Annuity Commissions: A Really Bad Thing! Really?

I recently read an article from an advisor referral website that claimed the only type of advisor one should use is a fee-based (or fee-only) financial advisor. Not only is that reasoning weak, but also very short-sided.

Let’s examine. We live in a free-market capitalist economy. Someone creates a product or service to sell. The entrepreneur incurs expense to market the product or service. He or she also has potential other cost to incur before the product or service is sold, among those are, but not limited to:

  • Cost of goods
  • Labor
  • Brick and mortar
  • Distribution/ sales

Once the entrepreneur calculates their cost of doing business, he or she then adds profitability, and then, wala… the cost of the product or service is determined. Competition drives the owners of business to create a product or service that is competitive in the market. If they are not competitive, they will ultimately not survive. This is how it works! One needs to be profitable to justify the amount of risk they are taking in running a business, but if they are not efficient, they will not succeed.

This is where the commission part comes in. Commission is an expense, a distribution expense. And from an efficiency perspective, it is a very savvy way to distribute a product or service. Expense is only occurred when there is a sale. No sale, no expense!

Now let’s compare that to a business that rarely operates on a commission basis. A good example is a bank! Yes, a bank!  Mostly everyone working at the bank is on a salary, and everyone at the bank is working in a building that has a cost. Those costs are constant all day, every day, whether there are any sales or not! Do you think that is more efficient than a system that only incurs a cost, when there is a sale, and the building cost (my office), is incurred by the sales person!

I know what you might be thinking; the sales person is biased, and gives advice driven by his or her need to make a living. Therefore, by definition the advice is suspect because of its origin.  What this reasoning ignores, is what truly needs to be evaluated – the quality of the advice, not the size of the commission.

Have you ever gotten bad advice from someone in a retail store? Even though they work on salary, they still have directives to sell or they won’t keep their job!  Their advice could very well be poor, even though they earn a salary. Yes, there are dishonest or inexperienced salespeople that give poor advice, and there is no place for them in a professional business. But unfortunately, they could be found in a commission (or salary) world.

How a salesperson’s advice should be evaluated is through thorough analysis of their background, professional education, experience, and by testimonial.  Yes, these people do exist – contrary to popular belief!  The marketing personalities on TV, Radio, and Online, claim that a commission salesperson is not to be believed. Really!  The so-called “experts “advice is always generic, and by definition, can’t be customized to the individual’s circumstances. Should they be believed? They should all have background bios on the credits scroll at the end of their broadcasts!

As an old school trainer I learned from years ago said, “The situation is the boss!” Every individual case is a separate and unique situation, and should be evaluated that way, and advised accordingly.

Commissions are not bad, poor advice is bad! The advice given is only as good as the knowledge and integrity of the advisor, not whether they earn a fee or a commission.

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