Are Commissions Bad?
Let’s talk about commissions. For many professions—like Real Estate agents, sales professionals, brokers and artists—it’s a compensation structure to which we’ve become accustomed. They make Money when you make a purchase related to the services they provide. But when it comes to commissions and financial advisors—whoa, hold your horses.
We’ve been conditioned to think that commissions and financial advisors shouldn’t mix. Is that the right approach?
Let’s look at it this way. Imagine you use a realtor to help you purchase a home; not just any home, but the right home for you. Instead of being paid a commission, they ask that you pay them annually for the privilege of helping you find this home. The cost will be 1% of the home’s value annually. Does that seem like a good deal?
Not so much. Yet, that’s how many financial advisors operate. They get 1% of all your money, regardless of how much (or little) they do for you each year. This point is most troublesome when you consider that your fee goes up the more you invest. Under a 1% advisor fee, you’d pay $1,000 annually if you invested $100,000, and $2,000 annually if you invested $200,000. But does your service grow too? Chances are the answer is “no.”
Yes, everyone needs to be paid for their work somehow. But the question is, should you really be paying an arbitrary percentage in perpetuity? We don’t think so. When you buy most annuities or a CD at the bank, a commission is paid to the seller. The payer is the insurance company or bank. It doesn’t come out of your account balance. It’s baked into the price you see, much like the margin on a product you buy in the store. That means you know exactly the terms you’re getting, right there in the moment. It’s finite, and most importantly, it’s simple.
For retirees on a fixed income, a fixed cost sounds pretty good, right? So why doesn’t the financial services industry embrace commissions? Because while that might be good for them, it isn’t necessarily the best thing for you. They’re in no rush to turn off the income stream of annual fees. And as we’ve seen, they’re certainly in no rush to accommodate the real needs of retirees either.