Working on Commission

Buyer beware. After years of hoping that we could get all investment advisors (including brokers) over to a fiduciary rule, it seems apparent that the brokerage industry will once again lobby hard enough that their salespeople won’t be required to act in their customer’s best interest. Brokers may eventually have to disclose fees, disclose conflicts of interest and may hand out a form that says they aren’t fiduciaries, but I predict it will be accompanied by a verbal explanation of why that doesn’t matter.

I’ve heard all the excuses about a fiduciary rule preventing brokers from being able to serve small clients and the huge compliance costs it could bring. At the end of the day it still sounds like people who are fighting tooth and nail to not serve their clients’ best interest.

Let me tell you a story from a different industry that illustrates what can happen when you work with someone who is paid on commission. Back in 2011 I bought a new bike. Admittedly I did very little research on this bike. I had saved up and I wanted a simple cruiser to get me around town.

There are two bike shops near me. One is known for no pressure sales and paying its employees a set wage to do right by its customers. The other one is known to pay its people on commission and sell stuff you don’t really need. I didn’t know this at the time. They both looked like fine bike stores. So I blindly walked into the wrong one, the one that used commission to incentivize sales.

The salesman who helped me out actually did an okay job. He talked me out of getting a cruiser bike, which wouldn’t have been very good if I wanted to go more than a few miles. He found me a hybrid. That was a good start. Then he upsold me on a hybrid that had shocks, just in case I wanted to go mountain biking. He also sold me two water bottle holders. I’m not likely to need those shocks or a second water bottle holder riding around town, but they earned my salesman a bigger commission.

Sound familiar? I have run into plenty of people who worked with commission-based “advisors” and ended up overpaying for things they didn’t need. As for me, I’m happy to work at Cherry Tree Wealth Management as a fiduciary for my clients (and to shop at that other bike store – the one that does the right thing for its customers every time).

True story – I do all my spending at Freewheel Bike these days.

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