The fee-based model is usually superior, but not because it's more ethical.
Although I advocate a recurring revenue business model for financial advisors, I've never believed that earning commissions are inherently unethical. Yet some fee-only advisors and industry leaders argue that commissions create a conflict of interest and anyone who accepts them is suspect. I think this is a self-righteous posture at best and a self-promoting lie at worst.
It's ridiculous to suggest that the type of compensation received is the only thing that separates the honest, do-what's-right-for-the-client advisor from the mercenary, gimme-what's-mine financial products salesperson. Let's face facts: Both mentalities co-exist with both kinds of compensation. Commissions do not breed criminals; neither do fees ensure integrity.
Recently, I had the pleasure of giving a presentation at a big-name industry conference that tends to attract a lot of fee-only advisors. The top advisors and keynote speakers had dinner together, with one keynote speaker at each table of top advisors. I like going to these dinners because I get to be attuned to my audience before I address them. I listened to the discussion at my table, without saying anything, through the salad and soup.
The conversation centered on this issue of fees versus commissions, and some fee-only advisors felt pretty strongly that commissions are unethical and that planners taking them are dishonest. I let all this sink in, then I looked around at them and made my first comment of the evening: "I wonder why some of you are so uncomfortable with your own integrity that you think how you get paid would threaten it."
They looked at me, slightly stunned, and asked, "What do you mean?"
I answered, "Well, it's interesting that you seem to think that if you got paid any commissions, rather than fees only, you would somehow do the wrong thing. Are you telling me you charge a fee because if you didn't, you would give in to the temptation to screw the client?"
That got things cooking at my table.
At first, these financial planners were a bit defensive, reiterating their belief that commissions have a built-in conflict of interest. I asked, "So if fee-only compensation became illegal, and the only way you could get compensated was by commission or some combination of fees and commissions, are you telling me you think your ethics would evaporate? That suddenly you wouldn't do the right thing for the client any more? Are you saying that the boundaries of compensation are all that keep you ethical?"
I looked around the table. "Susan, if you suddenly were paid by commission, not as you are now, would you still do the right thing for the client?"
"Of course I would."