Advisor compensation

Which clients know and how do they pay?

Abstract

Using the 2015 National Financial Capability Study Investor Survey, this study uses agency theory to inform an exploration of characteristics associated with knowing how one’s financial advisor/broker is compensated. This study further examines how individuals who do know the compensation method choose between financial advisors with different compensation models. Proposed changes in the financial advising regulatory landscape, as well as the pending changes to the CFP Board Standards of Professional Conduct, brings greater emphasis on understanding consumers’ advisor compensation preferences. Primary results indicate that clients who place importance on fees, that are more knowledgeable about diversification, and that perform background checks are more likely to know compensation methods. A follow-up analysis reveals distinct differences between individuals that used each model, but also provide some mixed results, indicating that clients may not fully understand the compensation paid to their advisors. Discussion and implications related to these results are provided.