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You may have lost money in your investment portfolio,
due to mismanagement and not even know it.

Broker or advisor? How are they paid?

Unless you have a lot of extra time, or a particularly strong interest, managing your own investment portfolio is probably a bigger job than you care to do yourself. Many people prefer to hire someone to do this for them.

Often, this can be a very smart choice. But, take a moment to think about how these professionals get paid, and what this means about the strategies they recommend.

Brokers are paid on commission

Traditional stockbrokers and broker-dealers are paid on commission, meaning that they only earn money when they make a transaction on your behalf.

In other words, they're salespeople. It's in their best interest for you to make transactions frequently, and to choose the investments that pay out the highest commissions. You don't always know whether they're recommending something because it really is your best option, or because it's a decent option that will earn them a lot of money.

A dishonest broker may even recommend investments that aren't good for you, just so they can profit.

Advisors can get paid fees, commissions or both

"Financial advisors" come in a lot of different stripes. Some belong to professional societies that impose significant oversight, education and ethical requirements. Others are largely unregulated.

The fee structures for financial advisors can vary significantly. Some charge a flat annual fee based on complexity of their clients' needs. Others are paid by commission or a commission-plus-fee arrangement. Make sure you fully understand how your advisor is being paid before you commit to hiring him or her.

Fee-based arrangements can be beneficial because you won't feel pressured to make trades you don't need. But, the flip side is that an uninvolved advisor can sit back and earn money without needing to do much work. A fee model may also be more expensive than a commission model if you have a relatively small or uncomplicated portfolio.

How do I know which to choose?

Ultimately, the most important thing is to choose a broker or advisor who you trust to act in your best interests. Get recommendations from friends and family, and don't be afraid to meet with several professionals before choosing one.

A good broker or advisor will be honest and open with you, and will have no problem clearly laying out how they get paid. Anyone who tries to dodge the question or who uses high-pressure tactics to get you to make a decision is not someone with whom you should be doing business.

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