The financial services industry can be broken down into two main parts: manufacturing and distribution. Manufactures create and administrate products like life insurance and mutual funds. Distribution brings these products to the end consumer and provides the ongoing servicing. At points in the past the distinction between these two parts was very blurred. Many manufactures had their own captive sales forces going directly to the end user with their product. This sales force sold only the product provided by that manufacturer.
With the advent of the independent broker the distinction became clearer. A life insurance broker could sell insurance product from a wide variety of sources, and an investment advisor could sell investment product from any number of providers. This helped to make things more competitive, and to somewhat reduce the potential for conflict of interest. Having said this however, the potential for conflict of interest is still an important consideration. The sale of financial service products can be very lucrative, and advisor compensation should be clearly disclosed and considered.
The industry has a history of marketing to the public using emotionally charged ‘hot button’ approaches to sell their wares…equating the size of your insurance policy to the amount you love your children, or creating a rosy view of the retirement that awaits those you invest with them. The industry also likes to create complicated and sometimes expensive products which provide guarantees of various kinds, playing on the fears of inventors. These things can cloud the issue and create confusion for investors. A trusted advisor can help you select product that is appropriate and competitively priced, and can help you to navigate the wilderness of commissions, fees, and transaction costs. Clear disclosure of compensation is an important part of any advisor/client relationship.
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