Is your financial professional an advisor or a salesperson?

Doug Horn

Financial professionals like any other profession are in the business to earn a living. It is unfortunate the compensation structure in this industry often leaves clients questioning the recommendations they receive. Whenever there are commissions involved, a question could arise as to the integrity of the advice or recommendation.

Morgan Stanley recently released 300 financial advisors from their very large base of professionals. While that move should not necessarily be worrisome, it does raise some questions once you know the reasoning. Morgan Stanley stated they released these professionals due to low production and may release additional advisors in the coming months as reported June 9, by Janet Levaux with “Advisor One.”

For many firms, the financial professional faces production requirements. Clearly, if those numbers are not met, the professional faces termination. With this in mind, it can become difficult to know whether the recommendations made are in the client’s best interest or for the benefit of the advisor.

There are a number of ways investors can protect themselves and yet still work with financial professionals. First, investors should understand how the advisor will be compensated and by whom. This is often based upon the licenses the advisor holds. If the advisor only holds insurance or security licenses, then they are compensated only by commission. Thus, a transaction must occur before the advisor has any earnings. Asking the advisor if they are subject to production requirements may have some value, but understand there are thousands of representatives whose normal business volume may be well beyond any requirements they may have.

There are also advisors which hold state of federal registrations which permit them to earn a fee rather than commissions. This approach is often thought to be more consultative, but it can also have concerns. If fees are being paid for asset management, this approach can be beneficial but only when the advisor is truly managing those assets. In my opinion, this can become an issue when Class C mutual funds are used for long term investments, lasting longer than four years.

Class C mutual funds do not pay an upfront commission, but instead have higher annual expenses of which a significant portion is paid to the advisor for management. This creates an annual income stream for the advisor and if misused, the client may not see a benefit for the additional cost. For me, management of assets can work well when there are little or no restrictions placed on the assets when moving them from one investment to another. In the case of Class C shares, they cannot be sold within a year of purchase without incurring a surrender fee except when exchanged for another fund within the same fund family, and each time they are sold and moved to a different mutual fund family, the one year surrender fee starts over.

For long term investing, Class A shares, while incurring the upfront commission, have a lower annual cost and if held for typically longer than four years they can provide greater returns to shareholders than their Class C counterparts. We recommend the use of Class C shares when the holding period is expected to be less than four years, but longer than one year.

In addition to understanding the fee structure of your advisor, it is also beneficial to know your advisor. Taking time to get to know them is important since they are managing or assisting on such an important asset. Also, by sharing your investment strategy, buy and hold, active management or some other method, you are helping the advisor recommend the appropriate service.

For assistance with portfolio allocations, insurance, estate planning, or investment management contact me at Quality Financial Concepts or one of the other Certified Financial Planners in our area. To continue a personal quest for education, you can also view our learning center on our website, There you will find articles on a variety of topics, on-line seminars, calculators, as well as a host of other free tools.

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