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Fee-Based vs. Commission Based Accounts: Financial Advisers’ Recommendations Change With the Market

The Wall Street Journal is reporting that financial advisors are turning back time and returning to the old ways of their business. As a result of economic downturn most client assets have diminished by 20%-50%, which produces a similar drop in the earnings of those advisors that are fee-based. 

Brokers are now moving their clients from fee-based accounts to a commission based fee account, in an effort to make up for fees lost in rough economic times.

Over the past several years, firms recommended fee-based accounts to their clients. In this scenario the broker would charge clients an annual fee of 1%-2% of their assets to manage the accounts, rather than charging small commissions for each trade.  The major firms would promote the fee-based model by providing brokers a higher payout where the business was fee-based.  Further, this model was touted as better for the clients because it was claimed it would prevent brokers from making unnecessary trades to make the commissions.

Interestingly, firms are now pushing the commission based accounts, which conflicts with prior recommendations, using the market conditions as a justification. Brokers are standing behind their new recommendations, arguing that they have to be able to make a living doing this and, thus, the commission based account will help them do just that.

Some brokers have dealt with the market change by including insurance products and/or other annuities that will allow them to bring in more fees.  Finally, some have resorted to the old fashioned way of making more money and that is by bringing in more clients to offset the business lost as a result of the market decline.

It is interesting that recommendations from your financial advisor can turn on how they can best make money.  Isn’t it the job of the advisor to be more concerned with protecting and growing the money of the client?  Is there a conflict that arises when the broker becomes more concerned with his financial well-being? Of course, the advisor should be compensated for his/her work, but whose financial portfolio comes first, the client’s or the advisor’s? 

To find out more information about potential financial advisor misconduct please visit the Investor Resource Center at www.dossfirm.com.