Mitigating conflicts of interest in financial advisory

TWENTY years ago, I wrote a column about the different ways financial institutions are compensated and their implications to consumers. Suffice to say, the industry – which is largely commission-based – was not too happy with what I wrote.

Over the past few months, in various media interviews, I was asked about this topic again and I noticed similar misconceptions about the compensation models of financial institutions and their advisers (also called representatives). And so I thought it would be timely to revisit this issue. My views have matured through two decades of my practice and travelling and learning from different countries.

Globally, there are three ways in which financial institutions and four ways that individual advisers are paid (see table). Institutions are commission-based, fee-based or fee-only. Representatives, in addition to the three modes, may also be paid a salary.