When it comes to advisor compensation, general advice appearing in the media and other outlets recommends a “fee-only” advisor. Fee only has become synonymous with objective financial advice.
It’s wise to seek objective advice because, when there is a conflict between what’s financially best for the advisor and what will best meet a client’s needs, recommendations sometimes favor the advisor. It’s human nature.
The problem is there is no such thing as objective financial advice. All advisors, regardless of their method of compensation, have conflicts of interest.
For the high net worth consumer, the percent of investment assets under management (AUM) is the most prevalent compensation model so it warrants special attention. Largely due to the way it’s been marketed, consumers equate AUM with fee-only and objective financial advice. That is simply not true. To illustrate this point, here is a comparison between an advisor compensated by a fee-only, percent of investment assets under management (AUM) model and a commissioned advisor.
Fee-Only, AUM Compensation Model: Advisor incentivized to sell you on moving more money under their management to increase their fee.
Commission Model: Advisor incentivized to sell you on buying more insurance to increase their commission.
Which one has less of a conflict of interest? Many people view investment management as a more desirable service than insurance management, and therefore they rationalize the AUM model as being less conflicted. Yet, desirability and conflict of interest should be viewed as separate issues.