Over the weekend I read some comments on why commission based financial planning fee models should, according to the author, stay in place.
I think that a fee for service fee model is superior to a commission based model for a number of reasons:
1/ You can recommend any investment in the world - not just select from those investments that pay commission.
2/ A client understands exactly how much they are paying - because the actually pay you, rather than have their fee collected by a financial services company in the form of an ongoing commission.
3/ There is no chance that a fee for service financial planner will choose a higher commission paying investment when it is not in the best interest of the client.
4/ A fee for service model mirrors the way other professionals (doctors, lawyers, accountants etc.) are paid. A commission based model mirrors the way sales people are paid. Clients deserve to deal with a professional, not a sales person.
5/ Charging a fee for service means that you have to work to provide value in both the areas of financial strategy for a client, and in the area of investment performance. A commission based financial planning model sees a focus on.
A quick comment on the 'alchemy' of commissions. A lot of financial planners say that the only way to service smaller clients is to charge them a commission. This is such a pile of rubbish that it hardly dignifies any comment - but here goes anyway: charging a commission is not some sort of financial alchemy that allows money to be magically created. The client pays for the service they have received in the form of an insidious and ongoing commission payment to the financial planner. This fee reduces FOREVER the potential ending balance of an investment or superannuation account. Clients are better off paying a fair, once off, fee for financial planning services - and then not having their future investment returns eroded by commissions.