.
Advisors will also convince themselves that even if what they’re recommending isn’t in the client’s BEST interest, it still makes them better off than where they were before. There’s a lot of truth to that and many clients are better off working with a commissioned advisor than trying to do it themselves or not doing anything at all. More often than not, our worst enemy when it comes to our money is ourselves
Still, there are less biased ways to get investment advice. Next week, we’ll examine other types of advisors and what to look for in choosing one. In the meantime, feel free to leave your own thoughts about commission-based advisors in the comments section below.