Financially Speaking Podcast

Only With Your Authority

Published on August 28, 2012

Financial advisors who work for a financial company are paid in three different ways.  They are paid commissions on products they sell. They are paid fees on product held in your account or both. 


The payment of commissions is pretty straight forward.  They offer to sell you an investment and you agree to buy the investment.  Generally, there is not a discussion of how much the commission is, or if you could buy the same investment elsewhere for a lower price.  Investments don’t have a bar code that you can scan with your iPhone to look for a more competitive price.  But the point is that you authorize the transaction.   The advisor cannot initiate the transaction without your expressed authority to do so in your account.  Those are  the rules established by the industry regulators.  Most, but not all, financial advisors follow these rules.


Why don’t all financial advisors follow these rules?  Because it’s hard work.  Imagine if you are a stock broker – excuse me, a financial advisor – and you have 900 accounts.  Let’s say that 100 of these accounts hold some shares of a particular investment that the advisor deems a good idea to sell and then buy a different investment.  The advisor has to call 100 people to explain the reason to sell and buy.  Can you imagine how much work it takes to call 100 people?  It is a lot of work.  Whew.


What if I am a financial advisor and don’t want to make all those calls?  One option is to change the account type from one that requires your authorization to an account type which does not.  Yep, the financial advisor can open a non-discretionary account which permits the advisor to make trades without your specific authority.  A recent Morningstar article noted that commission-licensed financial advisors plan on increasing their accounts which are fee-based and don’t require your authority.  The article explained that this trend allows advisors to spend more time adding and strengthening client relationships rather than seeking client approval.


I believe clients should know what is happening to their money at all times.  I made the decision that any change that was made in my clients’ accounts would not be   a surprise – that they would always be aware of everything in their accounts.  For my clients, transactions are made only with  authority.


Do I have to work a little harder?  Probably.  But my clients sleep a little better knowing that they control their investments.  Completely. 

Tags: investment commissions; investment authority; investor awareness

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