When William Shakespeare wrote, "To be or not to be, that is the question," he illustrated Hamlet's great internal debate upon the advantages and disadvantages of one's existence.
We in the financial services industry are faced with a great internal debate concerning our own existence. For us the measure is "To Fee or Not To Fee."
Unfortunately, the debate has traveled far afield from its intended purpose — for each of us to determine the best way we should be compensated when working with clients.
Instead, advocates on both sides have fired serious accusations of impropriety and unethical behavior to those who occupy the opposite side of the aisle.
Fee-only planners claim that commissioned sales people are only interested in selling high-commission products to clients. This accusation comes with the notion that commissioned salespeople are greedy and unalterably biased.
On the other hand, commission-based advocates accuse fee-only planners of being fee hungry, equally biased, uncaring about the quality of advice, and double dipping on commission earnings.
The truth is that both approaches to the business have advantages and disadvantages. Neither can be empirically demonstrated as "best" strictly in light of the kind of compensation the adviser receives.
Rather, each individual situation must be analyzed on its own merit to determine the appropriateness of the arrangement between the agent and the client. Anyone who claims that their method is best is misinformed.
What is the truth? Which is best? To fee or not to fee? Ultimately, how compensation is paid to the agent should not be the measure. Those in the position to give the "best advice" are not determined by how the person gets paid. In my 36 years in the financial services business, I have seen the worst and the best advisers and salespeople from both sides of the compensation fence. What ultimately counts, and what the consumer should be most interested in, is the quality of the financial advice given and the use of the most appropriate products to best serve clients' interests.
Most consumer products sold are by commission. This makes sense for two reasons. First, consumers have the right to shop around, compare prices, and get the best deal possible. Ordinarily, no one would want to walk into a department store to pay a fee to a clothing consultant before looking at the goods.
Second, commissions tend to attract the highest performing salespersons and compensate them accordingly for outstanding achievement. However, the commission sales structure can break down when inferior or misguided salespeople steer clients to inferior quality or higher-priced goods for the sake of a commission. As long as the best interests of the consumer drive the process, there is no reason for concern.
Fee-based advising is more of a recent phenomenon and provides what is perceived as an unbiased approach. When the advice fits the client, the fee-based agent is justified in feeling good about his or her work. But it must be understood that cost is cost, and whether a fee is paid by a client or a commission is built into a product, both approaches result in client costs.
I have been on the side of commission selling for more than 35 years in this business and I would do it no other way. I believe clients are best served with our financial system and a commission arrangement in which performance dictates whether or not I am paid. Our company has helped tens of thousands of life insurance agents sell millions of dollars of life insurance in the past 25 years. Most of this life insurance is permanent, too.I do not believe that this would have happened under a fee-only arrangement. Why? Because I believe that the commissions earned by our representatives laid the foundation for them to continually perform, in long-term relationships with their clients.
Does our track record of success indicate that commission-based advising is the best approach? I would say, "No!" But I also would not agree with anyone who said that fee-only is best. There are so many competent (and, unfortunately, some unprofessional ones as well) people on both sides of this issue. It is merely a question of choice. And to use one's compensation method as a marketing tool is unfair.
It is about time that the media stop bashing commissioned sales people as well as those agents in the business of charging fees.
Neither is better or worse. It is the professionalism of the person that the consumer chooses that is most important. In the final analysis, it is the years of experience, knowledge, and wisdom that makes the difference for consumers — not the compensation.
Commission-based advisers, I caution you not to sell products for the sake of the size of the commission, the use of product hype, or chasing the highest production club your company offers. These are not the attributes of the best commissioned people in the industry.
Fee-only planners, I caution you on the desire to increase the annual fee base beyond your review capabilities, the validity of the financial plan itself, and the promotion of low-priced and potentially low-quality financial products in the wake of having already charged your client a fee.
The debate surrounding "To Fee or Not to Fee" may continue for years, but one thing is certain: consumers need sound and valid advice that works regardless of market or social conditions, and when appropriate, high-quality products that perform well and are backed by the strongest companies in the industry. When you provide these benefits to your clients, they don't care whether your compensation comes from commissions or fees. You help them achieve peace of mind and financial success.
Robert Castiglione is founder and CEO of LEAP Systems, Inc. LEAP stands for Lifetime Economic Acceleration Process
TM, a breakthrough for consumers seeking to achieve financial success. Mr. Castiglione worked as a financial adviser of professional athletes, executives of Fortune 500 companies, and a wide cross section of consumers in the 1970s before starting his company. He has appeared on television, radio, and at major financial industry functions. He is the author of the book, LEAP, The Key To Financial Success, and has published many articles in various industry publications.