Should your compensation be fee-based or commission-based? Cerulli Associates’ most recent report on how advisors get paid, which it issued in 2013, says that 57% of advisors are fee-based. Morgan Stanley Wealth Management, for example, reports that 37% of its AUM were in fee-based accounts as of March 31, 2014; LPL Financial is one of many firms that have encouraged advisors to charge their clients fees for more than 10 years.
MarketCounsel President and Chief Executive Brian Hamburger told Investment News that many firms have switched to fee-based accounts because they are less prone to conflict of interest and are more transparent.
On the other hand, many firms still find compelling reasons to use a commission-based system. For instance, LPL advisor Sharon Joseph of Joseph Financial Partners does so because she finds it to be better for her clients, especially smaller ones.
Joseph notes, for instance, that for a $1 million retirement account, an upfront commission and quarterly 12b-1 marketing fee may seem steep, but actually they are more cost-effective for a client than a 1% annual wrap fee over 20 years. But this may not be true for all clients and accounts. For example, Ned Van Riper of Finetooth Consulting points out that there may be accounts for which a 1% annual fee results in clients paying less in the long run if their investments have low expense ratios.
