Show Me the Money!...or not

Conventional wisdom tells us that salesmen are bad. Further, salesmen who earn a commission are even worse. And salesmen who sell the most and make the most commission...very very bad! The financial crisis has placed a focus on compensation and perhaps for good reason. Without question, compensation does drive behavior and at times, bad behavior. But the generalization that one who makes his or her living on commissions is somehow devious or less than professional is absolutely ridiculous.

In high school and during college summers , I worked at Nordstrom for one primary reason; they paid the highest commissions and as a result, highest compensation for those of us who were good at what we did. To this day, I prefer to shop at Nordstrom for nothing else than they employ the most knowledgeable, service minded and attentive salespeople in the business. Why?...because they pay their people performance based compensation-a commission. When I drop into a store where the "salespeople" are not paid on performance based commissions, not only is it difficult to find someone to help, but when you do find them, you often wish you hadn't.

Having grown up in the financial services business and being paid commissions, fees, bonuses, incentive comp, non-cash comp, salary and multiple combinations of each, by far the most transparent and performance based form of compensation was commission. And perhaps that is part of the perception problem. A commission is highly visible and easier to distinguish than most other forms of compensation. And when a scoundrel gets caught for misrepresenting, overselling or manipulating a client into the wrong product, it is very easy to point to commissions as the motivating factor. Contrast that to the esteemed professions of law or accounting. If they misrepresent, oversell and manipulate their client by padding their billable hours, it is very hard to detect. It's less visible. An article in this week's WSJ titled "Billable Hour Under Attack" cites that Pfizer who pays $500 million a year in "billable hours" expects to reduce their legal expenses up to 20% by moving to a flat fee arrangement which will result in a savings of $100,000,000 a year. Were the law firms dishonest with Pfizer to the tune of overcharging $100 million? No one has even called that into question. But had it been a commission...

My point is that there are scoundrels in every profession and it's unreasonable to paint a broad brush across an entire field as a result of a dishonest few. The Financial Planning industry is doing its best to gain legitimate footing as a profession on par with Doctors, Attorneys and Accountants. And they are distancing themselves from FINRA regulated brokers and "salesmen" choosing to be perceived as more noble. But with 1/3rd of the Ponzi schemes hatching under the lightly regulated investment Advisor model with the vast majority of them charging fees for assets under management, not providing real financial planning services, it's a tough argument to defend. Frankly, I see little difference when a Merrill broker lands a client by selling a managed account and an Investment Advisor lands a client to manage his/her financial portfolio. And neither does the investing public.

I agree that the financial planning industry is legitimate and should be viewed on par with other professions. The data gathering, cash flow analysis, budgeting, modeling and coaching clients in reaching reasonable financial and personal goals is noble and the professional who does this should be paid a handsome fee for the service. But when a financial planner crosses the line and offers to manage the clients assets for a fee, I'm sorry, you've entered the financial sales business and should be regulated accordingly. The hubbub recently http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20090823/REG/308239991 about those in the Investment Advisory world getting bent over a FINRA regulated broker who gave bad advice in the sale of FINRA regulated products is laughable. Are they really arguing that her dishonesty should be protected from big bad FINRA because she is also an investment advisor? If there ever were a case FOR FINRA to take over SEC regulated advisors, this one is it. It makes the investment advisory community look just plain dumb.

Look...I want financial planning to be a legitimate profession. But those in the business who simply de-register from FINRA, but continue their asset management practices while claiming they are "holier than thou" compared to brokers are doing all of us a disservice. I personally believe we need to separate the regulation and activity of real financial planning services from the asset/investment management services. This is the only way Financial Planning will become legitimate and separate themselves from the blowhards who simply don't want to be regulated for what they do. You see, it's not how you are paid that should dictate the regulations, but what you do. And I'm willing to bet that for every rogue broker who sells an unsuitable product just for the commission, there is an investment advisor who pads his/her fees to pay the monthly bills.