Asking someone how they are compensated may seem like a taboo topic. But when you are considering hiring a financial planner, you absolutely should ask how they are paid and understand the answer. An advisor’s compensation often affects their objectivity and the products they recommend or don’t. The financial services industry has created many similar-sounding labels such as fee based financial advisor and fee only financial advisor. To sort through the clutter, here’s an overview of the major types of compensation for financial planners.
Commission Based Financial Advisors
Many advisors are compensated primarily through commissions. They receive payment for their services based on which mutual funds, insurance, annuities, or other products they sell you. Many honest, qualified advisors are compensated in this manner, however conflicts of interest can arise. Different commission amounts are paid on different products, and there can be incentives to recommend one product over another. It can also be difficult to tell exactly how much you’re paying because the loads, fees, and commissions are often not broken out as a separate line item. When an advisor provides financial advice in exchange for commissions on investment or insurance products, it may appear that the financial advice you are receiving is free. It’s not, nor should it be. However, you need to be aware of how much you’re paying and how it influences the advisor’s objectivity.
Fee Based Financial Advisors
Fee based means the advisor charges a fee and accepts commissions. When working with a fee-based financial planner, financial planning fees may be lower than with a fee only advisor. However, the financial planning fee may not be the only compensation the advisor is receiving. Commissions from products can also be received with a fee-based relationship. This approach makes it difficult to calculate the true cost of financial advice.
Salaried Financial Advisors
If a planner is salaried by a bank, financial firm, or discount broker, they have much less potential conflict of interest. However, you should still be aware of the spectrum of products they are permitted to offer through their employer and understand that performance appraisals, bonuses, and continued employment are still a factor influencing the objectivity of the recommendations.
Fee Only Financial Advisors
Fee only financial advisors are compensated only by you, the client. They receive no commissions or incentives based on product recommendations. This method of compensation encourages objectivity because the planner is able to focus solely on your best interests. There are different methods of calculating fee-only compensation. Some firms charge a percentage of assets, others a flat fee, and others an hourly fee based on the actual amount of planning time used. Keener Financial Planning is a fee only financial planner.
Fee Offset Advisors
Fee offset advisors charge a fee for their planning services but then will apply commissions received to offset the fee. This method has some of the benefits of fee-only advisors, however there’s a potential conflict of interest when the planner retains commissions generated in excess of the fee quoted.