From the outset of this series, it was made clear that the purpose of delving into the commission grid was not to simply provide ammunition with which to chastise the industry, but rather to provide the consumer with insight to the particular conflict of interests in the financial services as it stands today.
Remember, most industries are subject to conflicts of interest. This does not mean that every member of every industry cannot rise above apparent conflicts. There are many trustworthy financial advisers working in each model of remuneration that provide outstanding value and transparency to their clients. Unfortunately, there are also a handful of advisers that do not.
From the outside looking in, it would seem that all financial advisers walk and talk the same. Of course, now we know that in reality there are vast differences behind the scenes. Sales quotas, product offering availability, compensation models and more are all factors that every adviser grapples with at some point in their career.
Sometimes an adviser chooses to work under a certain firm because of the firm’s reputation, ability to provide research, or other resources made available to the adviser.
In other cases, the compensation model is a larger factor. Every adviser is different, but they all have their reasons for being where they are.
The commission grids at the big bank brokerages are clearly designed to modify behaviour, so it is here that a client needs to be most aware of the conflicts. There are incentives for the adviser to gather assets, increase the amount of commissions per client, and in some cases, incentives to generate additional transactions towards the end of the commission year. These multi-dimensional grids (payouts based on a combination of gross annual production and individual transaction commissions) exist to a lesser extent with non-bank owned brokerages as well.
Flat grids and 100% payout grids still incentivize the gathering of assets, but with much less behaviour modification exerting effects of the more complex grids structures. The product and service offering also differs from the big banks in most cases.
In the end, good financial advisers will be happy to discuss their compensation details with you. A far greater determinant of a good relationship with a financial adviser is not how or what they are paid, but rather, the candour they provide to you about it.
Related resources
I couldn’t agree more, Preet. Ultimately, the quality of a person’s character and candour are what you hope can win over. Someone honest dealing with your money is highly desirable – policies, codes of conduct and even laws can only protect you so far. We have seen painful examples of this in recent years.
When it comes down to it, misaligned incentives are a huge issue impacting the ability of brokers and other types of advisers from getting you the best returns. Even the simple, long-standing model of paying commissions for trades causes a bias towards greater activity – even if a broker is not consciously trying to misguide an investor, just having such a financial incentive is often too much to overcome and it can subconsciously creep into the advice. In my opinion, there are also two other things keeping a broker from smart investing on your behalf: lack of time, and having “no skin in the game”. Having too many clients can also cause a broker to not provide enough of a tailored, quality service, especially to smaller investors – hard to be aligned if they do not know what you need. And, where typical incentive models do not reward brokers for clients portfolio gains, as well as punish for losses, then it is further more difficult to align ones actions.
In my opinion, every financial adviser should have an incentive system that aligns with the client’s portfolio goals. Preferably, this would mean that the client could choose how their broker/adviser gets rewarded up front, to assure the best alignment. Not “how much”, but just the method of incentives.
Thanks for bringing up the importance of incentives, Preet.
James
Hi James, thanks for your comment. You make great points about time and skin in the game. Two other very important factors indeed.