Can Commissions Influence Financial Advice?

May 30, 2023 | Investments, SJB Service

The Impact of Commissions on Financial Advice

When you seek financial advice, you want two things – good information that will help you make informed decisions, and an advisor who has your best interests at heart. Unfortunately, the commission-based structure of the financial industry means that you may not always get both of those things. In this blog post, we’ll explore how commissions can influence the financial advice you receive and what you can do to protect yourself.

How Commissions Work

Commissions are a type of fee that is paid to a financial advisor for selling products or services, including investment products like stocks, mutual funds, and insurance. In most cases, these fees are assessed as a percentage of the transaction value – so, for example, if you buy $10,000 worth of stock, your financial advisor may receive a $50 commission. Commissions are generally considered to be “front-end,” meaning they are paid when the transaction is made, as opposed to “back-end” fees which may be assessed later.

The Impact of Commissions on Financial Advice

While there’s nothing inherently wrong with commissions, they can create conflicts of interest between the advisor and the client, especially if not disclosed to you. Advisors who are paid commissions may be incentivised to sell certain products regardless of whether they are truly in the client’s best interests. For example, an insurance agent who is paid a higher commission for selling one type of policy may be more likely to recommend this insurance product to a client even if it is not the best fit for that client’s needs. Of course, good practice can happen too especially when the commission is disclosed and compared against others in the marketplace.

What You Can Do to Protect Yourself

If you’re concerned about how commissions might be influencing your financial advice, there are steps you can take to protect yourself. First, ask your advisor how they are compensated – specifically, whether they receive commissions for selling certain products. If they do receive commissions, find out how much they would stand to gain from recommending a particular course of action.

You should also ask whether your advisor has any conflicts of interest that could cloud their judgment – for example, do they own any investments that would benefit from the recommendations they’re making? Finally, don’t hesitate to get a second opinion from another financial professional before making any major decisions.

When you’re seeking financial advice, it’s important to be aware of how your advisor is compensated. Commissions can create incentives for advisors to sell certain products regardless of whether they are truly in your best interests. By asking questions and getting multiple opinions, you can help ensure that you’re receiving sound advice that is in line with your goals.

This communication is for informational purposes only based on our understanding of current legislation and practices which are subject to change and are not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.

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Schedule an Obligation-free Call With an Adviser

By scheduling an appointment with an adviser they will reach out to you at your requested time. 
Personal advice, whenever it suits you.

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