There is an ongoing debate in our industry about whether ethics are driven by compensation. The debate is that one form of compensation is "more" ethical than another. In fact, it is thought that if we control how advisors are paid then their ethics will fall in line with the regulatory and publics' expectations and behave in an ethical manner. Advisors often become embroiled in heated debates over their ethical standards as it relates to their compensation. If one earns commissions, one is inherently unethical, but if one is paid a fee, one is ethical. Nothing is further from the truth. And so, advisors argue this point ad nauseum. Advisors have never been in charge of their compensation per se-companies have. Advisors have never designed products-companies have. Advisors have never promulgated the rules and regulations that companies have used to design their products or to determine their payouts-Congress and federal regulators have, as have state departments of insurance. But as soon as the compensation is thought to be "outlandish" or "unworthy," then let's blame it on the advisor for being unethical.

To be sure, unethical practices have been and will continue to be committed and those people need to be either fined or punished or both. But to think that commissions are at the root cause of this behavior is foolish. Bernie Madoff didn't earn commissions. Former Enron CEO Kenneth Lay didn't either. Neither did Arthur Anderson's CPAs when they were in charge of Enron's books, nor the rating agencies before the 2008 financial crisis. The largest portion of the blame lies with the regulators and the supervisors within the financial companies (broker dealers, mutual funds, insurance and/or investment banks) that have accepted and approved of these business practices by their employees. These supervisors are responsible for enforcing suitability standards that assure their clients that their employees are acting ethically. If you want the unethical behavior to stop, fine those companies and punish those officers who have supervisory oversight. If an advisor writes business that is wrong for the client, then it is wrong for the company and should be refused by that company. But that is not typically done, especially if the one writing the business is a big producer for the company.  As is typical in many of these cases, it all comes down to the money. How much money does the company stand to earn if it doesn't get caught. Or, if they do get caught, will the punishment or fine be substantially less than the added profits to the company. Let's be clear: if a CEO had to do jail time every time his company was fined, behavior would change throughout the company. 

Let's review how a financial advisor is compensated. The methods are: salary, salary plus bonus, commissions, fee for services and fees for managing assets. Someone who is paid a salary can either be paid an hourly rate or an annual salary. Someone who is salary plus bonus receives a salary plus a bonus based upon achieving specific company objectives. Those objectives vary with the job assignment but can include: assets transferred into the company or assets saved from being transferred out; and appointments made with new prospects or appointments with clients where new products are sold. Commissions are determined by the company where the financial advisor is placing their business and varies by company. Commission schedules are approved by regulators and cannot exceed specific maximums. Fee for service usually means that the financial advisor will not sell you anything but will provide you a plan for a fee, which the client pays. Then there are fees for managing client assets.

The public may, and often doe,s view these forms of compensation differently-thinking one to be more ethically than another. Perhaps the public believes that if one is merely paid a salary that the individual is more  honest, trustworthy and ethical. But we know that is not true. Salaried employees have acted just as unethically as others. Is a commission-based financial advisor trustworthy, honest and ethical than one that is fee for service? Of course not. How an advisor is compensated, in and of itself, is not the defining factor when it comes to an advisor's integrity. Can any one of these compensation methods be used in a dishonest or unethical way? Yes, they all can. When a company or advisor states how they are compensated-calling themselves fee-only, for example-they are trying to distinguish themselves from their competition. It is part of their marketing campaign. It is a way to get the consumer through the door and into their firm. It does not mean that the company or advisor is more honest, trustworthy or ethical than their counterparts who earn a commission. To make that type of judgment, we would have to closely review how that company is paid when a consumer becomes a client. Perhaps they sell annuities and mutual funds and the issuing company pays the owners of the firm a commission, but the owners pay the advisor a salary. If the firm uses only those companies that pay the highest commissions, regardless of whether those products meet the needs of the client, then the client is better off working with a commission financial advisor who seeks to match the needs of the client with the features of the product, regardless of the commission. A firm can state they have access to a wide selection of products, but if their core business is consistently done with three of the highest commission-paying companies, it is telling.

I fully understand why compensation is sometimes tied to unethical conduct in our profession, but I submit it is not the root cause of why clients are at times placed into inapproriate products. That happens because the regulators have approved the product for sale to the public and the issuing company incentivizes it to the advisor. If we want to manage someone's ethical behavior then begin with, as Steven Covey states, the end in mind. And that end is the regulating bodies that approve these products. The financial advisors are not to blame nor are they the root cause for this malaise of unethical behavior afflicting our industry.

No matter what profession in our society we inspect, we will find those individuals that will cheat and circumvent the rules and the boundaries of those rules in the hopes of increasing their own profits. If the regulators won't stop approving these unsuitable products, then we, the public, need to insist that when companies break the law, those at the top pay the price with their own money and their own jail  time. Place the highest paid officers of companies in jail and you will have better products, suited to meet client needs. In other words, put the client's interest and needs first always.

Ethics are not determined by how one is paid, or by a plaque on the wall, or a code of ethics, or an oath someone has sworn to uphold, because ethics are not what one says but what one does. It is what results from the advisor's relationship with the client that will ultimately determine whether the advisor is ethical. Did the advisor determine his client's needs and objectives and suggest a suitable product? If he did, does it really matter how he was paid? I think not.