By Travis Maus, AIFA®
When it comes to financial advice, the way advisors are compensated can shape not only the recommendations you receive but also the quality of your long-term relationship with your advisor. Let’s break down commission structures, how they work, and why they matter so much for your financial well-being.
What Are Commission Structures?
Commission structures are compensation models where financial advisors, agents, or salespeople earn money by selling financial products – like annuities, mutual funds, or insurance policies. The commission is typically paid upfront, sometimes spread out over several years, and is often tied to the specific product being sold. For example, you might buy an annuity and pay a base fee annually, plus extra for features like a death benefit. These fees are what fund the advisor’s commission, and they can stack up quickly, especially if you’re not aware of all the charges involved. It is not uncommon to see all in fees of 3% or more per year.
How Commissions Influence Advisor Behavior
There’s fluff and then there’s reality. We’re about reality and no matter what you think of dealing with a salesperson, commission-based compensation creates a fundamental conflict of interest. Do you really want to do business with someone who is incentivized to sell products that pay them the most, not necessarily those that are best for you. Once the sale is made and the commission is paid, there is very little financial motivation to continue servicing an account or ensuring your investment performs well.
Some advisors will spin the story, claiming that commissions motivate them to work harder for you. But in practice, the commission is a one-time payment, and the advisor’s engagement often ends once the sale is complete. If you’re told that commissions keep your advisor invested in your success, be skeptical. The reality is, after the upfront payment, there’s little incentive for ongoing support unless another sale is involved.
The Problem of Churning and Partial Advice
Churning is a term used when advisors repeatedly sell new products to clients just to earn more commissions, often with no real investment purpose. This practice is especially common with annuities and other structured products. Small investors are particularly vulnerable, as they may stay small forever due to excessive fees and poor investment performance caused by constant product turnover.
It is even possible that your commission based advisor doesn’t even have the required registrations to give comprehensive advice. Many are simply salespeople with minimal training, selling products like indexed annuities that don’t even qualify as securities. They may not be required to act as fiduciaries, meaning they aren’t legally obligated to put your interests first. This is a critical distinction. True financial advice is unbiased and focused on your needs, not the advisor’s compensation.
Fee-Only vs. Commission-Based Advisors
Fee-only advisors are paid solely by you, the client, for things like advice, plan implementation, and ongoing asset management. They are fiduciaries, required to act in your best interest and avoid, or minimize when unavoidable, conflicts of interest. In contrast, commission-based advisors can earn money from both you and the products they sell, creating significant conflict. If you want unbiased advice, seek out fee-only advisors who are transparent about their compensation and committed to your financial outcomes.
Protecting Your Financial Future
Commission structures can create hidden costs and conflicts that undermine your financial goals. By understanding how advisors are paid and choosing a fee-only, fiduciary advisor, you can protect yourself from sales-driven advice and ensure your needs always come first. Your money, your life. Make sure your advisor is working for you, not for their next commission.
This material is for educational purposes only. It is important to seek the guidance of a licensed financial professional before making any investment or financial decisions.