Fee-based advisor or commission-based broker?
Category: Technology
Fee-based advisor or commission-based broker?

The financial advice industry has been changing very rapidly and especially in the last couple of years fueled by technology innovations, new and upcoming regulations, and growth in passive investment (ETFs), among others. With all these changes and more to come, one area that has been scrutinized recently is the fee and commission structure of the financial advice model. Thanks to the financial crisis of 2008, clients came asking why they were paying so much in so many fees and thus an industry debate developed and continues over the merits of fee-based versus commission-based advice.

Recently we have seen a pattern in the investment advice service sector to shift from the traditional commission-based business model, into the more stable fee-base model. Without a doubt management and stakeholders of an advisory firm favor the fee-based model as it brings a steady and predictable income streams. The great recession was a tough reminder that revenues can be very volatile for a commission-based business, especially when clients suddenly become passive investors as they are conquered by fear and uncertainty.

In addition, the fee-based model limits the conflict of interest a broker may have while selling investment products to the client. On this model the client is disclosed in details what he is expected to pay for the investment advice provided, whereas the traditional broker model commission and fees may remain undisclosed.

Nonetheless, some firms are still strong advocates of the commission-based model. Although a broker does not have the same fiduciary duty and suitability standards as the other structure, there still are many experienced and honest professionals who can deliver better returns on this strategy. Moreover, a fee-based advisor can overlook or miss opportunities as he may not feel financially incentivized to contact a client and propose a time sensitive investment. Remember, the more transactions a broker conducts, the more he would probably get paid.

In conclusion, this can become an endless debate with merits on both sides, but what we all can agree on is that no model is perfect or conflict-free, and one may fit certain type of client or entity while other may be more appropriate for another. Also, every day our industry is becoming more transparent as a result of new regulation and technology, therefore any model can be appropriate depending on your client profile. Ultimately it is the client’s obligations to find an honest and effective financial advisor.

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Fee-based advisor or commission-based broker?