There are 3 basic models of advisor compensation in the financial services industry.
- Sales Commissions from product sales. Commissions, markups or surrender fees are not always disclosed and often vary from product to product, running as high as 10%. Broker incentives may exist to favor certain products. Some compensation may come from contests, promotions or favors from product wholesalers or sales managers.
- Fee-based – a fee for advice and often additional costs for commissions on product sales for implementation of that advice, especially for mutual funds, annuities and insurance
- Fee-only –at Cornerstone Investment Services, there is a $300 one-time setup fee per client and management fees ranging from 0.6% – 1.25% annually, depending on account size. These fees are the ONLY sources of advisor income and fees are fully disclosed.
Why is a fee-only relationship so important?
- Advisor compensation is for ongoing advice, service and management, not product sales
- Transparency – a confirmation or invoice is sent each quarter. No hidden fees or markups
- No hidden incentives like sales promotions, awards
- Eliminates conflict of interest arising when different investments vary greatly in how much they pay the advisor – I receive absolutely no compensation from products
- Removes advisor temptation to recommend more trades for more commissions
- Provides advisor incentive to keep taxes and any other costs as low as possible
- True no-load mutual funds can be bought
- No-load annuities are available with no commissions or surrender fees
- Any commissions on stocks are at low, discount broker rates
- Advisor business growth comes from account growth and referrals, not commissions