“A broker is someone who invests your money until it’s all gone.” – Woody Allen
Does your broker operate on a commission basis, receiving incentives from insurance and investment companies for each policy they sell, or do they charge their clients a flat fee for the advice they give? If you’re wondering what the difference is between these two approaches, and how they affect you as a client, here is an explanation that may surprise you.
Brokers who work on a commission basis rely mostly on commissions from the investment companies and insurers whose policies they sell. This is no different than a sales rep who earns commission on each product sold, except that brokers are meant to offer more objective advice on their policies – but is this always the case?
It’s quite possible for a commission-based broker to be objective about the policies they recommend to clients, but sadly this isn’t always the case. In our experience, many clients have come to us with policies that were ill-suited to their financial needs because their previous brokers were operating on a commission basis and were keen to “sell” a certain type of policy from a certain investment or insurance company.
The danger of this practice is that an investment company which pays better commissions may be promoted by the broker even though the investment itself is not a very good one – this is an example of putting commissions before the needs of a client, and it is very tempting for many commission-based brokers to do this.
Unlike a commission-based broker who is essentially paid by the investment or insurance company, a fee-based broker makes their living from fees which they charge their clients. A truly fee-based broker should not accept incentives or commissions from insurers and investment firms. This has been our policy at Northwood for some time, and we are confident that it allows us to serve our clients objectively and recommend the best investments and other policies to suit their needs.
A fee-based broker is answerable to the client, because their income comes directly from advisory fees. If they give bad advice, they are likely to lose clients and gain a negative reputation. At the same time, a broker who has the interests of the client at heart will thrive in this situation, free from any pressure to “sell” a certain type of policy to earn sufficient commission for the month. This situation benefits the client as well as the broker, because it allows a relationship of trust to be built and maintained.