TITLE

Who's the Fairest of Them All? A Comparative Analysis of Financial Advisor Compensation Models

AUTHOR(S)
Robinson, John H.
PUB. DATE
May 2007
SOURCE
Journal of Financial Planning;May2007, Vol. 20 Issue 5, p56
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
• There are three primary modes by which investors pay for financial advice: commissions, asset-based fees, and fiat fees. This paper examines the economic incentives at work in each and suggests that the debate over which model is "fairest" is flawed because all three models contain incentives that can lead to conflicts of interest and each may also represent an optimal choice for certain investor circumstances. • The recent trend away from commissions in favor of fee-only planning may not represent a best-practice model for the profession. Alternatively, the ideal compensation platform may be one that incorporates all three models. • While conflicts of interest in the commission model are seemingly obvious, data exist to suggest that the impact of these conflicts may be overstated and that the commission model may have a cost advantage for some investors. • A clear advantage of asset-based fees is that advisor compensation is tied to performance. Still, conflicts in this model may arise from inherent disincentives to recommend strategies that lead clients to reduce assets under management, even if such strategies are in the clients' best interests. • The flat-fee model is the only one that truly allows the client to pay for broad-based financial planning guidance that is not merely incidental to the investment plan. Nonetheless, shirking and over-billing are potential conflicts of interest that arise under this model. • There is little evidence to suggest that regulatory differences lead fee-based advisors to be either more qualified or to act more ethically than commission-based advisors; however, the fee-based models are clearly superior with respect to fiduciary disclosure requirements. It can be argued that regulatory inequality denigrates the commission model's credibility.
ACCESSION #
24957347

 

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