Understand How Financial Services People Get Paid

In the Financial Services industry, and probably true in many other industries, understanding how someone gets paid can reveal their true motivations or at least reveal conflicts of interest.

People respond to incentives, so well-run businesses provide proper incentives to their employees that simultaneously benefit them and the client.  Incentives that are skewed too far to the employee at the expense of the client can lead to bad business practices and are thus improper.  Lack of incentives can lead to sub-optimal business practices because neither the employee nor the client benefits.

In the Financial Services industry this can be seen in the fee-based business model versus the commission-based model.  The nature of charging fees based on assets under management broadly aligns the service provider with the client, since both benefit from growing assets and there is a higher possibility of a more objective solution for the client.  The nature of commissions can lead to activity that is not in the best interests of the client, such as excessive trading (churning) and selling clients products that don’t meet their need.  Of course, there are pros and cons to any practice, which is why full disclosure is important.

When dealing with anyone in the Financial Services industry, do you understand how they are paid?


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