How we make money drives what we sell

Advisers make money in two main ways. You need to understand which method your planner has chosen, because that helps explain his or her behavior. We either get a commission to sell you a financial product, or we charge an asset-based fee — typically 1 percent annually of the assets you let us manage.

Commissions can range from a recurring annual fee of 1 percent for some kinds of mutual funds to as high as 10 percent for certain annuities. If we sell you a $100,000 annuity with a 10 percent commission, we get a $10,000 check.

You can’t see this commission the way you can see, for example, a real estate broker’s take when you sell a home. The size of the commission is often reflected only in the penalty you pay if you try to get your money back before the insurance company has had time to recoup the commission.

Obviously, a planner who works on commission would want to sell you products that yield the highest commission — typically, load-carrying mutual funds, hedge funds, private investments and a host of insurance investments, ranging from annuities to universal life.

How sales quotas affect you

A commissioned planner at a big financial firm like Merrill Lynch, Wells Fargo Advisors or MorganStanley SmithBarney might also be under pressure to make a sales quota or to sell particular investment products the firm wants to sell, whether or not they’re the best investment for you. This is not to say that all commission-based planners are out to rip you off; they’re not.

And if you don’t have more than $100,000 or so to invest, commission-based planners may be the only ones who will take your business. But the conflict of interest is particularly stark in the commission business.

Fee-based planning

Another model is fee-based financial planning, which has been gaining ground on the commission model. (About one-third of FPA members say they work for fees only, no commissions.) In theory, charging you 1 percent of your assets each year aligns our interests with yours: We have no incentive to sell you a particular investment just because it brings us a higher commission than another, and if your portfolio grows, so does our fee.

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