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 compsensation often affects their objectivity and the products they recommend or don’t. Here’s an overview of the major types of compensation in the financial services industry.
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.
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 fee only.
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.