Improving Investor Savvy Part V: The Cost of Investing

By: La’ Nise Harrington Spring 2017 Student Intern

You must spend money to make money! While Plautus’ quote may not always be true, it often is in the investment world. And one of those expenses is your financial professional. The final part in this five-part series of Increasing Investor Savvy leaves one last question to ask yourself:

Do I know how my financial professional is compensated?

Why is this important? It is important because it changes the motivation of your financial professional. For example, if a financial professional is compensated by the number of transactions he conducts rather than a flat fee, he may be motivated to increase the number of transactions in order to increase his paycheck. Therefore, it would be wise of you to keep aware of the potential for churning.

While financial professionals can include brokers, investment advisers, accountants, planners and other in the financial realm, this article will focus mainly on investment advisers and brokers. It is important to know the difference between them as a broker may not have a fiduciary duty to his clients while investment advisers do.  When an individual has a fiduciary duty he is obligated to look out for their client’s best interest BEFORE his own. Therefore, knowing whether your financial professional has a fiduciary duty to you may change his motivation on how your account is handled.

Financial professionals are most often paid in one of three ways: (1) commissions only (2) fee-based and (3) fee only. Fee based is a combination of commissions and fees. They charge an overall fee and a commission fee for products. Any compensation that includes commissions may cause the financial professional to be motivated for that purpose while fee only compensations are more likely to be managed solely for the client’s interest. If you do not know how your financial adviser is paid, it’s never too late to find out. Once you do make sure to monitor your account accordingly.