Commission Versus Fee
You Need To Understand
Many questions about investing can be answered simply by understanding the financial services business and the advisors that the industry creates. The following two pages outline key differences between two types of advisors.
Are you a customer that is sold investment products or are you a client in a managed investment relationship?
Has your money just been invested or has it been invested and is being managed?
Are you working with a sales person who knows facts and figures or an educated advisor who is dedicated to understanding how money works?
These are crucial questions to consider. I hope that the next few pages help create a better understanding of the financial services industry.
Not all commission advisors are ineffective and just out to make sales. This is not intended to say that all commission advisors are sales people with an advisor title. Just because an advisor works on a fee basis does not mean that they are managing your money. They could be no different than the commission based advisor and just investing it.
An advisor that is being paid fees should be doing something that earns those fees.
These two philosophies differ greatly. A buy and hold philosophy is based on investing your money and never moving it regardless of the stock market environment.
A money management philosophy is based on the fact that there are good markets and there are bad markets. It makes no sense to be invested in stocks when the risk is high. A money management philosophy constantly evaluates the investment strategy and makes appropriate changes based on risk and opportunity for growth.
The appropriate strategy is to invest the money and then manage it. Commission-based advisors just invest it. This is one of the key flaws with the financial services industry.
There is a huge difference between a qualified advisor and a sales person. The financial services profession is based on selling products. Thus they create sales people and not educated and trained advisors. Most advisors who make commissions just regurgitate what they learn in sales training from their home office. Most sales people form their beliefs based on this training without fully understanding the risks associated with the sales presentations that they are giving.
A money management system is based upon continual research and focuses on history of markets and economies. History tells us a lot about what is happening in the present. A money management system continually looks at the environment to determine the risk level. It works for the client to protect their investments and grow them. Money management is a pro-active system.
The commission-based advisor is busy making sales and bringing on new clients. There really is nothing to communicate because they are not managing your investments in a buy and hold environment.
A fee-based advisor must communicate with clients and keep them informed. It is their responsibility to communicate effectively to clients, keeping them informed of risks and opportunities and the reasons for changes in investment strategy.
The easiest investment philosophy to communicate to a potential client is that the market goes up over time, you should just invest in good quality stocks and that there will be ups and downs in the market. It is easy to train sales people on this message and easy for potential clients to grasp.
The problem is that investments do not always go up as easily as you are led to believe. History would indicate that investors could go through periods as much as twenty years in length where investments go virtually nowhere and, in a worst case scenario, lose money. This is hard to teach in sales school. Teaching this concept would require an advisor/sales person to learn how to manage money. By omitting this other side of the story, advisors only understand good markets. Since the fee-based advisor understands that there are two sides to investments, a bad market is looked upon as an opportunity to make money by investing in different types of investments.
Clients wonder why they never receive any communication from their commission based advisor. It is because the commission-based advisor is out making new sales, there is nothing to communicate because they are not managing your money, and the sale has already been made. Where is the incentive to communicate with the client?
The fee-based advisor has a vested interest. They have to continually create value for the fees that are being charged. It has to be a win/win relationship.
There is a reason the commission-based advisor does not make changes. They don’t manage the investments. As stated earlier, most are not trained and educated on what changes to make. In fact, money management is discouraged by the traditional financial services business. The industry is smart enough to realize what a nightmare it would be for salespeople to manage money.
A fee-based advisor manages the money and makes changes when needed. It is their job to take care of the investments for the client.
Commission-based advisors might use a software system and plot out some goals. However, they don’t manage to those goals or make sure that those goals are being met. Fee-based advisors manage clients’ money based on the goals of the client. Thus, it is a critical part of the process.
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