Learn how an insider thinks.

For most investors, the first question is usually, “What should I invest in?”

But if you’ve read a few of my articles you know that I think a more important question for affluent investors is How is the advisor compensated?

That single detail shapes nearly everything else in the relationship.

Understanding Commission-Only Compensation

The investment industry uses several compensation structures. Some advisors charge hourly fees. Some take a percentage of assets under management, commonly called an AUM fee (see my May 29 newsletter). Others work on commission.

Today, many investors assume commission compensation is outdated or inherently problematic. Like most things in finance, the reality is more nuanced.

A commission-only advisor is compensated when a financial product is purchased or sold. There’s no ongoing annual fee, no quarterly deduction, no recurring percentage based on portfolio value. The advisor earns compensation only when a transaction occurs.

For some investors, particularly buy-and-hold investors who rarely make changes, that can result in lower long-term costs than paying an ongoing annual percentage indefinitely.

Consider this example: An investor places $500,000 into a diversified portfolio and intends to leave it largely untouched for ten years. Under a traditional AUM arrangement at 1% annually, they might pay $5,000 or more per year, with fees rising as the account grows, potentially exceeding $60,000 to $70,000 over a decade. Under a commission-based structure, they may pay a one-time upfront cost with little or no ongoing advisor compensation afterward.

That doesn’t automatically make one model better. It simply means the economics are different.

Comparing It to Other Professions

In many ways, commission-based compensation resembles how we pay other professionals. A real estate agent is compensated when the transaction closes. An insurance agent is compensated when the policy is issued. An attorney handling a specific matter charges for the work performed, not an indefinite percentage of your net worth.

Commission-based investing operates similarly.

The Real Concern — and the Honest Answer

Critics of the commission model raise valid points. Because compensation depends on transactions, conflicts of interest can arise. An unethical advisor could theoretically recommend unnecessary trades simply to generate commissions. History shows there have been real abuses.

But here’s something equally important, and something I’ve observed for forty-plus years: every compensation model creates incentives.

Fee-only AUM advisors often position themselves as conflict-free. But the AUM model has its own built-in incentives. An advisor charging 1% of assets has a financial interest in keeping as many client dollars inside the managed account as possible. That could discourage recommending that a client pay off a mortgage, buy investment real estate, or purchase an income annuity, all moves that would reduce managed assets.

This doesn’t make the AUM model bad. It simply means incentives exist everywhere. No compensation structure removes human nature from financial advice. That’s why character, experience, and transparency matter far more than marketing labels.

What Commission-Only Actually Looks Like in Practice

One misconception I see often is the assumption that commission advisors are constantly trading accounts. In reality, many commission-based advisors built careers around long-term client relationships and conservative investing, working primarily with bonds held to maturity, insurance planning, or retirement income strategies where transactions were infrequent.

The compensation method alone doesn’t tell you whether advice is thoughtful or reckless. What matters is how the advisor behaves.

Service Expectations Differ Too

An ongoing AUM fee generally implies ongoing portfolio monitoring, regular reviews, and continuous access; investors are often paying for behavioral coaching, tax coordination, and long-term guidance as much as investment selection.

Under a commission-only arrangement, the relationship is more transaction-oriented. Some investors want continuous hand-holding and regular meetings. Others prefer a more independent approach with infrequent decisions and no ongoing advisory costs. Neither preference is wrong.

The Right Questions to Ask

Much of the modern financial industry has turned compensation discussions into marketing battles. Fee-only firms sometimes portray commissions as inherently unethical. Commission-based firms sometimes portray AUM fees as excessive. The truth is more balanced than either side usually admits.

A good advisor can work within either structure. So can a bad one.

Over the years, I’ve seen commission-based advisors who placed clients first consistently and conscientiously. I’ve also seen fee-based advisors charge substantial ongoing fees while delivering very little value. Compensation matters. Integrity matters more.

The most useful thing any investor can do is ask direct questions:

How are you compensated? What will this cost over time? What services are included? How often will recommendations change?

A trustworthy advisor should welcome those conversations. After forty years in this business, I’ve learned that the best financial relationships are built on clarity and mutual understanding, not slogans. Commission-only compensation isn’t automatically good or bad. It’s one way of structuring a financial relationship, with real strengths, real weaknesses, and real tradeoffs.

The important thing isn’t finding a compensation structure that sounds perfect in a brochure. It’s finding an advisor whose judgment and honesty you can trust over time.

The Behavior Gap

Over the course of my career, I have sat across from some extraordinarily accomplished people. Surgeons. Executives. Business owners who built something from nothing. People who have outperformed in every arena that demanded their attention.

And yet, when it comes to investing, many of them share a quiet, nagging suspicion that they are somehow leaving money on the table. They are right. But the reason usually surprises them.

It is not that they chose the wrong funds or the wrong stocks. It is not that they missed a particular sector. It is not even that they paid too much in fees, though that matters. The single most expensive mistake most wealthy investors make is behavioral. It is the gap between what the market returns and what they actually keep.

Researchers call it the Behavior Gap. I can tell you it is real, it is persistent, and it is almost entirely avoidable.

A Small Number That Compounds Into a Large Problem

The S&P 500 has delivered roughly 10% annually over long stretches of history. DALBAR, a firm that has tracked investor behavior for more than three decades, consistently finds that the average equity fund investor earns meaningfully less, closer to 6% to 8% annually, depending on the measurement period.

Two percent. Maybe three. It does not sound catastrophic. Until you let it compound.

The Compounding Cost of Underperformance

A 2% annual gap doesn’t cost you 20% of your outcome, it can cost you nearly half. Starting with $1,000,000 at 10% annual return grows to ~$17.4M over 30 years. At 8%, roughly $10M. At 6%, approximately $5.7M. The gap is not theoretical, it is the retirement you planned for versus the one you’ll have.

Data source: Historical S&P 500 total returns: Federal Reserve FRED (fred.stlouisfed.org) or Morningstar. Investor return figures: DALBAR Quantitative Analysis of Investor Behavior, annual edition (dalbar.com).

The math is humbling. A two-percentage-point drag sustained over 30 years does not cost you 20% of your outcome. It costs you nearly half. The market was generous. The behavior was not.

This Is Not an Intelligence Problem

Here is what makes the Behavior Gap genuinely frustrating: it does not discriminate by sophistication.

A March 2025 study published in the Journal of Financial Planning surveyed 1,000 investors, comparing those with over $1 million in investable assets to those with between $250,000 and $999,999. The results were striking: high-net-worth individuals indicated higher levels of subjective financial knowledge, but were no less likely to have made investment mistakes due to emotions, suggesting the high-net-worth cohort displayed overconfidence in their abilities.

“More knowledge. Same emotional mistakes.”

The wealthy investors in that study were more confident in their abilities. They spent more time managing their portfolios. And yet, when emotions entered the picture, a volatile market, a geopolitical shock, a bad quarter; they made the same reactive decisions that hurt less sophisticated investors. The playing field was level in the worst possible way.

This pattern has a name in behavioral finance: overconfidence bias. High achievers are particularly susceptible to it because their professional success is real. The skills that built their wealth are not the same skills that protect and compound it.

Four Common Behaviors Cause the Gap

The Behavior Gap is not created by a single catastrophic decision. It is the accumulation of smaller, recurring errors; each one reasonable in the moment, each one costly in aggregate.

1. Performance Chasing

When an asset class has had a strong three-year run, it attracts capital. That is human nature. We extrapolate the recent past into the future. The problem is that by the time an investment appears on your radar as a “winner,” the return has often already been made. The money that floods in near the top is the money that suffers during the correction.

The Timing Problem: Fund Flows vs. Market Returns

Investors consistently pour money in near peaks and pull it out near troughs, buying high and selling low by following emotion rather than discipline. Facts.

Data source: Net equity mutual fund flow data: Investment Company Institute, monthly reports (ici.org). Annual S&P 500 total returns: Standard & Poor’s, Morningstar, or Federal Reserve FRED.

2. Panic Selling

Markets drop. Sometimes sharply. And in those moments, the brain, wired for survival, not wealth accumulation, treats a portfolio decline the same way it treats physical danger: get out. Investors who sold in March 2020 when the S&P 500 fell 34% in five weeks felt rational. They were preserving capital. Many missed the subsequent 12-month recovery of over 70%. The cost was not just the loss. It was the recovery they never participated in.

3. Over-Adjustment

The inverse of panic selling is compulsive tinkering. Some investors respond to uncertainty by continuously repositioning — shifting allocations, swapping managers, moving in and out of cash. Each individual decision may seem sound. Cumulatively, they generate transaction costs, tax drag, and the near-certain outcome of buying and selling at inopportune moments. Do you personally know any wealthy, amateur day traders?

4. Lack of Process

Perhaps the most underappreciated driver of the Behavior Gap is the absence of a systematic framework that removes emotion from the decision-making loop entirely. Research from Vanguard has estimated that behavioral coaching alone can add roughly 150 basis points in net annual return. DALBAR has consistently found that investors underperform markets by an average of 300 basis points annually, largely due to selling low and buying high.

The Rebalancing Blind Spot

One finding from a 2025 study in the Journal of Financial Planning deserves special attention, because it surprised even the researchers: there were no discernible differences in rebalancing behaviors between high-net-worth and affluent respondents. Only 45% of high-net-worth individuals proactively rebalanced their portfolios annually. This was unexpected, given that wealthier investors were more likely to have a formal financial plan and work with a professional advisor.

Rebalancing is not glamorous. But the discipline of selling what has become expensive and buying what has become cheap, enforced mechanically and on a schedule, is one of the few free lunches in investing. Vanguard’s research suggests systematic annual rebalancing can add up to 14 basis points in incremental annual return. More importantly, it enforces the one behavior that separates disciplined investors from reactive ones: buying low and selling high, by design rather than luck.

Portfolio Drift: What Happens When You Don’t Rebalance

Without rebalancing, a 60/40 portfolio silently becomes 75/25 or 80/20 over a strong equity bull market, exposing the investor to risk they never consciously agreed to take. You’re not (necessarily) a great investor, you’ve simply proved the risk/reward thesis.

Data source: Annual S&P 500 total returns (equity) and Bloomberg U.S. Aggregate Bond Index returns (bonds): Federal Reserve FRED (fred.stlouisfed.org), Morningstar, or Bloomberg. Model the drift manually in Excel. Reference: Kinniry et al., “Putting a Value on Your Value: Quantifying Vanguard Advisor’s Alpha” (2022).

What Wealthy Investors Get Right — and What Gets in the Way

The same 2025 FPA study1 found something encouraging: among respondents who use a sounding board or get a second opinion, wealthier individuals were more likely to report their advisor “keeps my emotions in check.” That language matters. It is not just about asset allocation or tax efficiency, it is about the human value of a process that insulates decisions from the emotions that erode them.

Approximately 84% of the high-net-worth cohort was very or somewhat interested in improving their financial skills, which suggests that the appetite for better outcomes is genuine. The gap is not in intention. It is in execution.

The investors I have seen build and preserve generational wealth are not necessarily the ones who were the smartest in the room. They are the ones who built a process, delegated the decisions most vulnerable to emotion, and stayed disciplined during the moments when every instinct told them to act.

Clarity is not something you generate in a moment of market stress. It is something you earn in advance, through planning, through structure, through the humility to recognize that even the most accomplished people need a counterweight to their own instincts.

Ready to Close Your Behavior Gap?

The Behavior Gap is not a market problem. It is a process problem. And the good news about process problems is that they have solutions.

If you have ever looked at your long-term returns and felt a quiet disconnect between what the market produced and what you actually experienced, start bridging the gap

The market will always be unpredictable. Your response to it doesn’t have to be.

Sources & Data References

¹

Sommer, M. & Lutter, S. (2025). “An Exploratory Study of the Wealthy’s Investment Beliefs, Preferences, and Behaviors.” Journal of Financial Planning, 38(3), 56–71.

DALBAR Quantitative Analysis of Investor Behavior, annual edition. dalbar.com

Kinniry, F.M. et al. (2022). “Putting a Value on Your Value: Quantifying Vanguard Advisor’s Alpha.” Vanguard. advisors.vanguard.com

Investment Company Institute. Monthly fund flow data. ici.org

The Market Is Not the Economy

If you’ve spent any time watching the stock market, you’ve probably had this thought:

• “How can the market be going up when everything feels so bad?”
• Or the reverse:
• “Why is the market falling when the economy seems fine?”

It’s a fair question.

It’s also based on a flawed assumption.

The market is not the economy.

Two Different Systems

The economy is what’s happening right now.

• Jobs.
• Wages.
• Spending.
• Business activity.

It’s real-time. It’s tangible. It’s what people feel in their day-to-day lives.

The market is something else entirely.

• It’s not measuring today.
• It’s pricing tomorrow.

The Gap That Confuses Everyone

Here’s where investors get tripped up.

• They expect the market to reflect current conditions.
• But the market is constantly looking ahead—six months, twelve months, sometimes longer.

Worse yet, economic indicators such as GDP growth, unemployment, inflation, etc. are always looking backward. Economic reports represent what has already happened.

So when the economy looks weak, the market may already be recovering.

And when the economy feels strong, the market may already be pricing in a slowdown.

That gap—between what is and what’s coming—is where most of the confusion lives.

The Cost of Waiting for Confirmation

After 40 years in the markets, I can tell you this pattern doesn’t change.

Investors wait for things to “make sense.”

• They want the economy to stabilize.
• They want the headlines to improve.
• They want confirmation.

As I’ve mentioned in previous articles about Market Timing and Volatility, by the time most investors “get it”, the market has already moved.

And usually, not by a little.

Why This Matters

This isn’t just an academic point.

It directly impacts behavior.

If you believe the market and the economy move together, you’ll tend to:

• Hold back when things look bad (missing recoveries)
• Stay aggressive when things look good (ignoring risk)

In other words, you’ll consistently be a step behind.

The Market’s Job

The market is not here to validate your experience.

It doesn’t care how things feel today.

The market’s job is to aggregate millions of opinions about the future and turn them into a price.

• That process is messy.
• It’s imperfect.
• And at times, it looks completely disconnected from reality.

But over time, it tends to be directionally right.

The Emotional Challenge

Let’s be honest—this isn’t easy.

• It’s uncomfortable to invest when the news is negative.
• It’s just as uncomfortable to get cautious when everything feels fine.

But that discomfort is part of the process.

Just like volatility, it’s not a bug. It’s a feature.

The Practical Takeaway

Instead of asking,

“What is the economy doing right now?”

A better question is:

“What is the market already expecting?”

Because that’s what’s being priced.

Final Thought

Over time, the market and the economy do align.

They always have.

But in the moments that matter most—turning points—they can tell completely different stories.

Understanding that difference won’t make you perfect.

But it will keep you from making the most common—and costly—mistake I’ve seen investors make for four decades:

Basing long-term decisions on short-term reality.