Aren't you glad your doctor is not paid on commission?

Nov 24, 2020

Is your doctor getting paid on commission? Nope. Is your financial advisor? Maybe

There is an odd dynamic that exists in the financial advisory business. Someone with the title of ‘financial advisor’ can be paid on commission, meaning, they might be compensated based on the type and quantity of the products they sell you. That doesn’t sound like an ‘advisor’ does it? It sounds more like a financial salesman to me. To make things more confusing to the consumer, there are financial advisors who are in fact paid for their advice alone and not paid on commission.

Is this commission based compensation model a problem for consumers? Oh yes.

Imagine being in the emergency room and hearing that your doctor is paid on commission. He gets compensated by various medical companies based on the number of products he sells to you. These products may include a stint, heart transplant, or a pacemaker. Are you confident he is going to be completely objective when his compensation structure is tailored around product sales? I would not be. Thank goodness that sort of activity in the medical profession is outlawed.*

You should be equally cautious with your financial health.

In the financial services arena, those sort of conflicts of interest occur all the time, but it is not as discernible to the customer. As a client, you want the best financial products for you, not what a salesman is pushing that day. Brand names can confuse us as well as titles that don’t seem to match up with the services provided. The title says ‘advisor’, the company is a big well known firm, so it must be good, right? I wouldn’t be so sure. I will teach you the magic word that will help you determine who actually works for you. That word is fiduciary.That magic word will clear up a bit of confusion, although not all of it, to do that you need to read "the books."

The takeaway:

Are you currently working with a fee-only financial advisor that is free of conflicts? Ask your current or future financial advisor if they are a ‘fiduciary’. If they don’t quickly answer yes, find a new one, fast.

I’ll save you the suspense, yes, I am a fiduciary :) In short, this means I am required to put my clients’ interests first. Sounds like common sense to me.

*The medical profession is not immune from the temptation to not put the patient first. Despite the clear rules regarding putting the patient first, doctors can stumble terribly in this area.

Thanks for reading! Can RHF help further guide your investing?