Financial Advisors

A typical Financial Adviser or a Broker normally works for a full service brokerage firms (Merrill Lynch, Morgan Stanley, Edward Jones, American Express, and many other firms you may or may not have heard of before) and sometimes call themselves Financial Advisers or a Personal Financial Adviser. They are most often compensated on a commission basis. They receive a cut out of the commission charged by their firm for whatever transaction that happens in your account. So in reality their compensation is really based on the actual transaction in addition to any financial advice given. Keep in mind that commissions are not only charged on stocks and bonds, but also on Mutual Funds through what is called “front” or “back” loads. As the term implies, these are commissions, sometimes as high as 5.75% of the transaction.
More recently, many full service brokerage firms have introduced fee based accounts where clients are not charged a commission for each transaction but rather an annual all inclusive fee that is based on the dollar size of the account. It is very important to note that Mutual Funds purchased in these accounts may also have the “front” or “back” loads in addition to an annual management fee charged by the Mutual Fund. Hence, in these accounts you may be paying at least 2 layers of fees if you hold Mutual Funds (the brokerage account annual fee and the Mutual Fund management fee for the Mutual Fund portion of the account) plus a third fee in the event that those funds have a front or back load.

Cons: Full service financial advisers work on commission, which means that the more transactions the more the commissions. This will lend itself to an inherent conflict of interest. This is not to say that all full service stock brokers are out there to generate unnecessary trades in your account just to earn a commission. On the other hand, they won’t earn a good paycheck if they do not generate trades in your account, hence the conflict.