Not all financial advice is equal. Though they offer what is supposed to be sound financial advice to you and your family, not all financial planners are conflict-free.
Certain considerations may “color” the information and advice offered by a financial planner. Knowing how the financial planner is being paid can help you make the best decision about who you hire to be your financial planner.
Understand the three basic compensation structures
Although pay structures vary between different firms and advisors, financial planners typically have three types of compensation packages.
1. Commission only
One of the most attractive aspects of commission-based financial advice is that it seems quite affordable. If you visit a financial planner whose income is solely derived from this method, you may be charged a small fee or no fee at all.
This type of financial planner only makes money off specific services or products. If you choose to invest in the portfolio or products the advisor offers you, the company offering the recommended product typically pays your advisor. His or her incentive may be to guide you to an investment that offers higher commissions.
Some of these investments may be sound and entirely appropriate for your situation. Others may not be good investments for you, but offer larger commissions for the financial planner.
If you feel the planner does not have your best interests in mind, you should walk away.
2. Fee-based plus commission
This type of compensation structure can be tricky. You pay a fee, usually based on the value of your portfolio, to get ongoing advice and service. The fee is ongoing, but your financial plan may also include items that may pay commissions to the financial planner.
The financial planner will receive his fee and receive more money if you choose to implement certain portions of your plan that pay him commissions.
Your particular plan may or may not contain commission-based products. The various investments and services woven into your financial plan may be suitable for your financial situation, and some may not.
In either case, you’re charged the ongoing fee regardless of whether you purchase commission-based products.
3. Fee-only
Most fee-only planners are independent. In the two examples above, your financial planner must maintain securities licenses that allow him to accept sales commissions from third parties.
Independent financial planners are also licensed and regulated, but they cannot accept commissions from third parties. Their only compensation comes from fees clients pay them.
You may feel more comfortable with the advice fee-only, independent financial planners offer. Since independent advisors have no commission incentive, the conflicts of interest are minimized.
These financial planners can also recommend the best products and services for your situation, and you don’t need to worry if their recommendations are being influenced by how much they make from them. Their fees range from hourly to asset-based to retainer fees.
With any financial planner, you assume risk. However, the financial planner and the recommended portfolio may offer you the opportunity to make smarter financial decisions for you and your family.
Any financial planner should have the moral and ethical grounding to forewarn a client of dangers as well as opportunities they see coming regardless of their compensation or other financial incentives. Ask questions and learn about how particular investments work and how financial planners operate. This will help prepare you to choose which investment options and which financial planner is right for you. Armed with this information, you’ll heighten your chances of making sound financial decisions.
Is your financial planner commission-based, or does he or she serve you under a fee-based or fee-only compensation structure? If you’re not certain, do you plan to ask him?
Russ is a Certified Divorce Financial Analyst and fee-only financial advisor based in Atlanta, GA, and has provided personal financial advice to individuals and families for 20 years. His focus in on serving women, especially widows and divorcees. You can learn more about Russ and the work he does by visiting WealthcareForWomen.com. Find him also on Twitter, LinkedIn, and Google+.
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