The commission-based way of doing mutual fund business has been on retreat in recent years, yet it doesn't have a monopoly on conflicted advice.

That's the thesis behind a recent column by Morningstar's resident mutual fund industry guru, John Rekenthaler . Ominously titled "All Financial Advice Is Conflicted" (Rekenthaler's preferred alternate headline, "Why Most Financial Advice, in Most Cases, Has Conflicts That You May Not Recognize," is a bit long), the article highlights the way business models impact behavior of those from different walks of financial advice.

John Rekenthaler Morningstar, Inc. VP, Research

Commission-based advisors like selling annuities (or, in days of yore, mutual-funds with front- or back-end loads, i.e. A or B shares) because they get paid on commission. Yet an RIA that is not dually-licensed as a broker may not be able to get paid on annuity or commission-based fund AUM.

"Those who are paid by assets are unlikely to recommend actions that reduce the amount of those assets," Rekenthaler writes. "The cost of forgoing payments on monies that disappear forever into fixed annuities is larger than the gain made from placing a client into a higher-commission rather than lower-commission investment."

And while commissions may encourage brokers to make more trades, RIAs face similar pressure.

"Advisors who are paid on AUM feel pressure to take action, to justify the ongoing nature of their fees," Rekenthaler writes. "Thus, the turnover rates on their portfolios tend to be even higher than those of traditional, commission-based advisors."

Rekenthaler also notes that 401(k) platforms (where often-proprietary target date funds dominate net inflows) and in-house roboadvisors both often wind up full of proprietary funds, or at least funds offered by allies.

"Be aware. Those who give financial advice and profess to be conflict-free are probably mistaken," Rekenthaler warns.

Rekenthaler offers perspective from Canadian FA Jim Otar (an annuities fan), fee-based advisor David John Marotta, and Retirement Income Journal's Kerry Pechter (who profiled Otar). 

Edited by: Neil Anderson, Managing Editor


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