Can it matter significantly how an investment advisor is paid?

One of the most crucial parts of an investment advisor's relationship with you is how he or she is paid. The reason for this is that the method of payment that the investment advisor receives will often determine what investments are recommended to you, the investor. While many times these recommendations may be in your best interest, often times they may not be. Therefore it is crucial to understand how your investment advisor is being paid, in order to determine if their recommendations will be in your financial best interest.

The main issue concerning payment of investment advisors is the potential for conflict of interest. This often happens with regards to payments that are generated from their parties. It is important that the investor consider the following questions-

• Will third party compensation change the quality of the recommendations that the investment adviser makes?


• If an investment advisor works on commissions from sales or accepts other third party payments, will he or she still be able to provide the best recommendations that will be based solely on the investor's best financial interests?

It should be noted that most investment advisors are highly ethical. These advisors work hard to properly manage any conflicts of interest that could arise, through 3rd party payment methods that they would receive. Most ethical and professional investment advisors are working hard for their clients, no matter how they are paid.

It is also important to understand that there is a wide variety of types of payment that investment advisors receive. Investment advisors that receive payment directly to themselves, from their investors, are known as fee-only advisors. Other investment advisors receive only payment from 3rd parties. Some investment advisors receive both kinds of compensation. It is imperative that any investor should first decide what kind of investor advisor compensation that they feel comfortable with, before they choose an advisor to work with. This means that it is imperative to education yourself before entering the world of investing. There are several online sites, magazines and books that can explain compensation methods in detail.

The issue that lies at the heart of the problem is that whether an investor will be able to tell the difference between an investment advisor, who is ethical, yet is paid by third parties, versus an investment advisor, who only has the clients interests as a secondary priority.

Theirs is still no clear agreement, within the industry as to what forms of advisory compensation is better for the investor. Much of this is a result that of the fact that investment advisors who are fee-only claim that they have no conflict of interest with their clients. The bottom line is that an investor can expect that that the advisors recommendations are objective and in their best interest, assuming the advisor is ethical. Many fee-only investment advisors call those who are commissioned advisors, just salespersons in disguise.

On the other side of the argument investment advisors who do accept 3rd part payments, argue that they can be just as objective, and still offer the best products to their clients. Much of this argument is based on the fact that investment advisors who are commissioned say that they are more motivated to meet investor's needs, because unless a client acts on their recommendations, they make nothing. Many also feel that a commissioned advisor is more engaged then a fee-only advisor, since the fee-only advisor gets paid regardless.

The bottom line is that all investors must be aware of the different payments methods, and determine what they feel most comfortable with. Educating yourself before making any investment decisions is always the wisest course and the one that will most likely lead to financial success.

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