Fees vs Commissions

Fees vs Commissions?  No contest.  We’re not talking Coke and Pepsi here, we’re talking right and wrong.

Not all investors need a fee-based advisor, but no investor needs a stockbroker.  No one should pay a 3% commission to execute a stock trade or a 5% sales load to buy a mutual fund.  They should also not deal with an investment professional who is compensated based on the volume of transactions – they will never be on the same side of the table, trust me.

But the fee-based model is not without its own conflicts.  I address this topic in my latest piece for the Wall Street Journal today.  I argue that these conflicts are either obscure or manageable versus the old industry-standard compensation regime.

Having had clients as both a retail broker and a financial adviser, I can tell you emphatically that the advisory model is better.  Better for clients, better for firms and better for people like you and I who are simply trying to do the right thing with as little conflict as possible.  The brokerage and fee-based models are not merely “different,” as some captured industry participants will tell you.  One is superior than the other, period.  I realize that we live in a society where kids get “participation trophies” and no one is allowed to win or lose anymore, but this is business so let’s be real.  There is a winner here and a loser here; one method of investment management that will endure and one that is already borderline extinct.

But just because the fee-based, assets under management compensation model is better, this doesn’t mean it’s perfect.  Anytime and anywhere that money is changing hands, there is imperfection.

Head over for the whole thing:

Business Model Darwinism (WSJ)