Asking the Tough Questions about Advisor Compensation
Monday, July 16, 2012 at 8:00AM | Troy W. Wyman, CFP® 
There is one question you should not be afraid to ask your advisor: How will you be compensated? It’s a simple and fair question. Sadly, it’s usually avoided.
Why is it so important? You may be surprised that HOW MUCH you pay your advisor can be less important than HOW. The HOW comes in two primary forms: FEES and COMMISSION. I’m not writing to debate which option is best; both have merits. However, commission-based products can be the most difficult to understand from a cost perspective.
The fees that pertain to commission-based products can be confusing when you’re trying to determine the overall cost of an advisor’s compensation. For example, an annuity may have no upfront cost, but higher internal expenses that can add up significantly over time. The additional expenses may help the insurance company to pay your advisor. That said, it is important to understand the distinction between how much you paid versus how much your advisor was paid.
What information are you entitled? The CFP Board states that the client is entitled to, “an accurate and understandable description of compensation arrangements being offered.” Any person offering investment advice for professional compensation should be more than willing to patiently describe the services you can expect to receive and how they are compensated. This discussion will provide valuable insight into the ongoing service and relationship you might expect. If you ever sense any hesitation, my advice would be to head for the door!
Advisory fees are in addition to the internal expenses charged by mutual funds and other investment company securities. To the extent that clients intend to hold these securities, the internal expenses should be included when evaluating the costs of a fee-based account. Clients should periodically re-evaluate whether the use of an asset-based fee continues to be appropriate in servicing their needs. A list of additional considerations, as well as the fee schedule, is available in the firm’s Form ADV Part II as well as the client agreement.
