Do You Know the Difference Between an Advisor and a Salesperson? You Should.
(Here’s a hint: you can’t tell based on their job title).
In the financial world, everyone calls themselves an advisor but no one ever calls themselves a salesperson. Sales is an honorable profession. People need to buy things and salespeople make that happen, and when a sale is made, a salesperson typically receives a commission. In most industries this is clearly defined. But in the financial industry the lines can be a bit blurry.
The main difference between a true financial advisor and a salesperson is who they work for. A financial advisor works for you. A salesperson works for someone else.
If an advisor generates their income from commissions – the fees their clients pay each time they make an investment transaction, they are a salesperson. In this type of situation, it is in the best interest of both the advisor and the firm they work for to generate revenue through transactions. It is not in your best interest.
The biggest problem with a commission structure is that advisors are rewarded for encouraging their clients to make more and more transactions. The personal interest of the advisor is different than the interest of the client. Have you ever heard the phrase “churning?” It is the unethical practice of excessively buying and selling securities to create commissions from transaction fees. This is clearly not in the best interest of the client.
Thank goodness the occurrences of “churning” are not widespread. What is common though, are the fees that are glossed over, such as new issue closed-end funds, mutual fund loads, sales loads on REITs, BDCs, and insurance products. These fees can be large and most people are unaware of what they are paying. If you hear answers to your fee questions such as, “100% of your money goes to work for you” or “the product company pays my fee” or “the insurance company pays me out of their fees,” you should be sure to read the fine print. One way or another, you pay, and your advisor is selling you a product and earning a commission.
In comparison, financial advisors that use an asset-based fee, flat fee or hourly rate can provide advice that is not motivated by transactions, commissions or selling specific products. They make investment decisions and recommendations based on what is in your best interest.
These types of fees-based compensation structures allow financial advisors to earn a living while providing services that puts their clients’ best interests first. Advisors that are hourly fee-based or asset fee-based allow investors and clients access to their professional expertise while remaining independent from commission-based advice. What clients pay for is the advice they receive.
One final comment on fees and commissions: like everything else in life, no one answer is the best for every situation. Although we believe an advice-based practice is in the best interest of most individual investors, it is not the best choice for everyone. If you still have questions, let’s talk. Together we’ll determine if we are the right financial advisor for your needs.
Sound Advice Financial does not earn commissions on anything so you can be assured that our goal is to be a trusted financial advisor – not a salesperson. We help you plan well so you can live well, and we’ll never charge you a commission.