How expensive is financial advisor compensation paid via sales loads?
A sales load might be the method that you prefer to compensate your broker or advisor. If your advisor is truly competent and ethical, he may be able to manage properly the inherent conflicts of interest that are associated with commissioned investment product sales. Even if you actually are getting good advice, paying your advisor via a sales load charge is just one of several potential compensation method alternatives to pay for his services. (See: Can you really get free and objective investment advice, when you pay investment sales loads? and Does it matter how financial planners and investment advisors are paid?)
If the sales load charged truly is reasonable for the value of the services rendered, then you might consider a load to be a convenient compensation method. However, this convenience could be very, very expensive. When you buy an investment that involves a sales load, you write one investment check and the load is taken out of this check. Alternatively, you could write two checks – one check for the investment and one check to pay your advisor (which may be paid to your non-commissioned advisor in advance of any investment). What is the real cost of this “convenience?” What is the value of being able to defer you advisor’s payment until your make the investment, and/or what is the value of perhaps never paying the advisor, if you choose not to take his advice?
The key question is whether the cumulative lifetime value of the investment sales load charges you pay is reasonable in the context of your lifetime financial affairs. Are there any other cheaper compensation methods? How would the cost of direct hourly service payments compare to the cost of paying sales loads? Does separating advisor compensation from the selection of investments improve the quality of investment alternatives that are suggested to you? You need to have a much better understanding of the lifecycle cost of sales loads, so that you can assess whether the cost is lower than paying for advice directly.
For two primary reasons, The Skilled Investor has concluded that compensating advisors through sales loads is extremely expensive. First, the lifetime value of the assets you give away through sales loads can be huge. (Below, we discuss how VeriPlan can analyze the lifetime costs of sales loads for you.) There are much [...]