Do You Know How Your Broker Gets Paid?

You’ve probably been taught not to ask people how much money they make. However, there’s an important distinction if you work with a financial advisor. Asking your advisor or broker how he or she gets paid is the most important question you can ask to ensure he or she will always act in your best interests.

Recently, the Financial Industry Regulatory Authority (FINRA) sent a proposal out for public comment that would require any firm recruiting brokers to provide the broker’s current clients with FINRA-prepared educational materials that include questions to ask their broker about their compensation. FINRA intends these materials to help investors to evaluate whether they should move with their current broker to the new firm. However, critics of FINRA’s efforts insist the current draft is not compelling enough to get investors to break the social taboo of talking about compensation.

This is particularly relevant given the great number of brokers changing firms — and the sometimes significant bonuses they receive to do so.  A broker may cite several reasons for changing firms including better service, research, etc. However, according to Forbes “the brokerage firm they work for provides little more than support services that are available from any employer.  The advisor can handle your investments equally well from just about any firm.  Think of it this way, if one firm were truly superior, they would not need to offer rich bonuses to recruit quality advisors.” Forbes shares that a top producing broker may receive as much as four times their annual compensation to switch firms. Ask your self one very simple question:  Do you believe your broker switched to serve you better or was he/she enticed by the bonus?

Whether you have questions about how your current advisor gets paid or are in the process of hiring an advisor for the first time, I suggest you visit NAPFA. There, you can read the Fiduciary Oath pasted below. Investors who can’t bring themselves to discuss compensation with their advisors can use the Fiduciary Oath to broach the subject of fees and spark a thorough, honest discussion.

Fiduciary Oath

The advisor shall exercise his/her best efforts to act in good faith and in the best interests of the client. The advisor shall provide written disclosure to the client prior to the engagement of the advisor, and thereafter throughout the term of the engagement, of any conflicts of interest, which will or reasonably may compromise the impartiality or independence of the advisor. The advisor, or any party in which the advisor has a financial interest, does not receive any compensation or other remuneration that is contingent on any client’s purchase or sale of a financial product. The advisor does not receive a fee or other compensation from another party based on the referral of a client or the client’s business.

What the Fiduciary Oath Means to you – the client:
  • Your advisor shall always act in good faith and with candor.
  • Your advisor shall be proactive in disclosing any conflicts of interest that may impact you.
  • Your advisor shall not accept any referral fees or compensation that is contingent upon the purchase or sale of a financial product.
Your advisor’s signature

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