Financial Advisor Compensation

Discussion in 'Economics' started by Beebers, Mar 2, 2010.

  1. Beebers


    Prudent as I am, some of my money always gets put away in various accounts. There is the trading account, some other investmen account and here I am considering something new - an investment advisor. Why would I do that? Just for diversification - in this case, diversification of opinion.

    So the other day I met with an investment advisor and he assured me of his sounds judgment, and regular portfolio reviews. I liked him and after he assured me that this is a long term relationship ( between him and me) in the making, I was wondering:

    He probably gets compensated through a commission - and maybe he gets a base salary too. But then what? He says, the company gets a trailing percentage on the account, i.e. he gets some of that if the account does well - hence his incentive to do well.

    Ok, and if he leaves the company nevertheless, who gets that trailing percent? The senior manager? Is that why financial advisor's salary look so exponential on the salary pages of, etc? (the longer they are there, the more they make)

    Does the mid level financial advisor have a job security - or am I just a headcount? What does a work contract for a financial advisor look like?

  2. there might be a few good FA's out there but generally the private wealth business is about increasing the assets under management and not beating the market.

    they take a cut of assets under management and the gains as well. the easiest way for them to make money for themselves is to maximize the amount of money they manage. people hate losing money so FA's normally stick to the bluest of the blue chips. in fact, many, if not most FA's do not beat the average return of the stock market, and this is even before commissions.

    after a FA leaves to another firm, i believe whoever takes over your account gets their commission.
  3. I dont know if I would agree with all of that. My dad is a private wealth planner and he is more concerned about wealth preservation and helping you efficiently tax plan your estate.

    He gets 2% and commissions, but commissions usually aren't much IMO (unless there is a big LI policy or something).. but money is diff. to everyone.

    Financial Advisors aren't market timers in general and shouldn't be labeled as such.
  4. Don't waste your time and money with financial advisors. They are just salesmen and are generally clueless about actual investing, let alone trading. When your portfolio gains, they take all the credit, even if S&P gained significantly. When your portfolio loses, they blame it on the market.

    Also, the inner workings of any brokerage are against the clients benefit.
  5. Beebers


    Also, the inner workings of any brokerage are against the clients benefit. [/B][/QUOTE]

    So far it looks like:

    FA are bad traders - but that is not really their job - maybe more something like wealth preservation.

    The firm's goal (increase of assets under management) is therefore implemented by selling - hence the commission incentive for the FA and potential conflict when advising a client.

    What do you mean by the above quote - inner workings of any brokerage are against the clients benefit? - because it is sales/commission based?

    What about the trailing percentage incentive?

    And from the point of view of the FA, does he have job security? Or is he out the door as soon as he stops selling?
  6. FAs have quotas, very similar to quotas in any sales based business. You are dealing with a salesman. Do you trust salesmen? Do you think their interest is aligned with yours?

    Watch the movie Boiler Room. It's nowhere as extreme at the big brokerage houses, but the general concept and strategy stay the same. Big houses do frontrun their clients by taking on positions and then issuing recommendations on stocks which then are pushed by the sales team, aka financial advisors to the clients.

    Aside from that, the products from your standard brokerage shop, even on the institutional and high net worth side are pure crap. There is nothing above mediocre, no matter the type of product and they never have anything that is new & revolutionary. Smart investors look outside your traditional wirehouse or "wealth management" firm for real investment opportunities.
  7. if a fa puts money into a fund they get money from the fund. that is how they get paid.

    so they are salesmen. they go between the client and the funds.
  8. Financial advisors are a waste of time to most people. If you are just looking to invest, learn how to set up your stuff on your own, not that hard. There are tons of free resources on the web.
  9. I know some good advisors. They kinda coach, teach, invest, etc.

    Find one that knows economics! as well as finance, some accounting, and one that has connections with CPA's and lawyers. If you need something he/she can then get you to a solid person.

    If they leave the firm you can go with them. You are the customer and call the shots, remember that. Watch out for the mutual fund redemption fees though. You can get hit with a ~4% fee on leaving before 4-5yrs sometimes.

    Watch out for bonds now too ;) they could be a bubble from what some experts are saying.