Commissions: Conflict of Interest?

Although I advocate a recurring revenue business model for financial advisors, I've never believed that earning commissions are inherently unethical. Yet some fee-only advisors and industry leaders argue that commissions create a conflict of interest and anyone who accepts them is suspect. I think this is a self-righteous posture at best and a self-promoting lie at worst.

It's ridiculous to suggest that the type of compensation received is the only thing that separates the honest, do-what's-right-for-the-client advisor from the mercenary, gimme-what's-mine financial products salesperson. Let's face facts: both mentalities co-exist with both kinds of compensation. Commissions do not breed criminals; neither do fees ensure integrity.

Recently, I had the pleasure of giving a presentation at a big-name industry conference that tends to attract a lot of fee-only advisors. The top producers and keynote speakers had dinner together, with one keynote speaker at each table of top producers. I like going to these dinners because I get to be attuned to my audience before I address them. I listened to the discussion at my table, without saying anything, through the salad and soup.

The conversation centered on this issue of fees versus commissions, and some fee-only advisors felt pretty strongly that commissions are unethical and that planners taking them are dishonest. I let all this sink in, then I looked around at them and made my first comment of the evening: "I wonder why some of you are so uncomfortable with your own integrity that you think how you get paid would threaten it."

They looked at me, slightly stunned, and asked, "What do you mean?"

I answered, "Well, it's interesting that you seem to think that if you got paid any commissions, rather than fees only, you would somehow do the wrong thing. Are you telling me you charge a fee because if you didn't, you would give in to the temptation to screw the client?"

That got things cooking at my table.

At first, these financial planners were a bit defensive, reiterating their belief that commissions have a built-in conflict of interest. I asked, "So if fee-only compensation became illegal, and the only way you could get compensated was by commission or some combination of fees and commissions, are you telling me you think your ethics would evaporate? That suddenly you wouldn't do the right thing for the client any more? Are you saying that the boundaries of compensation are all that keep you ethical?"

I looked around the table. "Susan, if you suddenly were paid by commission, not as you are now, would you still do the right thing for the client?"
"Of course I would."
"John?"
"Of course."

So it became apparent to them that the issue isn't compensation, but whether you have the ability to put the client first no matter what.

Is there a question of integrity at all, then? Only if you're twisting the competition's legal, legitimate compensation into something sinister just to make yourself look good. You shouldn't use your method of payment as a marketing tactic, or preach that everyone else lacks integrity because they operate with a different model.

Although it's not an ethical issue, it is true that the fee-based business model is usually superior to commission and fee-only, because advisors in such a business have a finite number of clients who generate a predictable minimum annual recurring revenue (PMARR). These advisors can earn fees for planning, advice and managing assets, as well as commissions on products. My point: fee-based businesses are not superior because they prevent advisors from impropriety. It's because they help advisors limit the client list to a reasonable number, so everyone gets better service. The higher the amounts of predictable recurring revenue, the fewer clients the advisor needs—he or she can work toward what I call Being Done™, which means that the marketing machine stops when the advisor has established relationships with enough people to provide sufficient PMARR to meet the advisors business goals. Once an advisor is 'done,' clients get even more personal attention because the advisor has no more prospecting to do, and the advisor has more time for continuing education and growth, which benefits the clients again when the advisor applies increased knowledge to managing their money. Fees are not necessarily the moral high road, yet they might support a better business model, one that ensures clients get the best from their advisors. It's also likely that the fee-based model is easier for clients to understand.

The challenge with the commission-based business model is that it doesn't work long-term because you have to continue adding client after client until serving them all becomes difficult or impossible. Earning commissions may be a less-than-optimal business model for financial advisors, but it does not intrinsically lack integrity.

To me, ethics and integrity are about client-first service, not compensation. If someone lacks ethics or integrity, changing the way that person gets compensated isn't going to fix them.

The most important aspect of being an advisor is taking care of the client. There are a lot of advisors out there, in all business models, who are doing this. And there are advisors out there, in all business models, who should not be in the business at all. Your job is simply to be in the former category: Put the client first, and your ethics will never be called into question, regardless of how you choose to be paid.

Don't be a salesperson. Be a Trusted Advisor.

© 2003 by Bill Bachrach, Bachrach & Associates, Inc. All Rights Reserved.
Bill Bachrach is the creator of Values-Based Financial Planning®. He has authored 4 industry best-sellers, delivered over 2,000 presentations worldwide, and is considered to be the leading authority on how financial advisors can avoid being salespeople and instead acquire better clients and serve them by being Trusted Advisors. For more ideas and articles on how to be a Trusted Advisor go to www.billbachrach.com where you can watch streaming video of Bill's presentations and register to get your FREE monthly Trusted Financial Advisor e-newsletter, or call 800-347-3707 for more information.