How Financial Professionals Are Paid

A look at an ongoing discussion that impacts retirement savers & investors.   Fee

Historically, financial services professionals have been paid in the same way. Sales or trading commissions linked to investment transactions were the norm. Brokers sold products and made trades to earn a living. Retirement planning or wealth management strategies were not emphasized. Fee

The era of the broker has given way to the era of the financial advisor who emphasizes lifelong client relationships rather than investment transactions. The difference in the eras seems like night and day. The compensation method for financial professionals, however, has only recently begun to change. Fee

Some financial professionals still receive the bulk of their income from commissions. This does not make them inferior to others in their profession; it does mean that they are working under a traditional compensation structure. Commission-based financial professionals commonly recommend investments to clients using a suitability standard – an investment is judged to be “suitable” for a client’s personal situation if it passes a strict multi-point test.1,2 Fee

Other financial professionals are fee-based. This means that they receive fees for providing advice or overseeing client portfolios. They may charge clients annual or monthly retainer fees for their services; alternately, the annual or monthly fee may be equivalent to 1% of a client’s invested assets under their management. In some cases, hourly or per-project fees may be charged. Fee-based advisors also earn commissions; those commissions are linked to investment and insurance products that may be integrated into the financial and retirement planning strategies they create. These financial professionals may make investment recommendations based on the suitability standard or under a fiduciary standard, which ethically and legally obligates them to act in a client’s best interest.1,2

Still other financial professionals are fee-only. They earn 100% of their income from fees directly paid to them by clients. (Such fees may be higher than those charged by fee-based financial professionals.) As fee-only financial professionals receive no commissions, they can recommend investment or insurance products without the potential for conflict of interest.1    

A Department of Labor ruling may help shift the paradigm further. In early 2016, the DOL revised its rules pertaining to retirement accounts. All financial professionals providing advice on these accounts are to act as fiduciaries. While some exemptions may apply for certain financial professionals and their clients, the DOL is clear on its intention for the fiduciary standard to become the industry norm by January 2018.2     Fee

Financial professionals who currently work by a suitability standard and receive commissions face a dilemma as a result of the newly revised rules. If they want to advise anyone about their retirement account, they will have to uphold a fiduciary standard as a condition of this responsibility. (Many financial professionals already abide by a fiduciary standard, among them Registered Investment Advisors or RIAs.). JST Investment Consulting, Inc. is a RIA and has been since 2011.1,2 Fee

If they still want to receive commissions while advising retirement plan accountholders, those accountholders will have to sign a Best Interest Contract Exemption (BICE) acknowledging that the financial professional may earn commissions stemming from sales of financial products.3

In the near future, you may see more fee-based and fee-only financial professionals. The biggest effect of the oncoming DOL regulations may be an industry-wide embrace of the fiduciary standard, with the fee-based and fee-only compensation models possibly becoming widespread throughout the investment and insurance industries. Perhaps it represents not only change, but an evolution and refinement of the compensation standards for financial professionals. Fee


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JST Investment Consulting does not provide tax or legal advice. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable. The information in these materials may change at any time and without notice.


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2 – [4/6/16]

3 – [7/24/16]